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Financial Services Law Insights and Observations

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  • Arizona Governor Signs Blockchain Records Bill

    Fintech

    On March 29, Arizona Governor Doug Ducey signed H.B. 2417, which recognizes blockchain signatures and smart contracts under state law. H.B. 2417 amends Title 44, Chapter 26, of the Arizona Revised Statutes, and defines “blockchain technology” as “distributed ledger technology . . . protected with cryptography . . . [that] provides an uncensored truth.” The amendment, cleared by the Senate in a 28-1 vote on March 23, addresses signatures and records and states “a signature that is secured through blockchain technology is considered to be in an electronic form and to be an electronic signature.” Furthermore, the amendment also discusses the legality and enforceability of a smart contract, defined by the bill as an “event-driven program, with state, that runs on a distributed, decentralized, shared and replicated ledger . . . that can take custody over and instruct transfer of assets on that ledger.” Smart contracts, therefore, “may exist in commerce . . . and may not be denied legal effect, validity or enforceability,” thus presenting a new option of delivering information via blockchain.

    Fintech State Issues Blockchain State Legislation Distributed Ledger

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  • Supreme Court Questions State Law Restricting Consumer Price Displays

    State Issues

    On March 29, the U.S. Supreme Court vacated and remanded a lawsuit challenging a New York law—N.Y. Gen. Bus. Law § 518—which provides that no seller “may impose a surcharge on a holder who elects to use a credit card” instead of a cash payments. (See Expressions Hair Design, et al. v Schneiderman.) Plaintiffs, a group of New York merchants, argued that the law violates the First Amendment by regulating how they communicate their prices. Plaintiffs further alleged that the law is unconstitutionally vague. In its defense, the State of New York asserted that the law merely prevents unfair profiteering, consumer anger, and deceptive sales tactics. After the district court ruled in favor of the Plaintiffs, the Court of Appeals for the Second Circuit vacated the judgment with instructions to dismiss. The Second Circuit appellate panel reasoned that the law is a “price regulation” that regulates conduct rather than speech and, as such, is immune from scrutiny under the First Amendment.

    Writing for the Supreme Court—which was unanimous in the judgment—Chief Justice John G. Roberts disagreed with the Second Circuit panel’s conclusion that the law regulates conduct alone. Specifically, Justice Roberts notes in his opinion that Section 518 “is not like a typical price regulation,” which regulates a seller’s conduct by dictating how much to charge for an item. Rather, the Chief Justice explained, the law regulates “how sellers may communicate their prices.” Notably, the majority opinion declined to delve into the First Amendment issues raised by the parties, including whether the law is a valid commercial speech regulation, citing its status as “a court of review, not of first view.”

    Justice Stephen G. Breyer filed a concurring opinion in which he noted that because the law’s interpretation is unclear, on remand, the Second Circuit should ask New York's highest court to clarify it, as this “is a matter of state law.” Justice Sonia M. Sotomayor, joined by Justice Samuel A. Alito, Jr., also filed a concurring opinion in which she called the majority's ruling a “quarter-loaf outcome,” because the holding failed to address whether the law unconstitutionally restricts speech. The Second Circuit erred by not certifying the question of the statute's interpretation to the N.Y. Court of Appeals “and this Court errs by not correcting it,” Sotomayor reasoned. The Justice indicated that she would have “vacate[d] the judgment below and remand with instructions to” certify the question for a definitive interpretation.

    State Issues Credit Cards Payment Processors U.S. Supreme Court Consumer Education

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  • Federal District Court Allows Discovery in Class Action Concerning Internet Company’s Collection of Biometric Data

    Privacy, Cyber Risk & Data Security

    In a Memorandum Opinion and Order handed down on February 27, a District Court in the Northern District of Illinois declined to dismiss a putative class action alleging that a cloud-based photographic storage service offered by an Internet company (the Company) violated the Illinois Biometric Information Privacy Act (BIPA) by automatically uploading plaintiffs’ mobile photos and allegedly scanning them to create unique face templates (or “faceprints”) for subsequent photo-tagging without consent.  Specifically, the Court rejected the Company’s argument that application of BIPA to facial geometry scanning by by an internet service located outside of Illinois is an improper extraterritorial application of Illinois law. 

    The Plaintiffs alleged that the Company failed to both (i) obtain the necessary authorization or consent to the creation and subsequent storing of “faceprints” by the photo storage service, or (ii) make publicly available a data retention and destruction schedule as required under the BIPA.  In responding to these claims, the Company argued that the term “biometric identifier,” as defined in the BIPA, does not extend to “in-person scans of facial geometry” and does not cover photographs or information derived from photographs.  The Company also sought to dismiss the case on jurisdictional grounds, arguing that under principles of federalism, pre-emption, and the extra-jurisdictional application of state law, the BIPA cannot properly regulate activity – such as the storage of data on the Company’s servers – that does not occur “primarily and substantially” within the state of Illinois.

    In analyzing the Company’s argument, the Court looked to the following two definitions set forth in the Illinois law:

    • “Biometric identifier,” which is defined as “a retina or iris scan, fingerprint, voiceprint, or scan of hand or face geometry” and explicitly “do[es] not include writing samples, written signatures, photographs. . . .”; and
    • “Biometric information,” which is defined as “any information, regardless of how it is captured, converted, stored, or shared, based on an individual’s biometric identifier used to identify an individual,” and explicitly “does not include information derived from items or procedures excluded under the definition of biometric identifiers.” 

    Ultimately, the Court disagreed with the Company’s reading of “biometric data” because, among other reasons, “nothing in the text of [the BIPA] directly supports this interpretation.”  The Court deferred deciding on the Company’s arguments that the claims would require extraterritorial application of the statute and/or would violate the Dormant Commerce Clause by reaching beyond state boundaries, because, among other reasons, “[d]iscovery is needed to determine whether there are legitimate extraterritoriality concerns.”

    On March 9, the Company filed a motion seeking permission to file an interlocutory appeal to the Seventh Circuit, with a request for a stay of further proceedings pending the appellate court’s decision on the request for an appeal.  

    Privacy/Cyber Risk & Data Security Courts State Issues Biometric Data

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  • Amendment to Utah Law Clarifies “Deferred-Deposit” Lender Registration Process; Adds Criminal Background Check

    State Issues

    On March 17, Utah Governor Gary Herbert signed an amendment to HB. 40, Utah’s Check Cashing and Deferred Deposit Lending Registration Act, which modifies registration requirements relating to the disclosure of criminal conviction information for individuals engaged in the business of cashing checks or deferred deposit lending. The amendment requires that the registration or renewal statement shall disclose whether there has been a criminal conviction involving an “an act of fraud, dishonesty, breach of trust, or money laundering” regarding any officer, director, manager, operator, principal, or employee. This information must be obtained through either a Utah Bureau of Criminal Identification report or by conducting an acceptable background check similar to the aforementioned report.

    The amendment also addresses operational requirements for deferred deposit loans. Interest and fee schedules are required to be conspicuously posted, as should contact information for filing complaints and listings of states where the deferred deposit lender is authorized to offer loans. The amendment also provides clarification on rescinding loans, partial payment allowances, and restrictions on loan extensions.

    State Issues State Regulators Lending Licensing Deposit Products

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  • Governor’s Proposed NY State Executive Budget Includes More Online Lending Supervision; State Assembly Budget “Rejects” Proposed Change

    State Issues

    Article 7 of the New York State Constitution requires the Governor to submit an executive budget each year, which contains, among other things, recommendations as to proposed legislation. On February 16, New York Governor Andrew Cuomo released a proposed 2017-18 Executive Budget that includes a proposed amendment to the New York Banking Law that would provide the New York Department of Financial Services (“NYDFS” or “DFS”) expanded licensing authority over online and marketplace lenders.  (See Part EE (at pages 243-44) of the Transportation, Economic Development and Environmental Conservation Bill portion of the Executive Budget).[1] 

    According to a Memorandum in Support of the Governor’s Budget, the proposed amendment would (i) address “[g]aps in the State’s current regulatory authority [that] create opportunities for predatory online lending,” and (ii) “ensure that all types of online lenders are appropriately regulated,” by (a) “increase[ing] DFS’ enforcement capabilities,” and (b) “expand[ing] the definition of ‘making loans’ in New York to not only apply to online lenders who solicit loans, but also online lenders who arrange or otherwise facilitate funding of loans, and making, acquisition or facilitation of the loan to individuals in New York.” If enacted, the NYDFS’s new authority would, under the Governor’s current proposal, become effective January 1, 2018.

    This proposal in the Governor’s Executive Budget has, however, been challenged by the New York State Legislature.  On March 13, after several hearings on the Governor’s proposed budget, the New York State Assembly released its own 2017-18 Assembly Budget Proposal (“Assembly Budget”), which, among other things, expressly rejected the aforementioned proposed amendment to the banking law found in “Part EE.” The Senate is now expected to release its own budget proposal shortly. And, once it is released, the two house of the State Legislature will reconcile the two bills in committees and pass legislation that stakes out the House’s position on the Governor’s proposals. From there, negotiations will begin in earnest between the Legislature and the Executive, with the goal of reaching a budget agreement on or before March 31, 2017.

     

    [1] See also N.Y. Banking Law § 340; N.Y. Gen. Oblig. Law § 5-501(1); N.Y. Banking Law § 14-a(1); N.Y. Gen. Oblig. Law § 5-521(3); N.Y. Ltd. Liab. Co. Law § 1104(a). 

    State Issues Lending Fintech NYDFS Online Lending

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  • PA Department of Banking & Securities Releases Consumer Pamphlet on Credit Reporting

    State Issues

    On March 7, the Pennsylvania Department of Banking and Securities announced it has published a new brochure to help consumers better understand what information should be included in their credit report and what steps to take if there is an issue.

    State Issues Credit Scores PA Department of Banking and Securities Consumer Education Consumer Reporting Agency

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  • Payroll Card Regulations in New York Are Struck Down

    State Issues

    In a Decision released on February 16, the New York Industrial Board of Appeals struck down the portions of a New York Department of Labor regulation (12 NYCRR 192), set to go into effect on March 7, that would have restricted a New York employers’ ability to pay its employees via payroll debit card. Specifically, the board ruled that the Department had exceeded its authority under New York labor law and encroached upon the jurisdiction of banking regulators when imposing fee limits and other restrictions on the cards. 

    The new rule – which was adopted by the Department of Labor in September 2016, and codified at section 192 of the New York Labor Law – set forth numerous regulations clarifying and/or specifying the acceptable methods by which employers in New York State may pay wages to certain employees. Among other things, the regulation required that an employer provide written notice to the employee and obtain written consent from the employee at least seven business days prior to taking action to issue the payment of wages by payroll debit card. The new rule would also have prohibited many fees, including charges for monthly maintenance, account inactivity and overdrafts, and for checking a card’s balance and contacting customer service.

    At issue before the Industrial Board of Appeals was a petition submitted by a single payroll debit card vendor challenging the Department of Labor’s authority to regulate payroll debit cards. Ultimately, the Board agreed with the vendor, finding that the Department sought to improperly regulate banking services provided by financial institutions – an area subject to the exclusive jurisdiction of the New York Department of Financial Services.  In reaching this holding, the Board noted that that the Department of Financial Services already regulates and has issued guidance concerning the fees that financial institutions may charge for banking services, including those related to checking accounts and licensed check cashers. The Board also noted that, should the Department of Labor wish to challenge the Decision, it may bring an Article 78 proceeding in New York Supreme Court, or, alternatively, it may choose to revise the Prepaid Card-related provisions identified in the Decision.

    State Issues Fintech Prepaid Cards Consumer Finance NYDFS

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  • NY AG Schneiderman Releases List of “Top Ten” Frauds for 2016

    State Issues

    On March 6, 2017, New York Attorney General Eric T. Schneiderman released the state’s 2016 top ten list of consumer fraud complaints. For the past 11 years, Internet-related complaints concerning service providers, data privacy and security, and consumer fraud topped the list, closely followed by complaints about automobile sales, service, financing, and repairs. Credit complaints about debt collection, billing, debt settlement, payday loads, credit repair and reporting agencies, and identity theft were sixth. Complaints related to mortgages were ninth. Not on the top ten list but highlighted by the Attorney General’s office were complaints involving scam student debt relief companies as well as two common schemes known as the IRS scam and the Grandparent scam. Also provided were tips consumers should use to protect themselves and their families.

    State Issues Consumer Finance Consumer Complaints Fraud State Attorney General

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  • 28 State AGs File Amicus Brief with Supreme Court in Debt Collection Case

    State Issues

    On February 24, the New Mexico Attorney General, along with 27 other states and the District of Columbia, announced that his office had joined in an amicus brief filed with the Supreme Court supporting the plaintiff in Henson v. Santander. As previously covered in Infobytes, the defendant argued below—and the Fourth Circuit agreed—that the FDCPA did not apply to a consumer finance company that purchased and then sought to collect a debt in default on its own behalf because it was not a debt collector as defined in the statute. In their amicus brief, the attorneys general  oppose the Fourth Circuit holding and argue that any “company that regularly attempts to collect defaulted debt that it has purchased is a ‘debt collector’ as the FDCPA defines [the] term,” and therefore, the obligations and restrictions of the FDCPA should apply. The Supreme Court set oral arguments for April 18 of this year.

    State Issues Courts Debt Collection FDCPA State Attorney General U.S. Supreme Court

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  • Colorado Issues Advisory on Entities Required to File UCCC Sales Finance Notifications

    State Issues

    On December 28 of last year, the Colorado Attorney General’s Office, through the Administrator of the Uniform Consumer Credit Code (UCCC), issued an advisory for entities filing sales finance notifications. The advisory strongly recommends that purchasers and assignees of consumer credit transactions subject to the UCCC develop and implement a due diligence process to confirm that the retail credit sellers originating those contracts have filed the proper notice under UCCC Section 5-6-203(4). As explained in the advisory, if notice is not properly filed, consumers “may not have an obligation to pay the finance charge due on those consumer credit transactions.” The list of retail credit sellers who currently file notifications with the department can be accessed here.

    State Issues Consumer Finance Credit Sellers Customer Due Diligence UCCC State Attorney General

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