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District Court Advances Securitization Case Involving N.Y. State Usury Law
On February 27, a U.S. District Court in White Plains, N.Y. issued an Order ruling on motions for summary judgment and class certification in a consumer class-action against a debt collection company that purchased defaulted consumer debt from a national bank, and its affiliate, which sought collection of debt charged at a rate in excess of New York state usury limits. Midland Funding v. Madden, [Opinion & Order] No. 11-CV-8149 (CS) (S.D.N.Y. Mar. 1, 2017).
As previously covered by InfoBytes, the district court had originally ruled in Defendants’ favor, holding that the National Banking Act (NBA) preempted state law usury claims against purchasers of debt from national banks. The Second Circuit, however, overturned that ruling in a May 2015 opinion to the extent it relied on the NBA, but remanded the case for a determination whether Delaware choice of law provisions in the credit agreement precluded the Plaintiff’s claims because the rates were not usurious in Delaware.
Now, revising the issue on remand, the District Court held that New York’s criminal usury cap (but not the civil usury) applies to Plaintiff’s defaulted debt, notwithstanding the Delaware choice of law provision. The Court reasoned that New York does not follow the “rule of validation” (calling for courts to assume the parties intended to enter into a valid contract and apply the law of the state whose usury law would sustain it). The Court concluded, therefore, that the Plaintiff could predicate her FDCPA claims on a violation of New York’s criminal usury cap. Based on the foregoing, the Court granted partial summary judgment for the Defendant. The court also granted, but modified, Plaintiff’s request for class certification.
District Court Denies Injunction Against “Operation Choke Point” Activities
On February 23, a U.S. District Court for the District of Columbia issued a Memorandum Opinion denying a request for injunctive relief sought by a group of payday lenders to stop “Operation Choke Point” – a DOJ initiative targeting fraud by investigating US banks and the business they do with companies believed to be a higher risk for fraud and money laundering including, but not limited to, payday lenders. Payday lenders have called the initiative a coordinated effort by federal regulators to stop banks from doing business with them, thereby threatening their survival. See Advance America v. FDIC, [Memorandum Opinion No. 134] No. 14-CV-00953-GK (D.D.C. Feb. 23, 2017). According to the lenders, the Fed, FDIC, and OCC have adopted DOJ guidance on bank reputation risk and then used that guidance to exert “backroom regulatory pressure seeking to coerce banks to terminate longstanding, mutually beneficial relationships with all payday lenders.” The government has rejected this characterization, asserting that banks can do business with payday lenders as long as the risks are managed properly.
Evaluating the request under the due process “stigma-plus rule,” the Court focused on whether the payday lenders could show they were likely to succeed on the merits of their case and whether or not they were likely to suffer irreparable harm without the injunction.
Ultimately, the payday lenders were unable to convince the Court that they were likely to suffer the harm central to a “stigma-plus” claim. The Court reasoned that (i) the closure of some bank accounts would not be enough to constitute the loss of banking services, and that the lenders needed (and failed) to show that the loss of banking services had effectively prevented them from offering payday loans; and (ii) nearly all of the lenders were still in operation; and (iii) because the lenders were still able to find banks to work with, evidence of the possibility of future loss of banking services was too speculative to support an injunction.
The Court was also not persuaded that the lenders would be able to prove that regulatory actions caused banks to deny services to petitioners. Specifically, the Court determined that the lenders were “unlikely” to be able to set forth evidence of the “campaign of backroom strong-arming” underlying petitioners’ request for injunctive relief. Specifically, the Court noted that the lenders relied on “scattered statements,” some of which the Court characterized as “anonymous double hearsay,” to support their claims. The only direct evidence, according to the Court, was actually just “evidence of a targeted enforcement action against a single scofflaw.”
Though the Court explained that the two other factors—the balance of equities and the public interest—were of less significance in this situation, it noted in closing that “enjoining an agency’s statutorily delegated enforcement authority is likely to harm the public interest, particularly where plaintiffs are unable to demonstrate a likelihood of success on the merits.”
FDIC Releases March List of CRA Compliance Examinations
On March 3, the FDIC published its monthly list of state nonmember banks recently evaluated for compliance with the Community Reinvestment Act (CRA). The list reports CRA evaluation ratings assigned to institutions in December 2016. Monthly lists of all state nonmember banks whose evaluations have been made publicly available since July 1, 1990 can be accessed through the FDIC's website.
House Financial Services Committee Approves Budget Views and Estimates for FY2018
On March 1, the House Financial Services Committee met in open session and voted, along party lines, to approve its Budget Views and Estimates for Fiscal Year 2018. Among other things, the plan calls for advancing “legislative proposals—including the Financial CHOICE Act—to replace the failed aspects of the Dodd-Frank Act with free-market alternatives that end bailouts, restore market discipline, ensure that the financial system is more resilient, pare back unnecessary and burdensome regulations, encourage capital formation and economic growth, and protect consumers by preserving financial independence and consumer choice.” In addition, the Committee intends to advance legislation to place the non-monetary policy activities of the independent agencies within the Committee’s jurisdiction on the appropriations process. The Committee voted down, along party lines, a series of amendments submitted by the Democratic members.
FDIC Announces 22 January 2017 Enforcement Actions
On February 24, the FDIC released its list of administrative enforcement actions taken against banks and individuals in January. Several of the consent agreements included on the list seek the payment of civil money penalties for, among other things, violations of the Flood Disaster Protection Act of 1973 and its flood insurance requirements. Other violations cited in the enforcement actions relate to unsafe or unsound banking practices and breaches of fiduciary duty. The FDIC database containing all of its enforcement decisions and orders may be accessed here.
NAFCU Recommends FSOC Use Authority to Rein in CFPB
On February 28, the National Association of Federally-Insured Credit Unions (NAFCU) sent a letter to Treasury Secretary Steven Mnuchin urging him to use his position as chairman of the Financial Stability Oversight Counsel to alleviate the CFPB's “burdensome” regulatory impact on credit unions. The letter, among other things, urges the Secretary and FSOC to use the Counsel’s authority to set aside CFPB regulations as leverage to “spur renewed dialogue between the Bureau and the federal banking agencies regarding rules that may actually pose systemic risk to the financial sector.” The NAFCU attached an appendix to the letter listing 10 CFPB rules that the group finds “ripe for further review.” The letter was sent a day before FSOC’s March 2 executive session—its first under Secretary Mnuchin. Separately, the CUNA is holding its annual governmental affairs conference in Washington this week, bringing in 5,000 credit union advocates from around the country.
Colorado Issues Advisory on Entities Required to File UCCC Sales Finance Notifications
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.
National Consumer Protection Week 2017 Announced
On February 28, the FTC issued a statement to promote the 19th annual National Consumer Protection Week to be held March 5-11, 2017, in partnership with more than 100 agencies at the federal, state, and local level, as well as consumer groups and national advocacy organizations. The week is a nationally-coordinated campaign dedicated to the mission of “informing Americans of their consumer rights while providing them access to free consumer-related resources.” Activities include a Facebook live video stream where FTC staff will answer questions about fraud prevention, Twitter chats with both the Connecticut Department of Consumer Protection and the Colorado Attorney General’s office, as well as numerous events across the country geared towards promoting consumer education.
Industry Groups Submit Letters in Response to CFPB’s Request for Input on Comment Letter
As previously covered in InfoBytes, on November 17 the CFPB launched an inquiry into the benefits and risks associated with consumers authorizing third-parties to access their financial and account information held by financial service providers. In response to the Bureau’s Request for Information (Dkt No. CFPB-2016-0048), consumer and industry groups have offered their thoughts and positions concerning the issue. A summary of several comment letters is included below:
American Bankers Association (ABA). The ABA submitted a comment letter in which it noted that “technology is fundamentally changing the way financial services are being delivered,” but urged the CFPB, subject to certain enumerated regulatory limitations, to “fairly address[] both the opportunities and risks” in order to “give consumers innovative services that they can trust.” Among other things, the ABA discussed the need for the Bureau to clarify data aggregator responsibility for maintaining the privacy and security of consumer financial data. Specifically, the ABA recommended that the CFPB: (i) impose breach notification obligations; (ii) confirm liability assignments under Regulation E; (iii) subject larger data aggregators to supervisory oversight; and (iv) educate consumers about the choices, responsibilities, and risks presented.
Financial Services Roundtable (FSR). FSR and its technology policy division responded with a letter highlighting the importance of innovation and collaboration and outlining five core elements the group believes should be considered in assessing this "evolving ecosystem." These elements are: (i) security and privacy; (ii) data access and use transparency; (iii) clarity of liability; (iv) customer choice and control; and (v) technology neutrality. FSR also encouraged the CFPB to avoid unnecessary rulemaking or standard-setting that would “blunt innovation.”
Independent Community Bankers of America (ICBA). The ICBA urged the CFPB, subject to certain enumerated regulatory limitations, to carefully consider the privacy, regulatory burden, data security, and legal implications posed by third-party account access. Among other things, the ICBA expressed concern that “non-bank entities” do not take the same care in protecting consumer privacy and data as community banks and stated that community banks “must be able to protect customer data without having to meet new regulatory mandates which increase the risk of breach and/or consumer loss.” ICBA’s letter also stated that consumers’ rights to have access to their own information should be balanced with ensuring that consumer privacy is not needlessly threatened.
Americans for Financial Reform (AFR). AFR and a coalition of consumer groups set forth the organizations’ position that “the digital economy should ensure consumers can access and use records about themselves, and that consumers can choose to authorize third-parties to access such data on their behalf to support their financial health and facilitate competition among financial services providers.” Among other things, the letter stressed the need for “standards to enforce compliance with Section 1033 to benefit consumers who utilize online data aggregation and other applications.” Additionally, the letter urged the CFPB to confirm that consumers “retain their legal protections vis-a-vis account-holding institutions if unauthorized charges are made to their accounts when they use data aggregation services.”
Financial Innovation Now (FIN). FIN expressed the organization’s belief that regulation of permissioned access to consumer financial account data is “not necessary at this time.” Rather, FIN argued for “standards for permissioned access to consumer financial account data,” which could be “developed by industry, regularly reviewed and updated.” Ultimately, FIN pushed for consumer access to consumer financial account data “securely and easily, using whatever secure application or technology they wish, without charges or restrictions that unreasonably favor any one application or technology over another.”
CFPB Will Renew Four Advisory Councils
On February 23, the CFPB published four notices in the Federal Register to renew three advisory councils and one advisory board for an additional two year period, covering the Academic Research Council, Community Banker Advisory Council, Consumer Advisory Board, and Credit Union Advisory Council. According to each respective notice, these entities have been reestablished for the purposes of providing information and recommendations in accordance with provisions of the Federal Advisory Committee Act. Each notice is effective as of its publication date and charters filed for each entity are set to expire two years after the filing date unless renewed again.
- The Academic Research Council provides the CFPB’s Office of Research with “advice and feedback on research methodologies, framing research questions, data collection, and analytic strategies.”
- The Community Banker Advisory Council provides information and recommendations concerning the Bureau’s exercise of its authority under the federal consumer financial laws “as they pertain to banks or thrifts with total assets of $10 billion or less.”
- The Consumer Advisory Board provides information and recommendations concerning the Bureau’s policy development, rulemaking, and enforcement functions, including on “emerging practices in the consumer financial products or services industry, including regional trends, concerns, and other relevant information.”
- The Credit Union Advisory Council provides information and recommendations concerning the “Bureau’s policy development, rulemaking, and engagement functions as they relate to credit unions.”