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Financial Services Law Insights and Observations

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  • Connecticut Supreme Court says lender protected by tribal sovereign immunity

    Courts

    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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  • FHFA studies the evolution of mortgage risk

    Federal Issues

    On May 20, FHFA released a comprehensive dataset on ways mortgage risk has evolved over time. The revised staff working paper, “A Quarter Century of Mortgage Risk,” provides an account of the evolution of default risk for newly originated home mortgages over the past 25 years. As FHFA explained in its press release, reviewing a comprehensive dataset containing “aggregated results using more than 200 million purchase-money and refinance mortgages from 1990 to 2019” has led researchers to “challenge some long-held assumptions about the impetus of the 2008 financial crisis.” Key findings presented in the working paper include: (i) new data shows that increased mortgage risk in the 1990s “was a precursor to the market failing in 2008,” whereas “previous research could not identify the fact that a refinance boom from 2000-2003 masked the mortgage risk accumulation”; (ii) prior to the 2008 financial crisis, “mortgage risk accumulated across the full spectrum of borrowers, not just those with low credit scores as some have previously asserted”; (iii) “[m]ortgage rate spreads between ‘not risky loans’ and ‘very risky loans’” tightened for portfolio and private-label securities mortgages in the mid-2000s—an indication of expanded credit supply directly prior to the Great Recession; and (iv) during the current era, “sustained house price appreciation is leading mortgage risk to increase.”

    Federal Issues FHFA Mortgages Consumer Finance Fannie Mae Freddie Mac

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

    Courts

    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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  • Arizona amends various financial institution rules

    State Issues

    On May 10, the Arizona governor signed into law SB 1463, a bill that makes various changes to the Arizona Department of Insurance and Financial Institutions (DIFI). Among other things, SB 1463 (i) eliminates certain application fees for financial institutions, enterprises, money transmitters, and collection agencies; (ii) establishes nonrefundable fees for advance fee loan brokers and for premium finance company branch offices; (iii) revises the annual assessment and renewal fee structure for enterprises, consumer lenders, premium finance companies, advance fee loan brokers, and collection agencies; (iv) clarifies that licensee name change fees for financial institution and enterprise licensees do not apply to loan originators and appraiser licensees; (v) allows the Deputy Director to engage a contractor for mortgage broker license testing; (vi) stipulates that the Uniform Standards of Professional Appraisal Practice are the standards in Arizona, unless the Deputy Director objects; (vii) requires licensee applicants to pass a written examination under the supervision of DIFI; (viii) requires mortgage brokers, mortgage bankers, or commercial mortgage bankers who are licensed as exempt persons to deposit a surety bond with the Deputy Director in order to do business; (ix) defines the phrase “federally regulated appraisal management company”; (x) modifies the definitions of “consumer loan” and “control”; and (xi) stipulates that a consumer loan made pursuant to a consumer lender license is not a secondary motor vehicle finance transaction. SB 1462 goes into effect 90 days after the Arizona legislature adjourns and will be retroactive to July 1, 2020.

    State Issues State Legislation Consumer Finance State Regulators Licensing

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  • CFPB obtains new judgments against debt-relief defendants

    Federal Issues

    On May 11, the U.S. District Court for the Central District of California obtained two additional judgments in an action by the CFPB against a mortgage lender and several related individuals and companies (collectively, “defendants”) for alleged violations of the Consumer Financial Protection Act (CFPA), Telemarketing Sales Rule (TSR), and Fair Credit Reporting Act (FCRA). These are the latest judgments reached with defendants in the ongoing litigation. (See InfoBytes coverage on previously announced settlements here, here, here, and here.)

    As previously covered by InfoBytes, the Bureau filed a complaint in January 2020 claiming the defendants violated the FCRA by, among other things, illegally obtaining consumer reports from a credit reporting agency for millions of consumers with student loans by representing that the reports would be used to “make firm offers of credit for mortgage loans” and to market mortgage products, but instead, the defendants allegedly resold or provided the reports to companies engaged in marketing student loan debt-relief services. The defendants also allegedly violated the TSR by charging and collecting advance fees for their debt-relief services. The CFPB further claimed that the defendants violated the TSR and CFPA when they used telemarketing sales calls and direct mail to encourage consumers to consolidate their loans, and falsely represented that consolidation could lower student-loan interest rates, improve borrowers’ credit scores, and change their servicer to the Department of Education. 

    The May 11 stipulated final judgment entered against a group of corporate defendants, as well as an associated individual, requires the defendants to pay more than $18 million in consumer redress. Payment will be suspended, however, upon satisfaction of certain outlined obligations. The defendants, who neither admitted nor denied the allegations, are also obligated to pay a $125,000 civil money penalty to the Bureau, and are permanently enjoined from offering or providing debt-relief services or from using or obtaining consumer reports for any purpose. Additionally, the individual defendant is banned from using or obtaining benefit from consumer information contained in prescreened consumer reports.

    On the same day, a second stipulated final judgment was entered against one of the individual defendants. The judgment requires the individual defendant to pay more than $3.4 million in redress to affected consumers, which will be partially suspended upon satisfaction of certain outlined obligations, along with a $1 civil money penalty. The individual defendant, who also neither admitted nor denied the allegations, is permanently enjoined from offering or providing debt relief services, from participating or engaging in the telemarketing of any consumer financial product or service, or from using or obtaining prescreened consumer reports for any purpose.

    Federal Issues Courts CFPB Consumer Finance CFPA Telemarketing Sales Rule FCRA Enforcement Settlement

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  • House passes comprehensive debt collection measures

    Federal Issues

    On May 13, the U.S. House passed, by a vote of 215-207, H.R. 2547, which would provide additional financial protections for consumers and place several restrictions on debt collection activities. Known as the “Comprehensive Debt Collection Improvement Act,” H.R. 2547 consolidates 10 separate proposed consumer protection bills into one comprehensive package.

    Provisions under the package would cover:

    • Confessions of Judgment (COJs). The bill would amend TILA and expand the ban on COJs to cover small business owners and merchant cash advance companies.
    • Servicemembers. The bill would amend the FDCPA to prohibit debt collectors from threatening servicemembers, including by representing to servicemembers that failure to cooperate will result in a reduction of rank, revocation of their security clearance, or prosecution. Covered debtors would include active-duty service members, those released from duty in the past year, and certain dependents.
    • Student Loans. The bill would amend TILA to require the discharge of private student loans in the case of a borrower’s death or total and permanent disability.
    • Medical Debt. The bill would amend the FDCPA by making it an unfair practice to “engag[e] in activities to collect or attempt[] to collect a medical debt before the end of the 2-year period beginning on the date that the first payment with respect to such medical debt is due.” The bill would also amend the FCRA to, among other things, bar entities from collecting medical debt or reporting it to a consumer reporting agency without providing a consumer notice about their rights.
    • Electronic Communication. The bill would amend the FDCPA to limit a debt collector from contacting a consumer by email, text message, or direct message on social media without receiving the debtor’s permission to be contacted electronically. It would also prevent debt collectors from sending unlimited electronic communications to consumers.
    • Other Debt Provisions. The bill would (i) expand the definition of debt covered under the FDCPA to include money owed to a federal agency, states, or local government; certain personal, family, or household transactions; and court debts; (ii) restrict federal agencies from transferring debt to a collector until at least 90 days after the obligation becomes delinquent or defaults; (iii) require agencies to notify consumers at least three times—with notifications spaced at least 30 days apart—before transferring their debt; and (iv) limit the fees debt collectors can charge.
    • Penalties. The bill would require the CFPB to update monetary penalties under the FDCPA for inflation. It would also (i) clarify that courts can award injunctive relief; (ii) cap damages in class actions; and (iii) add protections for consumers affected by national disasters.
    • Non-Judicial Foreclosures. The bill would amend the FDCPA to clarify that companies engaged in non-judicial foreclosure proceedings are covered by the statute.
    • Legal Actions. The bill would amend the FDCPA to outline requirements for debt collectors taking legal action to collect or attempt to collect a debt, including providing a consumer with written notice, as well as documents showing the consumer agreed to the contract creating the debt, and a sworn affidavit stating the applicable statute of limitations has not expired.

    Federal Issues Federal Legislation U.S. House Debt Collection Confessions of Judgement Servicemembers Student Lending FDCPA TILA FCRA Consumer Finance

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  • CFPB charges debt-settlement company with TSR and CFPA violations

    Federal Issues

    On May 17, the CFPB announced a settlement with a Massachusetts-based debt-settlement company for allegedly violating the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the Bureau alleged the company violated the TSR and/or the CFPA by, among other things, (i) requesting and receiving payment of fees for services before renegotiating, settling, reducing, or otherwise altering the terms of at least one debt pursuant to an agreement or before a consumer had made a payment under their agreement; (ii) misrepresenting to consumers that it would not charge fees for its services until it settled a debt and consumers made payments under the settlement to the creditor; (iii) charging fees based on the amount of debt after enrollment instead of the amount of debt at the time of enrollment; and (iv) failing to disclose the amount of time it would take the company to make a settlement offer or the amount of debt the consumer would need to accumulate to make a settlement offer to each creditor. The CFPB’s original complaint had sought an injunction against the company as well as damages, redress, disgorgement of ill-gotten gains, and the imposition of civil money penalties.

    The judgment, ordered by the court on May 19, requires the company to: (i) pay a $7.7 million judgment, which would be partially suspended upon the company paying harmed consumers $5.4 million; (ii) stop its deceptive practices and; (iii) pay a $1 civil money penalty.

    Federal Issues TSR CFP Act Dodd-Frank CFPB Telemarketing Courts Consumer Finance Enforcement

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  • FDIC announces Tennessee disaster relief

    Federal Issues

    On May 14, the FDIC issued FIL-33-2021 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Tennessee affected by severe storms, tornadoes, and flooding. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and suggested that institutions work with impacted borrowers to, among other things, (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans to those affected by the severe weather, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC will also consider regulatory relief from certain filing and publishing requirements.

    Federal Issues FDIC Tennessee Disaster Relief Consumer Finance CRA

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  • 6th Circuit affirms dismissal of FACTA credit card receipt suit

    Courts

    On May 11, the U.S. Court of Appeals for the Sixth Circuit affirmed dismissal of a putative class action for lack of subject matter jurisdiction, holding that while a merchant technically violated the Fair and Accurate Credit Transactions Act (FACTA) by including 10 credit card digits on a customer’s receipt, the customer failed to allege any concrete harm sufficient to establish standing. According to the opinion, the named plaintiff filed a class action against the merchant alleging the first six and last four digits of her credit card number were printed on her receipt—a violation of FACTA’s truncation requirement, which only permits the last five digits to be printed on a receipt. The plaintiff argued that this presented “a significant risk of the exact harm that Congress intended to prevent—the display of card information that could be exploited by an identity thief,” and further claimed she did not need to allege any harm beyond the violation of the statute to establish standing. The district court disagreed, ruling that the plaintiff “lacked standing because she alleged merely a threat of future harm that was not certainly impending” and that the merchant’s technical violation demonstrated no material risk of identity theft.

    In agreeing with the district court, the 6th Circuit concluded that a “violation of the statute does not automatically create a concrete injury of increased risk of real harm even if Congress designed it so.” Moreover, the appellate court reasoned that the “factual allegations in this complaint do not establish an increased risk of identity theft either because they do not show how, even if [p]laintiff’s receipt fell into the wrong hands, criminals would have a gateway to consumers’ personal and financial data.” The appellate court further concluded, “statutory-injury-for-injury’s sake does not satisfy Article III’s injury in fact requirement” and the court must exercise its constitutional duty to ensure a plaintiff has standing.

    Courts Appellate Sixth Circuit FACTA Credit Cards Class Action Standing Privacy/Cyber Risk & Data Security Consumer Finance

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  • 2nd Circuit affirms borrower standing in mortgage recordation delay suit

    Courts

    On May 10, the U.S. Court of Appeals for the Second Circuit determined that class members have constitutional standing to sue a national bank for allegedly violating New York’s mortgage-satisfaction-recording statutes, which require lenders to record borrowers’ repayments within 30 days. The plaintiffs filed a class action suit alleging the bank’s recordation delay harmed their financial reputations, impaired their credit, and limited their borrowing capacity. The district court agreed, ruling that the plaintiffs had Article III standing to sue because the bank’s alleged violation of the mortgage-satisfaction-recording statutes created a “material risk of harm” to them.

    On appeal, the majority opinion first determined, among other things, that “state legislatures may create legally protected interests whose violation supports Article III standing, subject to certain federal limitations.” The alleged state law violations in this matter, the majority wrote, constitute a concrete and particularized harm to the plaintiffs in the form of both reputational injury and limitations in borrowing capacity during the recordation delay period. Moreover, the majority concluded that the bank’s alleged failure to report the plaintiffs’ mortgage discharge “posed a real risk of material harm” because the public record reflected an outstanding debt of over $50,000, which could “reasonably be inferred to have substantially restricted” the plaintiffs’ borrowing capacity. The dissenting judge argued, however, that the plaintiffs “never suffered a cloud on title prohibiting them from selling their property, or adverse effects on their credit, or an inability to finance another property, or even a risk of these harms,” and that the “trivial nature of a recordation delay is reflected in the 30-day delay that is tolerated without penalty, and by the small penalty exacted even after 90 days.”

    The 2nd Circuit joined the Third, Seventh, Ninth, and Tenth circuits in holding that state legislatures have the power to “create ‘legally protected interests’” that, when violated, satisfy Article III injury-in-fact requirement, noting that it is “aware of no Circuit holding to the contrary.”

    Courts Appellate Second Circuit Mortgages State Issues Consumer Finance

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