Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On October 20, the U.S. District Court for the Central District of California approved a settlement with two non-parties in an action brought by the CFPB, the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney, alleging a student loan debt relief operation deceived thousands of student-loan borrowers and charged more than $71 million in unlawful advance fees. As previously covered by InfoBytes, the complaint asserted that the defendants violated the CFPA, the Telemarketing Sales Rule, and various state laws. Amended complaints (see here and here) also added new defendants and included claims for avoidance of fraudulent transfers under the FDCPA and California’s Uniform Voidable Transactions Act, among other things. A stipulated final judgment and order was entered against the named defendant in July (covered by InfoBytes here), which required the payment of more than $35 million in redress to affected consumers, a $1 civil money penalty to the Bureau, and $5,000 in civil money penalties to each of the three states. The court also previously entered final judgments against several of the defendants, as well as a default judgment and order against two other defendants (covered by InfoBytes here, here, here, and here). The most recent settlement resolves a dispute between a court-appointed receiver and the two non-parties. The settlement requires the non-parties to pay $675,000 to the receiver.
On October 18, FHFA announced two measures to advance housing sustainability and affordability. Speaking before the 2021 Mortgage Bankers Association Annual Convention and Expo, acting Director Sandra Thompson announced that Fannie Mae and Freddie Mac (GSEs) “will incorporate desktop appraisals into their guides for many new purchase loans starting in early 2022.” Thompson explained that including desktop appraisals in the selling guides will change what was a temporary flexibility into an option that will “mitigate risk for use over the long-term” and will “become an established option for originating [GSE] loans.” According to Thompson, this certainty should allow lenders, borrowers, and appraisers to take advantage of efficiency gains provided through desktop appraisals.
Thompson also announced that the GSEs will expand their refinance programs for low- and moderate-income borrowers that were introduced last year. Several enhancements will be made to the RefiNow and RefiPossible programs to expand eligibility requirements and make the programs easier for lenders to offer. Thompson noted that income threshold for eligible borrowers will be raised from 80 percent of area median income to 100 percent. Additionally, the GSEs are making other modifications to reduce operational frictions for lenders.
On October 19, the CFPB issued its first enforcement action under newly-appointed Director Rohit Chopra. The consent order, issued against a provider of financial services to prisons and jails, stated that the company engaged in unfair, deceptive, and abusive acts or practices in violation of the CFPA by charging consumers fees to access their own funds on prepaid debit cards that they were required to use. The CFPB also claimed the company violated the EFTA and implementing Regulation E by requiring consumers to sign up for its debit card as a condition of receiving gate money (i.e. “money provided under state law to help people meet their essential needs as they are released from incarceration”). According to the CFPB, the company provided approximately 1.2 million debit release cards to consumers, which replaced cash or check options previously offered by state departments of correction. In addition to forcing consumers to use the debit cards to access their funds, the company also allegedly charged consumers fees that were not authorized by the cardholder agreement and misrepresented the fees that it charged. Pursuant to the consent order, the company—which neither admitted nor denied the allegations—may only charge “a reasonable inactivity fee” if a debit card is not used for 90 days. The company is also required to pay $4 million in consumer redress and a $2 million civil money penalty.
Chopra released a separate statement, saying the “case illustrates some of the market failures and harms that occur when the disbursement of government benefits is outsourced to third-party financial services companies that fail to adhere to the law.” He warned that the CFPB “will continue to scrutinize these companies, particularly when law violations and abuses of dominance undermine the intent of such government benefits, and where the harms fall heavily on people who are struggling financially.”
On October 18, consumer advocates and several state attorneys general and financial regulators responded to a request for comments issued by the OCC, Federal Reserve Board, and the FDIC on proposed interagency guidance designed to aid banking organizations in managing risks related to third-party relationships, including relationships with fintech-focused entities. (See letters here and here.) As previously covered by InfoBytes, the proposed guidance addressed key components of risk management, such as (i) planning, due diligence and third-party selection; (ii) contract negotiation; (iii) oversight and accountability; (iv) ongoing monitoring; and (v) termination. Consumer advocates and the states, however, expressed concerns that the agencies’ proposed guidance does not “highlight the significant risks associated with high-cost lending involving third-party relationships,” and does not include measures to prevent banks from entering into nonbank lending partnerships (e.g. “rent-a-bank schemes”).
According to the consumer advocates’ letter, the agencies’ guidance “should unequivocally declare that it is inappropriate for a bank to rent out its charter to enable attempted avoidance of state consumer protection laws, in particular interest rate and fee caps, or state oversight through licensing regimes.” The consumer advocates stated that they are aware of six FDIC-supervised banks involved in rent-a-bank schemes with nonbank lenders making allegedly illegal high-cost loans, and urged the FDIC to take immediate, “overdue” action to put an end to them. Among other things, the consumer advocates said the new guidance should explicitly specify: (i) that a bank’s involvement in lending that exceeds state interest rate limits with a nonbank is a “critical activity”; (ii) that lending partnerships involving loans exceeding a fee-inclusive 36 percent annual percentage rate (APR) “pose especially high risks”; and (iii) that in instances where a loan exceeds the Military Lending Act’s 36 percent APR, the federal banking supervisor will directly examine the third-party partner and charge the bank for the cost of the examination.
The states wrote in their letter that “experience teaches us that, in the absence of an explicit disavowal of rent-a-bank schemes, the [p]roposed [g]uidance invites continued abuse of banks’ interest exportation rights, to the considerable detriment of state regulation, consumer protection, and banks’ safety and soundness.” The states strongly encouraged the agencies to “explicitly disavow rent-a-bank schemes.”
On October 18, the FTC issued its annual report to Congress on protecting older adults. Among other things, the report, Protecting Older Consumers, 2020-2021, A Report of the Federal Trade Commission, evaluates fraud trends impacting older adults and provides details on enforcement actions and efforts to combat scams related to the Covid-19 pandemic. According to the report, there were more than 334,000 fraud reports filed by consumers age 60 or older totaling more than $600 million in losses. While the FTC found that older adults were the least likely of any age group to report fraud monetary losses, older adults tended to report losing substantially more money than younger age groups. Older adults were also more likely to report financial losses related to tech support scams, prize, lottery or sweepstake scams, friend or family impersonation, and romance scams. Additionally, as online shopping has increased, the report noted that losses attributed to online shopping fraud among older adults rose sharply during the second quarter of 2020 and remained far higher than pre-pandemic levels in early 2021. The report also discussed significant FTC enforcement actions taken to protect older adults, as well as outreach and education efforts focusing on fraud prevention.
On October 15, the FTC released a staff report, Serving Communities of Color, that discusses the Commission’s enforcement and outreach efforts related to the impact of fraud on majority Black and Latino communities. The report details various studies and research. For example, one FTC study examined disparities related to payment methods received from consumers who live in communities of color compared to consumers who live in majority White communities. According to the study, consumers in communities of color more often reported a larger share of losing money when using payment methods that offer few legal protections—e.g. cash, cryptocurrency, money orders, and debit cards. In contrast, consumers living in majority White areas filed the largest share of reports about credit cards, which offer more robust fraud protection. Another study revealed that “different demographic populations reported different types of concerns at different rates,” with consumers living in majority Black communities filing a higher number of reports than consumers living in majority White communities related to credit bureaus, banks and lenders, used auto issues, and debt collection. According to FTC findings, consumers living in majority Latino communities also filed a larger share of reports about credit bureaus, banks and lenders, debt collection, auto issues and business opportunities. The report discusses, among other things, more than 25 enforcement actions where the FTC identified that the unlawful conduct either targeted or disproportionately affected communities of color. Examples include auto buying cases, for-profit colleges, student loan debt relief programs, prepaid card scams, fake Covid-19 products and services, business “opportunities” and pyramid schemes, payday lending, and credit and consumer reporting accuracy. The report also shares information about FTC outreach programs to consumers in these communities.
On October 8, the New York governor signed S737A, which requires creditors and debt collectors to clearly and conspicuously disclose to a debtor that communications are available in alternative formats. Among other things, the bill requires that creditors and debt collectors: (i) be assessed a civil penalty of up to $250 for violations of the law and up to $500 for each subsequent violation; and (ii) supply a phone number for consumers to request the letter in an alternative format. The bill also defines “communication,” “debt,” and “debt collector.”
Earlier this year, the Hawaii governor signed HB 1192, which amends certain provisions related to small dollar lending requirements. Specifically, the bill sets forth a new licensing requirement for “installment lenders” and specifies various consumer protection requirements. The bill defines installment lender broadly as “any person who is the business of offering or making a consumer loan, who arranges a consumer loan for a third party, or who acts as an agent for a third party, regardless of whether the third party is exempt from licensure under this chapter or whether approval, acceptance, or ratification by a third party is necessary to create a legal obligation for the third party, through any method including mail, telephone, the Internet, or any electronic means.” This language appears to capture loans offered under a bank partnership model under the purview of the new law.
Further, the bill: (i) caps installment loan amounts at $1,500, and restricts the total amount of changes to no more than 50 percent of the principal loan amount; (ii) limits monthly maintenance fees to between $25 and $35 depending on the installment loan’s original principal amount; (iii) stipulates that the minimum repayment term is two months for installment loans of $500 or less, or four months for loans of $500.01 or more; (iv) states that lenders must “accept prepayment in full or in part from a consumer prior to the loan due date and shall not charge the consumer a fee or penalty if the consumer opts to prepay the loan; provided that to make a prepayment, all past due interest and fees shall be paid first; (v) prohibits a consumer’s repayment obligations to be secured by a lien on real or personal property; (vi) prohibits lenders from requiring consumers to purchase add-on products such as credit insurance; (vii) provides that the maximum contracted repayment term of an installment loan is 12 months; (viii) caps the annual interest rate on installment loans at 36 percent; and (ix) states that any installment loan made without a required license is void (the collection, receipt, or retention of any principal, interest, fees, or other charges associated with a voided loan is prohibited).
The bill exempts certain financial institutions (e.g., banks, savings banks, savings and loan associations, depository and nondepository financial services loan companies, credit unions) from the installment lender licensing requirements.
The bill also repeals existing state law on deferred deposits. While HB 1192 became effective July 1, provisions related to the repeal of the existing law on deferred deposits and installment lender licensing requirements are effective January 1, 2022. License applications will be available via the Nationwide Multistate Licensing System.
On October 4, the California governor signed AB 1320, which requires a licensee to supply a toll-free telephone number on its internet website so that a customer may contact the licensee for customer service issues and receive live customer assistance, in addition to displaying the days and times that the telephone line is operative. Among other things, the bill requires that a telephone number be included in the information contained in a receipt given to a customer at the time of a money transmission transaction. In addition, the bill specifies that the telephone line must be operative “at least 10 hours per day, Monday through Friday, excluding federal holidays.” The bill is effective July 1, 2022.
On October 12, the California Department of Financial Protection and Innovation (DFPI) issued a third draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. In July 2019, California released the first draft of the proposed regulations, initiated the formal rulemaking process with the Office of Administrative Law in September 2020, and subsequently released a second round of modifications in August (covered by InfoBytes here, here, and here). The third modifications to the proposed regulations follow a consideration of public comments received on the various iterations of the proposed text. Among other things, the proposed modifications:
- Amend several terms including “approved advance limit,” “approved credit limit,” “at the time of extending a specific commercial financing offer,” “benchmark rate,” “broker,” “provider,” and “recipient funds.”
- Define the term “specific commercial financing offer” to mean a written communication to a recipient related to specific payment amounts and costs of financing, but does not include a recipient’s name, address, or general interest in financing.
- Amend certain disclosure requirements and thresholds, including specific circumstances that a provider can disregard when making calculations and disclosures.
- Clarify APR calculation requirements and tolerances and outline disclosure criteria for specifying the amount of financing used to pay down or pay off other amounts owed by a recipient.
- Amend duties and requirements for financers and brokers.
- Amend criteria for specifying the amount of funding a recipient will receive.
Comments on the third modifications must be received by October 27.