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States sue installment lender for hidden add-on products
On August 16, a multistate lawsuit led by the Pennsylvania attorney general was filed against a subprime installment lender for allegedly charging consumers for hidden add-on products without their consent. According to the Pennsylvania AG’s press release, consumers believed they had entered into agreements to borrow and repay, over time, a fixed loan amount when allegedly the lender “added hundreds to thousands of dollars to the total amount a consumer owed.” Among other things, the complaint claimed the lender’s alleged “aggressive, high-pressure sales tactics” were “dictated by a profit-driven model,” and that its loans and aggressive sales tactics targeted the most vulnerable borrowers (often subprime and deep subprime borrowers that already carry significant credit card, installment loan, and/or student loan debt) by offering them “small dollar personal loans with high interest costs.” Additionally, the complaint contended that the lender’s corporate policies and practices resulted in employees charging consumers for add-on products they did not know about and did not consent to buy, and that employees were encouraged to perpetrate the unlawful conduct by being rewarded for maximizing add-on charges. The complaint seeks restitution, repayment of unlawfully obtained profits, civil penalties, rescission or reformation of all contracts or loan agreements between the lender and affected consumers, and injunctive relief.
California requires consumer credit contract notices to be provided in multiple languages
On August 15, the California governor signed SB 633, which expands the obligation of creditors who obtain more than one person’s signature on a consumer credit contract when providing cosigners a notice regarding their obligation if the borrower does not pay the debt. Under existing law, these notices had to be provided in English and in Spanish. A creditor who provides a consumer a contract in a foreign language will now have to provide the cosigner notice in the language in which the contract is written. In addition to expanding the languages the notice must be provided in, the required cosigner notice must be provided even if the individuals are married to each other. SB 633 also requires the California Department of Financial Protection and Innovation to provide translations of these notices on its website by January 1, 2023, along with any translations of languages later added to state law. Additionally, notice must be provided only on a separate sheet preceding the contract.
District Court rules use of “obligation” in collection letter carries “litigious connotations”
On August 11, the U.S. District Court for the District of New Jersey denied a defendant debt collector’s motion for judgment on the pleadings, ruling that using the word “obligation” in a letter suggested that a time-barred debt was legally enforceable. The plaintiff received a letter in 2022 seeking to recover unpaid debt that had been in default since August 2017 (the statute of limitations for collecting the debt had expired in August 2021). The letter included language stating: “We recognize that a possible hardship or pitfall may have prevented you from satisfying your obligation. We are presenting three options to resolve your balance. We are not obligated to renew this offer.” The letter also stated that it was an attempt to collect a debt and that “any information obtained will be used for that purpose.” The plaintiff sued for violations of Sections 1692e(2)(A), 1692e(5), and 1692e(10) of the FDCPA, claiming the defendant’s letter offered payment options for time-barred debt. The defendant moved for judgment on the pleadings, arguing that that the claims fail because the letter did not include language that could lead the plaintiff to believe that the time-barred debt could be legally enforced.
The court reviewed whether the phrase “satisfying your obligation” would confuse the least sophisticated debtor, and eventually determined that the word “obligation” carried “litigious connotations” and therefore was “closer to ‘settlement’ and other impermissible language than it is to permissible language such as ‘satisfy.’” According to the court, “[i]t is more than plausible, and even likely, that the least sophisticated debtor would understand that their ‘obligation’ is a duty to pay that a creditor could enforce in court through the commencement of litigation.” The court also explained that Congress intended “obligation” as used in the FDCPA to mean “a legal duty arising from mutual promises to pay on the one hand and to perform services or provide goods on the other,” including “one susceptible to being ‘reduced to judgement.’” As such, the court concluded that when viewing the letter in its entirety, it appeared to be “carefully crafted to push the envelope of acceptable language under the FDCPA while maximizing the chance of collecting from debtors.”
FDIC warns financial institutions about NSF fees
On August 18, the FDIC issued FIL-40-2022 along with supervisory guidance to warn supervised financial institutions that charging customers multiple non-sufficient funds (NSF) fees on re-presented unpaid transactions may increase regulatory scrutiny and litigation risk. According to the FDIC, some institutions’ disclosures did not fully or clearly describe their re-presentment practices and failed to explain that the same unpaid transaction may result in multiple NSF fees if presented more than once. Failing to disclose “material information to customers about re-presentment and fee practices has the potential to mislead reasonable customers,” the agency said, noting that the material omission of this information is considered to be deceptive pursuant to Section 5 of the FTC Act. Additionally, “there are situations that may also present risk of unfairness if the customer is unable to avoid fees related to re-presented transactions,” the FDIC said.
The supervisory guidance also discussed the agency’s approach for addressing violations of law, noting that it will focus on identifying re-presentment-related issues to ensure correction of deficiencies and remediation to harmed customers. The agency stated that examiners “will generally not cite UDAP violations that have been self-identified and fully corrected prior to the start of a consumer compliance examination,” and noted that it “will consider an institution’s record keeping practices and any challenges an institution may have with retrieving, reviewing, and analyzing re-presentment data, on a case-by-case basis, when evaluating the time period institutions utilized for customer remediation.” However, the FDIC warned that “[f]ailing to provide restitution for harmed customers when data on re-presentments is reasonably available will not be considered full corrective action.” Financial institutions are encouraged to review practices and disclosures related to the charging of NSF fees for re-presented transactions and should consider FDIC risk-mitigation practices to reduce the risk of customer harm and potential violations.
Maryland Court of Appeals says law firm collecting HOA debt is not engaged in the business of making loans
On August 11, a split Maryland Court of Appeals held that “a law firm that engages in debt collection activities on behalf of a client, including the preparation of a promissory note containing a confessed judgment clause and the filing of a confessed judgment complaint to collect a consumer debt, is not subject to the Maryland Consumer Loan Law [(MCLL)].” A putative class action challenging the law firm’s debt collection practices was filed in Maryland state court in 2018. According to the opinion, several homeowners associations and condominium regimes (collectively, “HOAs”) retained the law firm to help them draft and negotiate promissory notes memorializing repayment terms of delinquent assessments. These promissory notes, the opinion said, included confessed judgment clauses that were later used against homeowners who defaulted on their obligations. The suit was removed to federal court and was later stayed while the Maryland Court of Appeals weighed in on whether the law firm was subject to the MCLL. Loans made under the MCLL by an unlicensed entity render the loans void and unenforceable, the opinion said.
Class members claimed that the law firm is in the business of making loans and that the promissory notes are subject to the MCLL and “constitute ‘loans’ because they are an extension of credit enabling the homeowners to pay delinquent debt to the HOAs.” Because neither the law firm nor the HOAs are licensed to make loans the promissory notes are void and unenforceable, class members argued. The law firm countered that it (and the HOAs) are not obligated to be licensed because they are not lenders that “engage in the business of making loans” as provided in the MCLL.
On appeal, the majority concluded that there is no evidence that the state legislature intended to require HOAs to be licensed “in order to exercise their statutory right to collect delinquent assessments or charges, including entering into payment plans for the repayment of past-due assessments.” Moreover, in order to qualify for a license, an applicant “must demonstrate, among other things, that its ‘business will promote the convenience and advantage of the community in which the place of business will be located[]’”—criteria that does not apply to an HOA or a law firm, the opinion stated. Additionally, applying class members’ interpretation would lead to “illogical and unreasonable results that are inconsistent with common sense,” the opinion read, adding that “[t]o hold that the MCLL covers all transactions involving any small loan or extension of credit—without regard to whether the lender is ‘in the business of making loans’—would cast a broad net over businesses that are not currently licensed under the MCLL.”
The dissenting judge countered that the law firm should be subject to the MCC because to determine otherwise would allow law firms to engage in the business of making loans in the form of new extensions of credit with confessed judgment clauses and would “create a gap in the Maryland Consumer Loan Law that the General Assembly did not intend.”
District Court approves $84 million payment processing settlement
On August 17, the U.S. District Court for the District of Nebraska granted final approval of an $84 million class action settlement resolving allegations that a payment processing company’s billing practices overcharged merchants. Class members retained the company to process credit card payments and claimed that the company allegedly charged fees that did not align with the terms of their contracts. Class members accused the company of Racketeer Influenced and Corrupt Organizations Act violations, breach of contract, and fraudulent concealment related to allegations that the company assessed noncompliance fees, increased contractual credit card discount rates, and shifted credit card transactions from lower-cost rate tiers to higher-cost rate tiers. Under the terms of the settlement, the company will pay up to $84 million into a settlement fund, which will provide cash benefits to class members and cover administrative costs, attorney fees, and other expenses.
8th Circuit affirms rulings for defendant in FCRA suits
On August 16, the U.S. Court of Appeals for the Eighth Circuit affirmed a district court’s dismissal of a complaint in an FCRA case. According to the opinion, the plaintiff filed for Chapter 7 bankruptcy protection. The bankruptcy court entered a discharge, and when the plaintiff obtained the credit reports, among other things, one debt was still being reported as “Current; Paid or Paying as Agreed” with an outstanding balance. The plaintiff filed suit, alleging the defendants violated the FCRA because they “do not maintain reasonable procedures to ensure debts that are derogatory prior to a consumer’s bankruptcy filing do not continue to report balances owing or past due amounts when those debts are almost certainly discharged in bankruptcy.” The plaintiff claimed to suffer emotional distress and obtained credit at less favorable rates. The defendants jointly moved to dismiss the complaint, contending that the plaintiff failed to plausibly allege the reporting. The district court granted the motion and dismissed the case with prejudice.
According to the 8th Circuit, the plaintiff’s complaint was “too thin to raise a plausible entitlement to relief.” The appellate court noted that, “[i]t is not the credit reporting agencies’ job to “wade into individual bankruptcy dockets to discern whether a debt survived discharge.” The appellate court ultimately agreed with the district court that “’there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.’”
The same day, in a separate suit, the 8th Circuit affirmed another district court’s dismissal of a complaint in an FCRA case. According to the opinion, the plaintiff filed for Chapter 7 bankruptcy protection, and after the debts were discharged, the plaintiff’s credit report still listed a debt with an outstanding balance that was noted as “open” and “past due.” The plaintiff filed suit, alleging the defendants violated the FCRA “by neglecting to ‘maintain reasonable procedures to ensure debts that are derogatory prior to a consumer’s bankruptcy filing do not continue to report balances owing or past due amounts when those debts are almost certainly discharged in bankruptcy.’” The plaintiff sought damages resulting from emotional distress and financial harm, but the district court granted summary judgment in favor of defendants, agreeing that plaintiff failed to show proof of actual damages.
On the appeal, the 8th Circuit noted that it was the bankruptcy, not the information in plaintiff’s credit report, that led to her applications for credit cards being denied. Regarding her allegation about emotional distress, the appeals court reasoned that plaintiff “‘suffered no physical injury, she was not medically treated for any psychological or emotional injury, and no other witness corroborated any outward manifestation of emotional distress.’” Accordingly, the court concluded that defendants were entitled to judgment as a matter of law.
District Court grants summary judgment concerning TILA, ECOA, FHA claims
On August 12, the U.S. District Court for the Southern District of Indiana issued an order denying plaintiffs’ motion for partial summary judgment and granting defendants’ cross-motion for summary judgment in an action concerning alleged violations of TILA, ECOA, and FHA disparate impact claims. According to the court’s determination, the defendant corporate entity was not a “creditor” during the leasing portion of the underlying rent-to-buy (RTB) agreements, and the plaintiffs lacked standing on certain claims because the wrong parties were targeted.
The defendant realty group purchases, sells, and manages real estate. The plaintiffs all entered into RTB agreements with the realty group that allowed the renter to make 24 payments and then execute a sales contract for the property. The agreements carried interest rate terms between 9.87 and 18 percent. According to the plaintiffs, the defendants, among other things, did not provide TILA-required disclosures for high-cost mortgages, did not require written certifications that tenants had obtained counseling prior to entering into the transaction, and did not provide property appraisals to tenants.
The plaintiffs sued alleging several claims under TILA for failure to provide required information. However, the court concluded that during the 24-month rental period, the realty group was not a “creditor” but was instead a “landlord.” Moreover, the court determined that “the only entities that could arguably be considered creditors are the Individual Land Trusts as the sellers and parties to the Conditional Sales Contract.” These trusts were not named as defendants, the court observed, adding that the plaintiffs failed to meet the burden of showing that the land trusts were sufficiently related to the named defendants to allow the court to “pierce the corporate veil” and hold the named defendants liable for actions conducted by the non-party individual land trusts.
With respect to the plaintiffs’ ECOA claims, which claimed that the realty group’s policies and practices were intentionally discriminatory and had a disparate impact on the basis of race, color, and/or national origin, the court applied the same rationale as it did to the TILA claims and again ruled that the realty group was not a “creditor.” In terms of plaintiffs’ FHA claims, the court said that “the racial disparity must have been created by the defendant.” In this action, the court determined that the realty group did not create the condition, reasoning that “the fact that lower-priced homes are more likely to exist in minority neighborhoods is not of Defendants’ making and existed before, and without, the RTB Program.”
However, the court’s order does allow certain individual and class claims related to disparate treatment under the FHA to proceed, as well as certain claims regarding Indiana law related to standard contract terms and the condition of homes in the RTB program.
Ed. Dept. discharges additional $3.9 billion
On August 16, the Department of Education announced that 208,000 borrowers who attended a large for-profit post-secondary education institution will receive full student loan discharges totaling $3.9 billion. The announcement builds on previous actions taken by the Department that have resulted in the approval of $1.9 billion in discharges for another 130,000 borrowers, including borrower defense findings that the institution “engaged in widespread and pervasive misrepresentations related to the ability of students to get a job or transfer credits” and lied about certain program accreditation. State attorneys general around the country, the CFPB, and Veterans Education Success also provided significant assistance in the Department’s findings. The Department referred in its announcement to a 2014 CFPB action, which alleged that the institution pressured students into taking out high-cost private loans even though it allegedly knew that most students would ultimately default. The Bureau ultimately announced a judgment barring the institution from offering or providing student loans, and obtained judgments against several entities accused of providing substantial assistance to the institution (covered by InfoBytes here). “While today’s action affects federal loans, and while past CFPB actions have addressed many of the private loans peddled by [the institution],” CFPB Director Rohit Chopra said in remarks following the announcement, he stressed that the Bureau “will continue our work with the Department of Education and other regulators to open up the books on in-house institutional lending programs—these are private loans pushed directly by schools—to ensure that they are not strongarming their students with illegal practices.”
The Department also announced that it has notified another for-profit institution that it is required to pay millions of dollars for approved borrower defense to repayment discharges. The institution can present arguments as to why it should not be required to pay or request a hearing before the Department’s Office of Hearings and Appeals, the Department said.
District Court dismisses EFTA claims over prepaid debit card fraud
On August 11, the U.S. District Court for the District of Maryland dismissed a putative class action alleging violations of the EFTA and state privacy and consumer protection laws brought against a national bank on behalf of consumers who were issued prepaid debit cards providing pandemic unemployment benefits. The named plaintiff—a self-employed individual who did not qualify for state unemployment insurance but who was eligible to receive temporary Pandemic Unemployment Assistance (PUA) benefits—alleged that he lost nearly $15,000 when an unauthorized user fraudulently used a prepaid debit card containing PUA funds that were intended for him. The court dismissed the class claims with respect to the EFTA and Regulation E, finding that the Covid-19 pandemic was a “qualified disaster” under applicable law and regulations (i.e. PUA payments were “qualified disaster relief payments”), and that as such, the payments satisfied the CFPB’s official interpretation of Regulation E and were excluded from the definition of a “prepaid account.” The court further explained that while relevant CFPB regulations define an “account” to include a prepaid account, Regulation E excludes “any ‘account that is directly or indirectly established through a third party and loaded only with qualified disaster relief payments.’” Because the prepaid debit card in question was established through a third party and was loaded only with PUA funds, it did not meet the definition of a “prepaid account” and therefore fell outside the EFTA’s definition of a covered account. The court also disagreed with the plaintiff’s contention that PUA payments were authorized by Congress in the CARES Act due to the public health emergency rather than a disaster.