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Financial Services Law Insights and Observations

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  • DOJ announces $3 million SCRA settlement with auto finance company

    Federal Issues

    On August 1, the Department of Justice (DOJ) announced a $3 million settlement with a captive auto finance company, resolving allegations that it violated the Servicemembers Civil Relief Act (SCRA) by repossessing 113 vehicles owned by SCRA-protected servicemembers without first obtaining court orders and failing to refund upfront capitalized cost reduction (CCR) amounts to servicemembers who lawfully terminated vehicle leases early under the SCRA. According to the DOJ’s complaint, when a servicemember terminated their lease early pursuant to the SCRA, the finance company retained the entire CCR amount even though the SCRA requires that it refund all lease amounts paid in advance for a period after the effective date of the termination. The settlement agreement covers all repossessions of servicemembers vehicles and leases terminated by servicemembers since January 2008, and requires the finance company to create an almost $3 million settlement fund to compensate affected servicemembers and pay the U.S. Treasury $62,000. Moreover, the agreement requires the finance company to review and update its SCRA policies and procedures to prevent future violations and to provide SCRA compliance training to specified employees.

    Federal Issues DOJ SCRA Servicemembers Department of Treasury

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  • VA encourages relief for Hurricane Barry-affected borrowers

    Federal Issues

    On July 30, the Department of Veterans Affairs (VA) issued Circular 26-19-21, encouraging mortgagees to provide relief for VA borrowers affected by Hurricane Barry on the Gulf Coast. Among other forms of assistance, the Circular encourages loan holders and servicers to (i) extend forbearances to borrowers in distress because of the severe storms and flooding; (ii) establish a 90-day moratorium from the disaster date on initiating new foreclosures on affected loans; (iii) waive late charges on affected loans; and (iv) suspend credit reporting. The Circular is effective until July 1, 2020. Mortgage servicers and veteran borrowers are also encouraged to review the VA’s Guidance on Natural Disasters.

    Find continuing InfoBytes coverage on disaster relief guidance here.

    Federal Issues Disaster Relief Department of Veterans Affairs Consumer Finance Mortgages

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  • Senators ask DOJ to clarify website accessibility under ADA

    Federal Issues

    On July 30, seven Republican Senators sent a letter to Attorney General William Barr requesting updates on the DOJ’s efforts to clarify website accessibility requirements for businesses under the Americans with Disabilities Act (ADA). This request follows a letter previously sent to the DOJ in September 2018, requesting the Department’s help in resolving uncertainties regarding website accessibility regulations and requesting guidance to address conflicting court opinions. According to the Senators, the DOJ withdrew two Notices of Proposed Rulemaking concerning website accessibility standards in 2017 under claims that it is “evaluating whether promulgating regulations about the accessibility of Web information and services is necessary and appropriate. Such an evaluation will be informed by additional review of data and further analysis. The Department will continue to assess whether specific technical standards are necessary and appropriate to assist covered entities with complying with the ADA.” The DOJ responded a month later, stating that “absent the adoption of specific technical requirements for websites through rulemaking, public accommodations have flexibility in how to comply with the ADA’s general requirements of nondiscrimination and effective communication. Accordingly, noncompliance with a specific voluntary technical standard for website accessibility does not necessarily indicate noncompliance with the ADA.”

    In their 2019 letter, the Senators stressed that, because the DOJ did not specify further concrete plans to address website accessibility guidance, businesses are subject to litigation risk and inconsistent outcomes. Moreover, the Senators urged the DOJ to provide further clarity, particularly because the issue of whether private websites must comply with the ADA “continues to be subject to conflicting judicial opinions.” Additionally, they pointed to the Web Content Accessibility Guidelines 2.0 standard, which governs website accessibility for federal government websites, and noted that if the government gets the benefit of clear guidance, then the public should as well.

    Federal Issues DOJ U.S. Senate Americans with Disabilities Act

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  • HUD approves settlement resolving redlining allegations

    Federal Issues

    On July 29, HUD announced a conciliation agreement to resolve allegations that a California-based bank engaged in redlining practices from 2014 to at least 2017 against African-American and Latino mortgage applicants in the Los Angeles region. In 2017, a California-based community advocacy organization filed a complaint with HUD asserting that the bank violated the Fair Housing Act by engaging in discriminatory acts, which allegedly resulted in a lower number of mortgages made to African-American and Latino borrowers relative to the area’s demographics and to the industry as a whole. Additionally, the complaint claimed that the bank located and maintained its branches in areas that do not serve minority neighborhoods or borrowers. While the bank denies having engaged in any discriminatory behavior, it agreed to (i) invest $5 million in a loan subsidy fund to increase credit opportunities for residents of majority-minority neighborhoods; (ii) contribute $1.3 million to advertising and community outreach; and (iii) provide $1 million in grants for various financial education, counseling, community revitalization, and homelessness programs. The bank also committed to originating “$100,000,000 in home purchase, home improvement and home refinance loans to borrowers in majority-minority areas, and to open a full-service branch serving the banking and credit needs of residents in a majority-minority and low- and moderate-income neighborhood.”

    Federal Issues HUD Fair Lending Redlining Fair Housing Act Mortgages

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  • House Fintech Task Force holds hearing on alternative data

    Federal Issues

    On July 25, the House Financial Services Committee’s Task Force on Financial Technology held a hearing, entitled “Examining the Use of Alternative Data in Underwriting and Credit Scoring to Expand Access to Credit.” As noted by the hearing committee memorandum, credit reporting agencies (CRAs) have started using alternative data to make lending decisions and determine credit scores, in order to expand consumer access to credit. The memorandum points to some commonly used alternative data factors, including (i) utility bill payments; (ii) online behavioral data, such as shopping habits; (iii) educational or occupational attainment; and (iv) social network connections. The memorandum notes that while there are potential benefits to using this data, “its use in financial services can also pose risks to protected classes and consumer data privacy.” The committee also presented two draft bills from its members that address relevant issues, including a draft bill from Representative Green (D-TX) that would establish a process for providing additional credit rating information in mortgage lending through a five-year pilot program with the FHA, and a draft bill from Representative Gottheimer (D-N.J.) that would amend the FCRA to authorize telecom, utility, or residential lease companies to furnish payment information to CRAs.

    During the hearing, a range of witnesses commented on financial institutions’ concerns with using alternative data in credit decisions without clear, coordinated guidance from federal financial regulators. Additionally, witnesses discussed the concerns that using alternative data could produce outcomes that result in disparate impacts or violations of fair lending laws, noting that there should be high standards for validation of credit models in order to prevent discrimination resulting from neutral algorithms. One witness argued that while the concern of whether using alternative data and “algorithmic decisioning” can replicate human bias is well founded, the artificial intelligence model their company created “doesn’t result in unlawful disparate impact against protected classes of consumers” and noted that the traditional use of a consumer’s FICO score is “extremely limited in its ability to predict credit performance because its narrow in scope and inherently backward looking.” The key to controlling algorithmic decision making is transparency, another witness argued, stating that if the machine is deciding what credit factors are more important or not, the lender has “got to be able to put it on a piece of paper and explain to the consumer what was more important,” as legally required for “transparency in lending.”

    Federal Issues U.S. House House Financial Services Committee Fintech Alternative Data

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  • DOJ announces settlements to resolve predatory loan modification allegations

    Federal Issues

    On July 30, the DOJ announced several settlements with a group of California-based mortgage loan modification service providers to resolve allegations that the defendants violated the Fair Housing Act by targeting Hispanic homeowners for predatory mortgage loan modification services and interfering with the homeowners’ ability to keep their homes. According to the DOJ, the defendants persuaded as many as 400 Hispanic homeowners to pay approximately $5,000 for audits advertised as essential for loan modifications, but in actuality had no impact on the modification process and provided no financial benefit. Additionally, the DOJ claimed that the defendants “encouraged their clients to stop making mortgage payments and instructed them to cease contact with their lenders,” which led to many homeowners losing their homes due to defaulted mortgages. The lawsuit stemmed from complaints filed with HUD by two of the defendants’ former clients, who intervened in the lawsuit, along with their attorney, Housing and Economic Rights Advocates (HERA), and members of one of the former client’s family.

    While three of the companies identified as defendants in the complaint ceased operations, the settlement agreements resolve allegations against the individuals responsible for owning and operating the now-defunct companies. Under the terms of the agreements, the individual defendants have agreed to, among other things, (i) refrain from engaging in the discriminatory conduct; and (ii) contribute more than $148,000 towards a restitution fund to reimburse fees paid to the defendants by former clients. Additionally, five of the individual defendants have agreed to pay an additional $405,699 in suspended judgments should it be determined the defendants misrepresented their current financial situations. The DOJ noted that the individual defendants have also agreed to an additional $91,650 in compensation in separate settlements reached with their former clients and HERA.

    Federal Issues DOJ Fair Lending Fair Housing Act Predatory Lending Mortgages

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  • FTC, Ohio AG halt payment processor and credit card interest-reduction telemarketing operations

    Federal Issues

    On July 29, the FTC and the Ohio attorney general announced temporary restraining orders and asset freezes issued by the U.S. District Court for the Western District of Texas against a payment processor and a credit card interest-reduction telemarketing operation (see here and here). According to the FTC, the payment processor defendants allegedly violated the FTC Act, the Telemarketing Sales Rule (TSR), and various Ohio laws by, among other things, generating and processing remotely created payment orders or checks that allowed merchants—including deceptive telemarketing schemes—the ability to withdraw money from consumers’ bank accounts. The FTC asserted that the credit card interest-reduction defendants deceptively promised consumers significant credit card interest rate reductions, along with “a 100 percent money back guarantee if the promised rate reduction failed to materialize or the consumers were otherwise dissatisfied with the service.” However, the FTC claimed that most customers never received the promised rate reduction, were refused refund requests, and often received collection or lawsuit threats. Additionally, the credit card interest-reduction defendants allegedly violated the TSR by charging advance fees, failing to properly identify the service in telemarketing calls, and failing to pay to access the FTC’s National Do Not Call Registry.

    Federal Issues FTC State Attorney General Enforcement Payment Processors Credit Cards Telemarketing Sales Rule FTC Act

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  • FDIC fines banks for flood insurance violations

    Federal Issues

    On July 26, the FDIC announced its release of a list of administrative enforcement actions taken against banks and individuals in May and June. The list reflects that the FDIC issued 15 orders, which include “one stipulated consent order; three termination of consent orders; five Section 19 orders; one stipulated civil money penalty order; two stipulated removal and prohibition orders; two voluntary terminations of deposit insurance; and one adjudicated civil money penalty order.”

    Among other actions, the FDIC assessed a civil money penalty (CMP) against a Wisconsin-based bank for alleged violations of the Flood Disaster Protection Act and National Flood Insurance Act, including, among other things, failing to (i) obtain flood insurance coverage on loans at the time of origination; (ii) obtain adequate flood insurance coverage on loans; (iii) meet escrow requirements for flood insurance; (iv) follow force-placement flood insurance procedures; or (v) provide borrowers with notice of the availability of federal disaster relief assistance when reviewing loans or within a reasonable timeframe.

    The FDIC Board also adopted and affirmed an administrative law judge’s recommended decision and issued a CMP against a Louisiana-based bank for alleged violations of the National Flood Insurance Act. The findings stem from a 2015 compliance examination, and included failures to (i) obtain or maintain flood insurance coverage; (ii) obtain sufficient flood insurance coverage; and (iii) properly notify borrowers of coverage discrepancies.

    Federal Issues FDIC Enforcement Flood Disaster Protection Act National Flood Insurance Act Civil Money Penalties Mortgages

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  • Agencies complete living will evaluations, extend next filing deadline

    Federal Issues

    On July 26, the FDIC and the Federal Reserve Board announced several resolution plan actions, including completing their evaluations of the 2018 resolution plans for 82 foreign banks and 15 domestic banks. Additionally, the agencies extended the deadline for the next resolution plans (known as living wills) from those firms until July 1, 2021. The agencies note that the deadline extension is to help mitigate the uncertainty around the filing requirements during the pendency of the agencies’ April proposal, which considers three changes: (i) creating tiered planning requirements for living wills based on an institution’s size, complexity, and other factors; (ii) revising the frequency and required content of resolution plan submissions, including eliminating living will submission requirements for certain smaller and less complex institutions; and (iii) improving communication between the FDIC and banks on resolution planning. (Previously covered by InfoBytes here.)

    The agencies’ evaluations did not identify shortcomings or deficiencies in the 2018 resolution plans of the 82 foreign banks and are requesting additional information in the next resolution plans from seven firms.

    Federal Issues Agency Rule-Making & Guidance FDIC Federal Reserve Living Wills Of Interest to Non-US Persons

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  • FDIC encourages relief for Missouri and Texas borrowers

    Federal Issues

    On July 26, the FDIC issued Financial Institution Letters FIL-44-2019 and FIL-45-2019 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Missouri and Texas affected by severe weather. FIL-44-2019 covers severe storms, tornadoes, and flooding causing significant property damage in areas of Missouri from April 29 through the present. FIL-45-2019 covers severe storms and flooding causing significant property damage in areas of Texas from June 24 to June 25. The regulatory guidance notes that certain areas in Texas and Missouri were designated federal disaster areas.

    The FDIC is encouraging institutions to consider, among other things, extending repayment terms, restructuring existing loans, or easing terms for new loans to borrowers affected by the severe weather. Additionally, the FDIC notes that institutions may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.

    Find continuing InfoBytes coverage on disaster relief guidance here.

    Federal Issues Disaster Relief CRA Mortgages

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