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Massachusetts AG reaches $1.25 million settlement with online lender
On January 21, the Massachusetts attorney general announced a $1.25 million settlement with an online marketplace lender to resolve allegations that it violated the state’s Small Loan Statute by facilitating the origination of loans with excessive interest rates to Massachusetts borrowers. According to an assurance of discontinuance (AOD) filed in the Suffolk Superior Court, the company allegedly facilitated personal loans to Massachusetts residents with interest rates exceeding the statutory interest rate cap set by the Small Loan Statute, which regulates terms for consumer loans of $6,000 or less. “Small loans” are defined by the statute as those where the disbursed amount is $6,000 or less. To determine whether a loan is a “small loan,” the Small Loan Statute provides that if, after all deductions or payments (whether on account of interest, expenses, or principal made substantially contemporaneously with the making of the loan), the amount retained by the borrower is $6,000 or less, the transaction will be deemed to be a loan in the amount of the sum retained by the borrower after deductions or payments, notwithstanding that the loan was nominally for a greater sum (the “deduction provision”). Among other things, the AG’s office claimed the company facilitated “small loans” with interest rates above the maximum permitted rate for non-licensed small loan companies, and that after the company obtained a small loan company license, it allegedly facilitated loans that exceeded the maximum permitted rate for licensed small loan companies based in part on its reading of the Act’s “deduction provision.” The company admitted no liability, agreed to pay $1.25 million to the Commonwealth, comply with Massachusetts law, and stop facilitating small loans to state residents with interest rates that exceed the maximum permissible rate based on the AG’s reading.
States urge Supreme Court to review FTC’s restitution authority
On January 30, a coalition of attorneys general from 22 states, the District of Columbia, and the Commonwealth of Puerto Rico filed an amicus brief in support of the FTC in a U.S. Supreme Court action that is currently awaiting the Court’s decision to grant certiorari. Last December, the FTC filed a petition for a writ of certiorari asking the Court to reverse an opinion issued by the U.S. Court of Appeals for the Seventh Circuit last August, which held that Section 13(b) of the FTC Act does not give the FTC power to order restitution when enforcing consumer protections under the FTC Act. (Covered by InfoBytes here.) The AGs assert, however, that restitution is a critical FTC enforcement tool that provides direct benefits to the amici states and their residents. Arguing that the 7th Circuit’s decision will impede federal-state collaborations to combat unfair and deceptive practices—citing recent FTC restitution amounts that directly benefited consumers in Illinois, Indiana, and Wisconsin—the AGs stress that without the authority to seek restitution, the states “may be forced to redirect resources to compensate for work that would have previously been performed by the FTC.” The AGs also discuss the states’ interest in the “uniform application of federal law.” The 7th Circuit’s decision “upends decades of settled practice and precedent,” the AGs contend, and may provide the opportunity for defendants to “forum shop” as they seek to transfer their cases to take advantage of a decision that may work in their favor. As a result, the decision has created confusion where none previously existed, the AGs claim.
As previously covered by InfoBytes, the FTC filed a brief in a separate action also pending the Court’s decision to grant certiorari that similarly addresses the question of whether the FTC is empowered by Section 13(b) to demand equitable monetary relief in civil enforcement actions. In this case, the petitioners are appealing a 9th Circuit decision, which upheld a $1.3 billion judgment against them for allegedly operating a deceptive payday lending scheme. The 9th Circuit rejected the petitioners’ argument that the FTC Act only allows the court to issue injunctions, concluding that a district court may grant any ancillary relief under the FTC Act, including restitution.
Colorado reminds entities of retail credit seller UCCC notification requirements
On December 27, the Colorado Department of Law issued an advisory stating that consumers may not be obligated to pay finance charges on consumer credit transactions that are purchased, acquired, or otherwise assigned to retail credit sellers that have not filed applicable notifications required by the Colorado Uniform Consumer Credit Code (UCCC). According to the advisory, in these situations, entities may be “required to re-apply all payments so that the consumer is not assessed any finance charges and issue refunds to the consumer of any resulting credit balance.” The UCCC regulates the terms and conditions of consumer credit in the state, including payday loans, automobile loans, second mortgages, state-issued credit cards, and signature loans. A current list of retail credit sellers that have notifications on file with the office can be accessed here.
Payday lender settles with North Carolina AG for $825,000
On January 27, the North Carolina attorney general announced that a Florida-based payday lender (lender) agreed to pay $825,000 to settle allegations of usury, lending without a license, unlawful debt collection and unfair and deceptive practices in violation of state consumer protection laws. According to the announcement, though the lender was not licensed in the state, it advanced “more than 400 loans online to financially distressed North Carolina consumers at interest rates between 78 to 252 percent,” which is markedly higher than the state interest rate limit of 30 percent. The AG claimed that the lender tried to skirt North Carolina laws by requiring some borrowers to collect their loan funds outside of the state. The AG also alleged that the lender required borrowers to secure the loans with their vehicle titles, which enabled the lender to repossess and sell the borrowers’ vehicles when they defaulted or were late on payments. In the settlement, without admitting to the AG’s allegations, the lender agreed to return to North Carolina borrowers (i) all fees and interest paid on the loans by the borrowers; (ii) all the auction proceeds exceeding the loan principal to borrowers whose vehicles were repossessed and sold at auction; and (iii) cars owned by borrowers that were repossessed but not sold at auction. Among other things, the lender will also be permanently barred from making loans to, and collecting payments from, North Carolina borrowers, and is prohibited from putting liens on and repossessing vehicles owned by borrowers.
Parties file amicus briefs in CFPB constitutionality challenge
On January 22, a coalition of attorneys general from 23 states and the District of Columbia filed an amicus brief in Seila Law LLC v. CFPB arguing that the U.S. Supreme Court should preserve the CFPB and other consumer protections provide under Title X of Dodd-Frank. Last October the Court granted cert in Seila to answer the question of whether an independent agency led by a single director violates the Constitution’s separation of powers under Article II. The Court also directed the parties to brief and argue whether 12 U.S.C. §5491(c)(3), which sets up the CFPB’s single director structure and imposes removal for cause, is severable from the rest of the Dodd-Frank Act, should it be found to be unconstitutional. (Previous InfoBytes coverage of the parties’ submissions available here.) In their amicus brief, the AGs argue that the Bureau’s structure is constitutional, and that—even if the for-cause removal provision is deemed invalid—the Bureau and the rest of Title X should survive. The brief highlights joint enforcement actions and information sharing between the states and the Bureau, and emphasizes the importance of Title X provisions that are unrelated to the Bureau but provide states “powerful new tools” for combating fraud and abuse. “These provisions are entirely independent of the provisions governing the CFPB, and they serve distinct policy goals that Congress would not have wanted to abandon even if the CFPB itself were no longer operative,” the AGs write. While the AGs support the U.S. Court of Appeals for the Ninth Circuit’s decision that the Bureau’s single-director structure is constitutional (previously covered by InfoBytes here), they stress that should the leadership structure be declared unconstitutional, the specific clause should be severed from the rest of Dodd-Frank. According to the AGs, “[s]everability is supported not only by [Dodd-Frank’s] express severability clause, but also by Congress’s strongly expressed intent to create a more robust consumer-protection regime to avert another financial crisis.” Moreover, the AGs assert that the states would suffer concrete harm if the Court decides to eliminate the Bureau or rule that the entirety of Title X should be invalidated.
The same day the U.S. House of Representatives filed an amicus brief arguing that the Court should resolve Seila without deciding the constitutionality of the Bureau director’s removal protection because the removal protection has no bearing on the issue in the case, which is an action addressing whether the Bureau’s civil investigative demand should be enforced. However, should the Court take up the constitutionality question, the brief asserts it should uphold the removal protection. “In establishing the CFPB, Congress built upon its long history of creating, and this Court’s long history of upholding, independent agencies.” The brief states that the “CFPB performs the same functions independent regulators have long performed, and it does so under the same for-cause standard this Court first blessed 85 years ago. The CFPB’s single-director structure does not transform that traditional standard into an infringement on the President’s authority.”
Earlier on January 21, Seila Law filed an unopposed motion for divided argument and enlargement of time for oral argument, which states that all parties “agree that divided argument is warranted among petitioner, the government, and the court-appointed amicus.” The brief suggests a total of 70 minutes, with 20 minutes for the petitioner, 20 minutes for the government, and 30 minutes for the court-appointed amicus, and notes that any time allotted to the House of Representative should come from the court-appointed amicus’ time. (The House filed a separate brief asking to be allotted oral argument time.)
A full list of amicus briefs is available here. Oral arguments are set for March 3.
Illinois AG sues credit repair companies for deceptive practices
On January 13, the Illinois attorney general announced that he filed two separate suits in the Circuit Court of Cook County against two credit repair companies and three individuals who allegedly engaged in deceptive and fraudulent practices when promoting credit repair services to consumers and collecting debts in violation of the Consumer Fraud and Deceptive Business Practices Act, the Credit Services Organization Act, and the Collection Agency Act.
In the first complaint, the AG alleges a credit repair agency is not registered in Illinois as a credit services organization, and that it, along with its owner, a co-defendant, has not filed the statutorily required $100,000 surety bond with the Secretary of State’s office. The AG’s complaint alleges that the company charges unlawful upfront fees while making false promises that it will increase consumers’ credit scores. When the defendants fail to live up to these promises, they subsequently refuse to refund the money that consumers paid for the credit repair services they did not receive.
In the second complaint, the AG makes the same allegations against a different credit repair company, its owner, and a former employee. In addition, the second complaint also alleges that the company operates as a debt collection agency, but does not possess the requisite state license as a collection agency. Further, the complaint claims that, among other things, the defendants extract payments for “completely fabricated” payday loan debt from consumers who do not actually owe on the loans by using threats and other abusive and harassing collection tactics.
The AG seeks a number of remedies including injunctive relief prohibiting all defendants from engaging in any credit repair business, and prohibiting the second company and its owner and employee from engaging in any debt collection business; rescission of consumer contracts; and restitution to all affected consumers.
State AGs urge OCC to withdraw Madden proposal
On January 21, a bipartisan collation of attorneys general from 21 states and the District of Columbia, along with the Hawaii Office of Consumer Protection, submitted a comment letter in response to the OCC’s proposed rule to clarify that when a national bank or savings association sells, assigns, or otherwise transfers a loan, the interest permissible prior to the transfer continues to be permissible following the transfer. (See Buckley Special Alert on the proposed rule.) The coalition, led by California, Illinois, and New York, urges the OCC to withdraw the proposed rule. Among their concerns, the AGs argue that the OCC’s proposal conflicts with the National Bank Act and Dodd-Frank, exceeds the OCC’s statutory authority, and is in violation of the Administrative Procedure Act. Specifically, the AGs claim that the proposed rule conflicts with National Bank Act (NBA) provisions that grant benefits of federal preemption only to national banks and no one else. Moreover, the AGs assert that Congress explicitly stated in Dodd-Frank that “that the benefits of federal preemption provided by the NBA accrue only to [n]ational [b]anks,” (emphasis in original) and argue that the proposed rule would contravene “this important limitation” and “cloak non-banks in [the NBA’s] preemptive power.” Moreover, the NBA sections say “nothing about interest chargeable by assignees, transferees, or purchasers of bank loans,” the AGs write.
The AGs also argue that the proposed rule would facilitate predatory “rent-a-bank schemes” by allowing non-bank entities to ignore state interest rate caps and usury laws. “The OCC has not addressed, even summarily, how the [p]roposed [r]ule, if adopted, will serve to incentivize and sanction predatory rent-a-bank schemes,” the AGs state. “This failure to consider the substantial negative consequences this rule would have on consumer financial protection across the country renders the OCC’s [p]roposed [r]ule arbitrary and capricious.” Furthermore, the AGs contend that the OCC’s proposed rule contains no factual findings or reasoned analysis to support its proposal to extend NBA preemption to all non-bank entities that purchase loans from national banks. “[T]his is beyond the agency’s power,” the AGs argue, asserting that “[t]he OCC simply ‘may not rewrite clear statutory terms to suit its own sense of how the statute should operate.’”
SEC files Supreme Court brief in favor of disgorgement
On January 15, the SEC filed a brief in a pending U.S. Supreme Court action, Liu v. SEC. The question presented to the Court asks whether the SEC, in a civil enforcement action in federal court, is authorized to seek disgorgement of money acquired through fraud. The petitioners were ordered by a California federal court to disgorge the money that they collected from investors for a cancer treatment center that was never built. The SEC charged the petitioners with funneling much of the investor money into their own personal accounts and sending the rest of the funds to marketing companies in China, in violation of the Securities Act’s prohibitions against using omissions or false statements to secure money when selling or offering securities. The district court granted the SEC’s motion for summary judgment, and ordered the petitioners to pay a civil penalty in addition to the $26.7 million the court ordered them to repay to the investors. The petitioners appealed to the Supreme Court and in November, the Court granted certiorari.
The petitioners argued that Congress has never authorized the SEC to seek disgorgement in civil suits for securities fraud. They point to the court’s 2017 decision in Kokesh v. SEC, in which the Court reversed the ruling of the U.S. Court of Appeals for the Tenth Circuit when it unanimously held that disgorgement is a penalty and not an equitable remedy. Under 28 U.S.C. § 2462, this makes disgorgement subject to the same five year statute of limitations as are civil fines, penalties and forfeitures (see previous InfoBytes coverage here). The petitioners also suggested that the SEC has enforcement remedies other than disgorgement, such as injunctive relief and civil money penalties, so loss of disgorgement authority will not hinder the agency’s enforcement efforts.
According to the SEC’s brief, historically, courts have used disgorgement to prevent unjust enrichment as an equitable remedy for depriving a defendant of ill-gotten gains. More recently, five statutes enacted by Congress since 1988 “show that Congress was aware of, relied on, and ratified the preexisting view that disgorgement was a permissible remedy in civil actions brought by the [SEC] to enforce the federal securities laws.” The agency notes that the Court has recognized disgorgement as both an equitable remedy and a penalty, suggesting, however, that “the punitive features of disgorgement do not remove it from the scope of [the Exchange Act’s] Section 21(d)(5).” Regarding the petitioner’s reliance on Kokesh, the brief explains that “the consequence of the Court’s decision was not to preclude or even to place special restrictions on SEC claims for disgorgement, but simply to ensure that such claims—like virtually all claims for retrospective monetary relief—must be brought within a period of time defined by statute.”
In addition to the brief submitted by the SEC, several amicus briefs have been filed in support of the SEC, including a brief from several members of Congress, and a brief from the attorneys general of 23 states and the District of Columbia.
State AGs support congressional disapproval of 2019 Borrower Defense Rule
On January 14, a coalition of attorneys general from 19 states and the District of Columbia sent a letter to Congress in support of H.J. Res. 76, which was passed by the House of Representatives on January 16, and provides for congressional disapproval of the Department of Education’s 2019 Borrower Defense Rule (covered by InfoBytes here). The Department’s 2019 Borrower Defense Rule, published last September and set to take effect July 1, revises protections for student borrowers that were significantly misled or defrauded by their higher education institution and establishes standards for loan forgiveness applicable for “adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020.”
The AGs claim, however, that the 2019 Borrower Defense Rule “provides no realistic prospect for borrowers to discharge their loans when they have been defrauded by predatory for-profit schools, and . . . eliminates financial responsibility requirements for those same institutions.” The AGs further argue that the new provisions require “student borrowers to prove intentional or reckless misconduct on the part of their schools,” which they claim is “an extraordinarily demanding standard not consistent with state laws governing liability for unfair and deceptive conduct.” Other standards, such as requiring student borrowers to “prove financial harm beyond the intrinsic harm caused by incurring federal student loan debt as a result of fraud” and establishing a three-year time bar on borrower defense claims, would further reduce protections for student borrowers. Citing to several state enforcement actions taken against for-profit schools for alleged deceptive and unlawful tactics, the AGs stress the need for a “robust and fair borrower defense rule.”
Washington state introduces comprehensive privacy bill
On January 13, Washington state lawmakers announced two bills designed to strengthen consumer access and control over personal data and regulate the use of facial recognition technology. Highlights of SB 6281, the Washington Privacy Act, include the following:
- Applicability. SB 6281 will apply to legal entities that conduct business or produce products or services that are targeted to Washington consumers that also (i) control or process personal data for at least 100,000 consumers; or (ii) derive more than 50 percent of gross revenue from the sale of personal data, in addition to processing or controlling the personal data of at least 25,000 consumers. Exempt from SB 6281, among others, are state and local governments, municipal corporations, certain protected health information, personal data governed by state and federal regulations, and employment records.
- Consumer rights. Consumers will be able to exercise the following concerning their personal data: access; correction; deletion; data portability; and opt-out rights, including the right to opt out of the processing of personal data for targeted advertising and the sale of personal data.
- Controller responsibilities. Controllers required to comply with SB 6281 will be responsible for (i) transparency; (ii) limiting the collection of data to what is required and relevant for a specified purpose; (iii) ensuring data is not processed for reasons incompatible with a specified purpose; (iv) securing personal data from unauthorized access; (v) prohibiting processing that violates state or federal laws prohibiting unlawful discrimination against consumers; (vi) obtaining consumer consent in order to process sensitive data; and (vii) ensuring contracts and agreements do not contain provisions that waive or limit a consumer’s rights. Controllers must also conduct data protection assessments for all processing activities that involve personal data, and conduct additional assessments each time a processing change occurs that “materially increases the risk to consumers.”
- State attorney general. SB 6821 does not create a private right of action for individuals to sue if there is an alleged violation. However, the AG will be permitted to bring actions and impose penalties of no more than $7,500 per violation. The AG will also be required to submit a report evaluating the liability and enforcement provisions of SB 6281 by 2022 along with any recommendations for change.
- Information sharing. SB 6281 will allow the state governor to enter into agreements with British Columbia, California, and Oregon, which will allow personal data to be shared for joint research initiatives.
- Facial Recognition. SB 6281 will establish limits on the commercial use of facial recognition services. Among other things, the bill will require third-party testing on all services prior to deployment for accuracy and unfair performance, conspicuous notice when a service is deployed in a public space, and will require companies to receive consumer consent prior to enrolling an image in a service used in a public space.
The second bill, SB 6280, will more specifically govern the use of facial recognition services by state and local government agencies, and, among other things, outlines provisions for the use of facial recognition services when identifying victims of crime, stipulates restrictions concerning ongoing surveillance, and requires agencies to produce an annual report containing a compliance assessment.
As previously covered by InfoBytes, last year, New York introduced proposed legislation (see S 5642) that seeks to regulate the storage, use, disclosure, and sale of consumer personal data by entities that conduct business in New York state or produce products or services that are intentionally targeted to residents of New York state. Provisions included in the measures introduced by New York and Washington state differ from those contained in the California Consumer Privacy Act (CCPA), which took effect January 1. (Previous InfoBytes coverage on the CCPA is available here.)