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Massachusetts Regulator Fines Auto Finance Companies for Violations of State Fair Lending Rules
On August 7, the Division of Banks of the Massachusetts Office of Consumer Affairs and Business Regulation (Division) announced it had entered into consent orders with several motor vehicle sales finance companies to address allegations of unlicensed and illegal auto lending practices uncovered during an investigation of approximately 200 car dealerships. According to a press release issued by the Division, the investigation resulted in “five enforcement actions, 135 cease directives, $170,000 in fines and penalties, and more than $200,000 in consumer reimbursements.” Violations include, among others, (i) pricing vehicles far above blue book value; (ii) charging interest rates that approach or are at, or exceed the state’s maximum level, which is set at 21 percent, including interest rate violations occurring as a result of the financing of debt cancellation (GAP) coverage premiums; (iii) assessing interest and/or late fees after repossession of a vehicle “on which a repossession of the collateral has been executed”; and (iv) failure to obtain a motor vehicle sales finance company license through the Division, failure to address license renewal application deficiencies, or operating without a valid license. According to one consent order, the company allegedly failed to provide consumers an opportunity to “cure a default” before using starter interrupt devices to shut down their cars. A different consent order ordered the company to identify borrowers for whom their finance charges were calculated incorrectly, or those who overpaid due to a total loss insurance claim, and reimburse borrowers the amount that was overcharged or overpaid. A third consent order was issued to a California-based auto lender who purchased finance contracts from Massachusetts auto dealers without being licensed through the Division and engaged in several of the aforementioned violations.
None of the companies entering into the consent orders admitted to any of the allegations or the existence of any violation of state or federal law concerning their operations as motor vehicle sales finance companies.
FTC Files Complaint Against Independent Sales Organization and Sales Agents for Alleged Credit Card Laundering Charges
On August 7, the FTC issued a press release announcing charges against 12 defendants, comprised of an independent sales organization (ISO), sales agents, payment processors, and identified principals, for allegedly violating the Federal Trade Commission Act and the Telemarketing Sales Rule (TSR) by laundering credit card transactions on behalf of a “telemarketing scam” operation (operation) through fictitious merchant accounts. According to a July 28 complaint filed by the FTC, the defendants engaged in a scheme with the operation to process credit card charges through merchant accounts set up by the operation under fictitious company names instead of processing charges through a single merchant account under the operation’s name. This type of practice, the FTC claims, is known as “credit card laundering” or “factoring” and violates the TSR. The defendants purportedly (i) underwrote and approved the operation’s fictitious companies; (ii) set up merchant accounts with its acquirer for the fictitious companies; (iii) used sales agents to market processing services to merchants; (iv) processed nearly $6 million through credit card networks; and (v) transferred sales revenue from the transactions to companies controlled by the defendants. The FTC seeks “permanent injunctive relief, recession or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten moneys, and other equitable relief.”
Notably, in 2013, the FTC accused the same “telemarketing scam” operation of allegedly promoting “worthless business opportunities” to consumers and falsely promising that they would earn thousands of dollars. A 2015 summary judgement resulted in over $7 million in consumer injury. (See previous InfoBytes coverage here.)
District Judge Denies Student Loan Servicer’s Motion to Dismiss, Rules CFPB is Constitutional
On August 4, a federal judge in the U.S. District Court for the Middle District of Pennsylvania denied a motion to dismiss brought by a student loan servicer, ruling that the CFPB is constitutional, and that it has the authority to act against companies without first adopting the rules used to define a specific practice as unfair, deceptive, or abusive. Further, the court found that the Bureau’s complaint is “adequately pleaded.” As previously reported in InfoBytes, the CFPB filed a complaint in January of this year, contending that the student loan servicer systematically created obstacles to repayment and cheated many borrowers out of their rights to lower repayments, causing them to pay much more than they had to for their loans.
Citing numerous precedents, including several which have already examined the issue of the CFPB’s constitutionality, the court disposed of several arguments raised by the student loan servicer, finding that:
- There is no merit in the argument that the “CFPB lack[ed] statutory authority to bring an enforcement action without first engaging in rulemaking to declare a specific act or practice unfair, deceptive, or abusive,” because under the provisions of Title X of Dodd-Frank, the CFPB has the authority to declare something as “unlawful” both through rulemaking and litigation.
- The CFPB isn’t outside the bounds of the Constitution, in part because its provision making it difficult for the President to remove the CFPB’s director isn’t any more burdensome than those of other agencies, such as the FTC. By recognizing this, and that the CFPB director “is not insulated by a second layer of tenure and is removable directly by the President,” the court ruled that the “Bureau’s structure is not constitutionally deficient.”
- The funding method utilized by the Bureau has parallels in other federal agencies and does not affect presidential authority, stating that “although the CFPB is funded outside of the appropriations process, Congress has not relinquished all control over the agency’s funding because it remains free to change how the Bureau is funded at any time.” The court therefore found that the President’s constitutional powers have not been curtailed.
The court dismissed the student loan servicer’s assertion that it is unable to “reasonably prepare a response” due to the vague and ambiguous nature of the complaint. Rather, the court argues that the Bureau’s complaint provides enough “multiple specific examples” to warrant a response by way of an answer.
CFPB Issues Bulletin Warning Service Providers About Pay-By-Phone Fees
On July 31, the CFPB issued a bulletin to warn service providers that misleading consumers about pay-by-phone fees may potentially be a violation of Dodd-Frank’s prohibition on unfair, deceptive, or abusive acts or practices. The Bureau also provided guidance regarding its expectations for UDAAP and FDCPA compliance when assessing pay-by-phone fees. According to the bulletin, the CFPB noted several instances where consumers were either not informed up front of the fees that came with paying expenses over the phone or were not offered lower-cost alternatives. The Bureau cited several public enforcement actions, in which it alleged, among other things, that entities (i) misrepresented available payment options or gave the impression that a fee was required to make a payment by phone, when the only purpose of the fee was to expedite the phone payment; (ii) failed to disclose phone pay fees, thus creating the impression that there was no service fee; or (iii) lacked monitoring and oversight programs to deter this type of misleading behavior. The Bureau further encouraged service providers to consult a 2016 bulletin issued to discuss “detecting and preventing consumer harm from production incentives” to examine whether existing or future provider production incentive programs might “steer borrowers to certain payment types or to avoid disclosures,” which it says increases the potential risk for UDAAP.
Massachusetts AG Announces Settlement with Law Firm Over Debt Collection Practices
On July 27, Massachusetts Attorney General Maura Healey announced a $1 million settlement with the largest debt collection law firm in the state to resolve allegations that the firm engaged in unfair and unlawful debt collection practices. According to a lawsuit filed by the Attorney General’s office in 2015, the firm began filing tens of thousands of debt collection lawsuits each year beginning in 2011, at times targeting the wrong consumers or filing claims based on unsubstantiated debts. The firm also allegedly demanded payment from consumers who relied on social security or other exempt income, despite being provided evidence that the income was exempt from court-ordered collection. Under the terms of the settlement, the company is required to reform its debt collection practices by adhering to guidelines including the following:
- The firm is required to obtain and review “original account-level documentation” prior to initiating a collection to determine whether a consumer is obligated to pay the debt such as, among others, (i) an authenticated bill of sale reflecting the transferred ownership of debt; (ii) original documents reflecting the charge-off balance; (iii) contractual terms and conditions; and (iv) original consumer signed documents showing proof the account was opened;
- The firm is prohibited from engaging in threatening actions to collect on a debt initiated on behalf of a collector or debt buyer, and is further restrained from commencing a collection suit without possessing a final judgment or execution against the consumer, or acceptable account-level documentation;
- The firm cannot initiate a collection suit against a consumer until an attorney listed on the company in the collection suit has reviewed the pertinent information and made the determination that the debt owed is not subject to bankruptcy proceedings and certifies in writing that the collection suit is in compliance.
The settlement terms also stipulate that the firm must comply with collection terms and restrictions concerning exempt and protected income, must adhere to time-barred debt collection restrictions, is enjoined from using false and misleading affidavits to collect debts, and must submit enhanced compliance reporting to AG Healey for review. Additionally, the firm previously paid $1 million to the state to be used in one or more of the following ways: (i) as payments to consumers; (ii) to assist with final judgment facilitation; (iii) to be added to the state’s general fund and/or the Local Consumer Aid Fund; and (iv) to fund programs that “address the negative effect of unfair and deceptive practices related to debt collection.”
Class Action Complaint Filed Against National Bank Related to Auto Insurance Coverage
On July 30, consumers accused a national bank of requiring them to pay for unnecessary auto insurance in a class action complaint filed in the Northern District of California. See Hancock v. Wells Fargo & Co., Case No. 17-cv-04324 (N.D. Cal. Jul. 30, 2017). The consumers allege that they paid for protection against vehicle loss or damage while making monthly loan payments, even though many drivers allege that they already had their own policies. According to the complaint, the bank allegedly received kickbacks from an auto insurance company through shared commissions on policies for more than 800,000 auto loans, which resulted in nearly 250,000 loans becoming delinquent and nearly 25,000 “unlawful vehicle repossessions.” The consumers allege that when they took out auto loans, both the bank and the insurance company failed to check whether the consumer already had coverage or ignored the information, and then created Collateral Protection Insurance (CPI) policies which were “secretly” added to the auto loan bills and the costs automatically deducted from consumer bank accounts.
In addition to the costs incurred for the unlawful forced-placed insurance policies, consumers also claim to have experienced financial harm in the form of (i) inflated premiums and interest rates; (ii) delinquency charges and late fees; and (iii) repossession costs and damage to credit reports. Consumers seek restitution, disgorgement of revenues and/or profits, and compensatory damages.
Notably, before the class action complaint was filed, the bank issued a press release on July 27, announcing plans to remediate approximately 570,000 consumers who may have been financially harmed—less than the 800,000 cited in the complaint. The bank stated that it had conducted a review of CPI policies placed between 2012 and 2017 and stated, ““We take full responsibility for our failure to appropriately manage the CPI program and are extremely sorry for any harm this caused our customers, who expect and deserve better from us. . . . Upon our discovery, we acted swiftly to discontinue the program and immediately develop a plan to make impacted customers whole.”
District Judge Denies Summary Judgement in FTC, New York AG FDCPA Suit
On July 18, the U.S. District Court for the Western District of New York denied summary judgment in a suit filed by the FTC and the New York Attorney General against four corporate defendants (Corporate Defendants) and four individual defendants (Individual Defendants) alleging that the Defendants engaged in abusive and deceptive debt collection practices. See Federal Trade Commission and People of the State of New York v. Vantage Point Services, LLC, Case 1:15-cv-00006-WMS-HKS (W.D.N.Y., Jul. 18, 2017). Plaintiffs argued that the Corporate Defendants, together with several non-defendant debt-collecting businesses, engaged in a single debt-collection enterprise. The Corporate Defendants maintained, however, that while they “did business with the various entities, either by placing debt with them or by processing payments on debt they were collecting,” the businesses remained separate, distinct entities, and they operated independently.
The court found that there were “numerous disputed issues of fact” concerning the plaintiffs’ common enterprise theory, including a failure by the plaintiffs to specify which entities allegedly made threats or used illegal tactics to collect debt. Indeed, the court noted that while there was “overwhelming evidence of wrongdoing,” the plaintiffs had “failed to link that wrongdoing to any specific Defendant.” In fact, the court observed that the “majority of the wrongdoing appears to have been committed by the non-defendant call initiators.” The court also found material disputes of fact as to whether the Corporate Defendants shared office space and commingled funds and as to whether the Individual Defendants were liable at all.
CFPB Withdraws CID, Petition to Enforce CID is Moot Due to Lack of Subject-Matter Jurisdiction
On June 8, the CFPB filed a petition to withdraw a 2015 CID issued to a financial services company concerning its structured settlement and annuity payment purchasing activities, and subsequently agreed to the dismissal of the petition to enforce the CID as moot due to lack of subject-matter jurisdiction. The action stems from a petition filed by the company to set aside the CID, arguing that structured settlements and annuity payment purchasing is not an extension of credit, nor qualifies as a consumer financial product. Therefore, the company claimed, its business activities do not fall under the CFPB’s UDAAP or Truth in Lending Act authority. The Bureau denied the petition, and in June 2016, it filed a memorandum in the U.S. District Court for the Eastern District of Pennsylvania for an order requiring the company to comply with the CID, asserting that “regulations authorize the Bureau to petition the district court in ‘any judicial district in which [that entity] resides, is found, or transacts business’ for an order to enforce the CID.” However, on June 5, the CFPB filed a notice to withdraw stating that “[b]ecause the CID is no longer active, the Bureau intends to soon dismiss the Petition,” and asked the court to “refrain from ruling on the petition.” The CFPB did not disclose a reason for its decision to withdraw the CID.
Notably, before the dismissal, the U.S. Chamber of Commerce (Chamber) filed an amicus brief opposing the CFPB’s petition. The Chamber opined that, should the CFPB be allowed to issue CIDs under a “virtually unlimited definition of the term ‘financial advisory services,’” under which it would include “advice with a financial element offered in connection with transactions unrelated to a consumer financial product,” it would expand the Bureau’s jurisdiction beyond the limits of Dodd-Frank’s prohibition on unfair, deceptive, and abuse acts and practices.
Appeal Denied in Los Angeles Fair Housing Suit
On May 26, the Ninth Circuit issued decisions affirming the District Court’s decisions to grant summary judgments in two separate lawsuits brought against two different national banks by the city of Los Angeles (city). (View the district court’s summary judgments here and here). In separate appeals, the city alleged that each of the banks violated the Fair Housing Act by engaging in discriminatory mortgage lending to minority borrowers. The city also asserted that this practice resulted in risky loans and increased foreclosures, which lowered the city’s property tax revenues.
The appellate court disagreed with the city. In both decisions, the court observed that the city’s theory of liability was based on alleged “disparate impact,” which requires the city to demonstrate both the existence of a disparity and a facially neutral policy that caused the disparity.” The court noted that under established precedent a disparate impact claim, to succeed, must be supported by evidence of a robust causal connection between the disparity and the facially neutral policy. In the first case, the court held that the city failed to show such a robust causal connection, and in the second, it found “[t]he record does not reflect that the city raised a genuine issue of material fact as to a policy or policies with a robust casual connection to the racial disparity.” (View appellate memoranda for these cases here and here).
FTC Obtains Multiple Judgments Against California and Florida-Based Robocall Operations
The FTC recently entered judgments against robocalling operations based in California and Florida who engaged in activities that violated, among other things, the Telemarketing Sales Rule (TSR) and the Telemarketing Consumer Fraud and Abuse Prevention Act.
California Default Judgments. On June 2, the FTC announced a California federal district court judge approved default judgments against an individual and each of the nine corporations for which he was an “actual or de facto owner, officer or manager” (Defendants). According to the FTC’s complaint, over a period spanning approximately seven years, the Defendants allegedly initiated—or helped to initiate—“billions” of illegal robocalls without receiving written permission from consumers. Many of the calls made were to numbers on the Do Not Call (DNC) Registry to “induce the purchase of goods or services” such as auto warranties, home security systems, or search engine optimization services. Violations of the TSR cited include knowingly assisting and facilitating telemarketers engaged in abusive practices. According to the terms of the default judgments, the individual has been assessed a $2.7 million penalty, and the Defendants are permanently banned from all telemarketing activities.
Florida Consent Order. On June 5, the FTC and the Florida Attorney General entered eight stipulated orders against Orlando-based individuals and companies—18 Defendants in total—who violated the TSR, Telemarketing and Consumer Fraud and Abuse Prevention Act, and Florida’s Telemarketing and Consumer Fraud and Abuse Act for, among others things, using robocalls to sell credit card interest rate reduction programs, in addition to calling numbers on the DNC Registry. According to the joint complaint, the Defendants allegedly engaged in the following violations: (i) offered debt relief programs but failed to provide promised services; (ii) misrepresented their affiliations with consumers’ banks or credit card companies; (iii) unfairly authorized charges without obtaining consent; (iv) received fees prior to providing debt relief services; (v) failed to transmit telemarketer information; (vi) used prerecorded messages to “induce the purchase of goods or services”; and (vii) failed to make oral disclosures. The stipulated orders settle charges against all Defendants and require that they stop the “allegedly illegal conduct.” Some of the Defendants have also been issued financial penalties. Furthermore, the FTC entered a $4.8 million judgment against 12 Defendants identified as the primarily parties for the scam. This amount represents the full amount of consumer harm caused. All stipulated orders can be accessed through the FTC press release.