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Financial Services Law Insights and Observations


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  • Auto financing company settles multistate subprime lending action for $550 million

    State Issues

    On May 19, the California attorney general, along with 33 other attorneys general, announced a multistate $550 million settlement with an auto sales financing company for allegedly placing subprime borrowers in auto loans that carried a high risk of default, in violation of state consumer protection laws. Specifically, California’s complaint alleges that the company violated the state’s Unfair Competition Law by, among other things, (i) extending auto loan credit to borrowers the company knew or should have known were likely to result in default and repossession; (ii) failing to disclose to borrowers the high risk of failure associated with the loans; (iii) requiring borrowers to make payments through methods that resulted in third-party fees; and (iv) misrepresenting borrowers’ ability to acquire repossessed vehicles already sent to auction. Additionally, the attorney general alleges that the company “turned a blind eye” to dealer abuse, resulting in higher origination prices for borrowers.

    According to the press release, the company will pay approximately $433 million in forgiveness of loans still owned by the company across the U.S. and will waive deficiency balances for borrower loans that the company no longer owns. Notably, certain borrowers who had defaulted as of December 31, 2019 but were still in possession of their vehicle will be allowed to keep the vehicle and have the deficiency balance on the loan waived. California’s settlement also requires injunctive measures such as (i) requiring the company to consider the borrower’s ability to repay the loan; (ii) barring the company from purchasing loans where the borrower’s residual income is zero or negative; (iii) setting reasonable debt to income ratios; and (iv) no longer requiring dealers to sell ancillary products.

    In addition to California, the multistate settlement includes: Illinois, Maryland, New Jersey, Oregon and Washington, who together with Attorney General Becerra comprise the executive committee; as well as the attorneys general of Arizona, Arkansas, Connecticut, Florida, Georgia, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Nebraska, New Hampshire, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Virginia, West Virginia, Wyoming, and the District of Columbia.

    State Issues State Attorney General Auto Finance UDAP Deceptive

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  • District court allows class autodialer claims to proceed against mortgage lender


    On May 18, the U.S. District Court for the Eastern District of Michigan denied a request to dismiss a putative class action concerning alleged violations of the TCPA, ruling that the plaintiff plausibly alleged the mortgage lender (defendant) sent unsolicited texts through the use of an automatic telephone dialing system (autodialer). The plaintiff claimed, among other things, that (i) the texts came by way of SMS short codes, which are “reserved for automatically made text messages”; (ii) the messages were generic and non-personal; (iii) the messages followed a similar calling pattern; and (iv) the plaintiff continued to receive them after opting out. The defendant countered that the claims should be dismissed because the plaintiff’s argument is “devoid of plausible allegations” under the TCPA that it used an autodialer that has the capacity to produce telephone numbers using a random or sequential number generator. However, the court determined that, in the absence of direction from the U.S. Court of Appeals for the Sixth Circuit “as to the kind of supporting factual allegations that must be included to sufficiently allege the [autodialer] element of a TCPA case,” the court will follow other district courts that have allowed TCPA suits to continue if the plaintiff sufficiently alleges facts to plausibly support a finding that an autodialer was used.

    Courts Class Action Mortgages TCPA Autodialer

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  • FTC announces $40 million settlement with payment processor in credit card laundering case

    Federal Issues

    On May 19, the FTC filed a complaint against a large payment processing company and its former executive for allegedly participating in deceptive or unfair acts or practices in violation of the FTC Act and the Telemarketing Sales Rule (TSR) by processing payments and laundering, or assisting in the laundering of, credit card transactions targeting hundreds of thousands of consumers. The FTC’s complaint alleges, among other things, that the payment processing company received and ignored repeated “warnings and direct evidence” dating back to 2012 showing that the former executive was using his company to open hundreds of fake merchant accounts and shell companies, and allowed him to continue to open merchant accounts until 2014. According to the FTC, the “schemes included, but were not limited to, a debt relief scam that used deceptive telemarketing, business opportunity scams that used deceptive websites, and a criminal enterprise that used stolen credit card data to bill consumers without their consent” in which the both defendants received fees for processing the scheme’s payments. The FTC also claims that the payment processing company violated its own anti-fraud policies by failing to adequately underwrite, monitor, or review its sales agents and their risk management processes, and failed to timely terminate the merchant accounts involved in the scheme.

    The payment processing company’s proposed settlement imposes a $40 million monetary judgment and prohibits the company from assisting or facilitating TSR and FTC Act violations related to payment processing. Additionally, the company will be required to (i) screen and monitor prospective restricted clients; (ii) establish and implement a written oversight program to monitor its wholesale independent sales organizations (ISO); and (iii) hire an independent assessor to monitor the company’s compliance with the settlement’s ISO oversight program.

    The former executive’s proposed settlement imposes a $270,373.70 monetary judgment, and bans him from payment processing or acting as an ISO for certain categories of high-risk merchants. He is also prohibited from credit card laundering activities, making or assisting others in making false or misleading statements, and assisting or facilitating violations of the FTC Act or TSR.

    Neither defendant admitted or denied the allegations, except as specifically stated within the proposed settlements.

    Federal Issues FTC Enforcement Credit Cards Anti-Money Laundering Payment Processors

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  • SBA clarifies PPP eligibility for foreign affiliates

    Federal Issues

    On May 21, the SBA recently published an interim final rule (IFR), which addresses the eligibility requirements related to employees of a Paycheck Protection Program (PPP) borrower’s foreign affiliates. The SBA reiterated in the IFR that a small business must include foreign affiliate employees when calculating how many people it employs for purposes of determining if the business meets the PPP eligibility requirement of 500 or fewer employees. The SBA acknowledged, however, that previous guidance (covered by InfoBytes here) may have created “reasonable borrower confusion,” so in “an exercise of enforcement discretion,” the agency reiterated that the “SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-US employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the United States.” The SBA further determined that these borrowers will “not be deemed to have made an inaccurate certification of eligibility solely on that basis.”

    The IFR takes effect upon publication in the Federal Register and is applicable to PPP applications submitted through June 30, 2020, or when program funding is exhausted. Comments are due within 30 days.

    Federal Issues Department of Treasury SBA Small Business Lending CARES Act Covid-19 Of Interest to Non-US Persons

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  • Arizona regulator streamlines license renewal process

    State Issues

    The Arizona Department of Financial Institutions announced the implementation of a new license renewal process that will enable licensees to renew licenses of the parent licensee and its branches at the same time. Previously, licensees were required to complete renewal at the parent level, and then repeat the process for each branch. The department is currently in the first phase of the project, which will cover renewals for advance fee loan brokers, debt management companies, and sales finance companies, which have licenses expiring in June 2020.

    State Issues Covid-19 Arizona Licensing Broker-Dealer

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  • State attorneys general send letter to auto manufacturers regarding Covid-19 practices

    State Issues

    On May 20, a coalition of state attorneys general sent a letter to ten major auto manufacturers relating to reports that dealerships have been engaging in predatory and harmful practices in connection with the return of leased vehicles during the Covid-19 pandemic. The coalition calls upon auto manufacturers to ensure that their financing arms and affiliated dealerships have appropriate controls to timely accept the return of leased vehicles during the pandemic. Further, car dealerships are urged to take certain steps, such as reviewing their lease-return policies for compliance with applicable law, assisting consumers with convenient lease returns, and refunding harmed consumers for certain costs arising from refused lease returns.  

    State Issues Covid-19 State Attorney General Auto Finance

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  • Rhode Island courts to recommence eviction proceedings on June 2, 2020

    State Issues

    On May 20, State of Rhode Island District Court issued Administrative Order 2020-02, announcing that it would recommence adjudicating eviction matters on June 2, and detailing a set of temporary practices and protocols for eviction matters. Similarly, on May 19, the State of Rhode Island Department of Business Regulation issued Certified Constables Bulletin 2020-1.2, noting that certified constables should conduct service of process and executions regarding eviction at a time and in a manner specified by the court.

    State Issues Covid-19 Rhode Island Evictions Mortgages

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  • Federal Reserve Bank of New York announces first subscription date of loan facility program

    Federal Issues

    On May 20, the Federal Reserve Bank of New York announced the first loan subscription date for the Term Asset-Based Securities Loan Facility (TALF) and released an expanded set of Frequently Asked Questions and other documents relating to the facility’s operations. The first subscription date will be June 17, 2020, and the first closing date will be June 25, 2020. The FAQs contain information on why the TALF was established, how the TALF will work, borrower eligibility, eligible collateral, eligible underlying assets, master trust requirements, credit ratings, collateral review, interest rates, and loan subscription and closing, among other things.

    Federal Issues Covid-19 Federal Reserve Bank of New York Securities

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  • Prudential regulators outline principles on small-dollar lending

    Federal Issues

    On May 20, the FDIC, Federal Reserve Board, OCC, and NCUA issued joint principles for offering responsible small-dollar loans. The agencies note the “important role” that small-dollar lending can play during times of economic stress, such as the Covid-19 pandemic, and issued the guidance to encourage supervised banks, savings associations, and credit unions to offer responsible small-dollar loans to consumers and small businesses. The principles cover various loan structures, including open-end lines of credit with minimum payments, closed-end loans with short single payment terms, and longer-term installment payments. The guidance indicates that reasonable loan policies and risk management practices would generally address the following:

    • Loan structures. Loan amounts and repayment terms should align with eligibility and underwriting criteria that support successful repayment of the loan, including interest and fees, rather than re-borrowing, rollovers, or immediate collectability in the event of default.
    • Loan pricing. Pricing, including for loans offered through managed third-party relationships, should reflect “overall returns reasonably related to the financial institution’s product risks and costs” and comply with applicable state and federal laws.
    • Loan underwriting. Underwriting should use internal and/or external data sources to assess a customer’s creditworthiness. Underwriting may use new technologies and automation to lower the cost of providing the small-dollar loans.
    • Loan marketing and disclosures. Disclosures should comply with applicable consumer protection laws and regulations and provide information in “a clear, conspicuous, accurate, and customer-friendly manner.”
    • Loan servicing and safeguards. Timely and reasonable workout strategies, such as payment term restructuring, should be provided for customers who experience financial distress.

    As previously covered by InfoBytes, the federal financial regulators issued a joint statement in March, encouraging institutions to offer reasonable, small-dollar loans to consumers and small businesses to help mitigate the effects of the Covid-19 pandemic.

    Federal Issues Agency Rule-Making & Guidance FDIC Federal Reserve OCC NCUA Small Dollar Lending Installment Loans Small Business Lending Covid-19

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  • FTC, FCC warn VoIP service providers about Covid-19 robocalls

    Federal Issues

    On May 20, the FTC and the FCC sent letters to three more Voice over Internet Protocol (VoIP) service providers, warning the companies to stop routing and transmitting robocall campaigns promoting Covid-19 related scams. According to the FTC, two of the companies are routing coronavirus-related fraud robocalls originating overseas. In April, the agencies sent an initial round of letters to three VoIP service providers for similar issues (covered by InfoBytes here). As in April, the letters warn the companies that they have been identified as “routing and transmitting illegal robocalls, including Coronavirus-related scam calls” and must cease the behavior or they will be subject to enforcement action. Additionally, the agencies sent a separate letter to a telecommunications trade association thanking the group for its assistance in identifying the campaigns and relaying a warning that the FCC will authorize U.S. providers to begin blocking calls from the three companies if they do not comply with the agencies’ request within 48 hours after the release of the letter.

    Federal Issues FTC FCC Robocalls Enforcement Covid-19

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