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Missouri Disbands Eight Payday Loan Operations
On March 5, Missouri AG Chris Koster announced an agreement to cease operations with eight unlicensed online payday loan businesses, provide $270,000 in restitution, and forgive all loan balances for Missouri consumers. According to Koster, an individual ran the numerous payday loan businesses from a Native American reservation in South Dakota and sold short-term loans to Missouri consumers, taking advantage of Missouri residents “through outrageous fees and unlawful garnishments.” The judgment obtained “permanently prohibits” the individual and his businesses from “making or collecting on any loans in Missouri, and it cancels existing loan balances for his Missouri customers.” Additionally, the judgment requires that the individual running the businesses inform all credit reporting agencies to remove the information they received on the customers who were negatively affected by the short-term loan sales.
Pennsylvania Orders Unlicensed Payday Lender to Refund Fees
On March 4, the Pennsylvania Department of Banking and Securities (DOBS) entered into a consent order with four payday loan companies for allegedly violating three Pennsylvania state laws: the Consumer Discount Company Act (CDCA), the Loan Interest Protection Law, and the Money Transmitter Act. From 2007 through January 2015, the companies allegedly acted together to sell short-term loans. According to the DOBS, the interest rate on some of the loans sold exceeded the statutory limit. The consent order also states that the company (i) was not licensed under the CDCA at the time of the marketing or selling of the loans; and (ii) did not have a money transmitter license. Immediately upon issuance of the order, the companies agreed to “cease and desist from engaging in the consumer discount business,” and within ninety days of the issue date of the order, the companies must remit to Pennsylvania consumers the balance of open and active accounts.
Supreme Court Grants Federal Agencies Wide Discretion in Interpreting Regulations
On March 9, the Supreme Court unanimously ruled that the Administrative Procedure Act (APA) does not require federal agencies to go through the formal rulemaking process when making changes to rules interpreting regulations, or “interpretive rules,” even if those changes are significant. This decision, Perez v. Mortgage Bankers Association, is of impactful significance to federal agencies and regulated entities alike because it overrules long-standing precedent—known as the D.C. Circuit’s Paralyzed Veterans doctrine—that required agencies to engage the public in the formal notice-and-comment period before issuing new interpretations of previously promulgated regulations. Here, the Court held that the Paralyzed Veterans doctrine is contrary to the APA’s rulemaking previsions and imposes unwarranted procedural obligations on federal agencies.
In this case, the Mortgage Bankers Association (MBA) challenged a 2010 Department of Labor (DOL) interpretative rule declaring that mortgage loan originators were no longer exempt from the Fair Labor Standard Act’s requirement that employees working more than forty hours per week are to be paid overtime. The DOL had previously taken the opposite position on this issue in a 2006 interpretative rule stating that mortgage loan officers were exempt from the overtime pay requirement. In challenging the DOL’s withdrawal of their 2006 interpretation, the MBA relied on the Paralyzed Veterans doctrine and argued that the 2010 interpretation was invalid because it was a “substantive change” that did not comply with the public notice-and-comment period. While the D.C. Circuit agreed with the MBA, the Supreme Court reversed, holding that the clear text of the APA’s procedural requirements does not apply to interpretive rules even though courts had long held this was not necessarily the case.
For highly-regulated entities, such as banks and other financial institutions, the Court’s decision in Perez will compromise the ability of such entities to maintain compliance with the regulations that govern their industries—especially when these regulations become the basis for enforcement actions. The deference the Court imparts to agencies allows them to informally change their positions on rules at any given time and has the potential to create an unstable and unpredictable regulatory environment.
Eleventh Circuit Holds Settlement Service Fees Do Not Violate RESPA
On March 2, the U.S. Court of Appeals for the Eleventh Circuit dismissed a homeowner’s claim that a title company violated RESPA fee-splitting bans during a refinanced mortgage closing by holding that if any real estate settlement service is rendered during a closing, fee charges for these services do not violate RESPA—regardless of whether such service is appropriate. A homeowner asserted that under state law, all real estate closing services are to be provided by a licensed attorney. Here, the title company performed all closing services and merely contracted with a law firm to provide an attorney to witness the closing, arguably not satisfying the law. The homeowner also claimed the title company unlawfully marked-up the recording fee and split it with the recording office. While holding that the homeowner satisfied standing requirements by alleging an unpaid refund as injury, the court declined to find that the title company violated RESPA. The court opined that even if it is illegal under state law to charge a settlement fee for services performed by a non-lawyer, services by both the title company and a law firm were performed nonetheless. Determining whether the fees were appropriate is not within the purview of the court or RESPA’s requirements. The marking-up of the recording fee also did not violate RESPA because both the title company and the recording office actually performed a service. The court subsequently dismissed the homeowner’s federal claims and remanded her state claims to the district court.
Illinois Federal Court Allows FCRA Lawsuit Against Credit Reporting Company to Move Forward
On February 5, the U.S. District Court for the Northern District of Illinois denied a credit reporting company’s motion to compel arbitration in a putative class action which alleged that the company sold credit scores to consumers that differed from the scores the company provided to lenders due to contrasting credit scoring models. The plaintiff alleged this practice violated provisions of the Fair Credit Reporting Act, Illinois Consumer Fraud and Deceptive Business Practices Act, and Missouri Merchandizing Practices Act, and that the credit reporting company was negligent in failing to inform consumers of the conflicting scores. The credit reporting company sought to compel arbitration on the basis of arbitration terms embedded in language in an online purchase agreement. As part of the purchase process, the consumer had to click on an “I Agree” button after reading agreement language in a window with a scrolling text box. The court found clicking “I Agree” did not constitute assent to the language in the text box because there was a paragraph placed between the text box and the “I Agree” button authorizing the credit reporting company to access the consumer’s personal information. Here, the authorization language was “so explicit that it was reasonable for users to assume that their click merely constituted their assent to the authorization,” not to the terms in the scrollable text box. Because of the confusion about whether the consumer provided consent to the authorization language or to the online purchase agreement’s terms, the court found the arbitration clause unenforceable and allowed the lawsuit against the credit reporting company to move forward.
Special Alert Update: OCC Revises Guidance Regarding Consumer Protection Requirements to Overdraft Lines and Protection Services
On March 6, 2015, the OCC issued its revised “Deposit-Related Credit” booklet (“DRC booklet”) of the Comptroller’s Handbook, which replaced the “Deposit-Related Consumer Credit” booklet issued on February 11, 2015 (previously covered in this Special Alert). While the new booklet covers the same products – check credit (overdraft lines of credit, cash reserves, and special drafts), overdraft protection services, and deposit advances – the OCC made significant amendments to scale back the provisions of the prior version. Specifically, the new DRC booklet no longer contains supervisory principles that could be read to require that banks provide substantive consumer protections that are not currently required by the applicable consumer protection regulations. For example, the DRC booklet no longer requires that banks:
- only enroll customers into an overdraft protection service if they have affirmatively requested that product;
- ensure the ability to repay for all applicants enrolled in an overdraft protection service; and
- ensure that any fees charged in connection with an overdraft protection service are reasonably related to the program’s costs and associated risks.
In making these changes, the OCC requires supervisors to assess DRC products more in line with existing consumer protection laws. The OCC states as much in OCC Bulletin 2015-17, which announced the DRC booklet. There, the OCC acknowledges that the DRC booklet “is intended as a summary restatement of existing laws, regulations, and policies [and] ... [n]othing in this booklet should be interpreted as changing existing OCC policy.”
Congressman Introduces Legislation to Reform CFPB
On March 4, U.S. House Representative Randy Neugebauer introduced H.R. 1266, a bill to reform the CFPB’s leadership structure to replace its single director with a five-member commission appointed by the President. Representative Neugebauer serves at the Chairman of the Financial Institutions and Consumer Credit Subcommittee.
DOJ Reaches Settlement with National Bank Over Bankruptcy Practices
On March 3, the DOJ’s U.S. Trustee Program announced a $50 million settlement with a national bank to resolve allegations that the bank engaged in improper actions during bankruptcy proceedings. Under the terms of the settlement, the bank will provide relief in the form of cash payments, mortgage loan credits, and loan forgiveness to over 25,000 homeowners who are, or were, in bankruptcy. Additionally, the bank will acknowledge that (i) the bank’s former employees and the employees of an outside vendor improperly signed more than 50,000 payment change notices filed in bankruptcy courts around the country; (ii) the bank failed to file timely, accurate payment change notices; and (iii) the bank failed to provide timely, accurate escrow statements. The bank further will agree to enhance its technology, policies, procedures, internal controls and other oversight systems. Finally, the parties will agree to engage an independent reviewer to confirm the bank’s adherence to the terms of the settlement. The settlement is pending court approval.
OCC Comptroller Delivers Remarks Regarding BSA/AML Compliance
On March 2, OCC Comptroller Curry delivered remarks before the Institute of International Bankers regarding BSA/AML compliance obligations for financial institutions. During his remarks, Comptroller Curry emphasized that a top priority for the OCC has been to strengthen BSA/AML compliance at its supervised institutions. In this regard, the OCC has (i) modified its bank examination process so that BSA deficiencies receive proper emphasis in the evaluation of safety and soundness; (ii) focused on the BSA/AML risks posed by third-party relationships; (iii) required that institutions adequately resource their BSA/AML compliance programs; (iv) required institutions to assign accountability for BSA/AML compliance across all business lines presenting BSA/AML risk; and (v) taken enforcement action to enforce BSA/AML compliance when appropriate. Through his remarks, Comptroller Curry also addressed the need to improve the BSA/AML regulatory framework itself. Specifically, Comptroller Curry indicated that the OCC wanted (i) to streamline the SAR reporting process, (ii) to find better ways to use technology to advance BSA/AML goals, and (iii) to increase information sharing by creating safe harbors from civil liability both for financial institutions that file SARs and for financial institutions that share information about financial crimes with each other.
FinCEN Fines Community Bank Over BSA Violations
On February 27, FinCEN announced a $1.5 million civil money penalty against a Pennsylvania-based community bank for violating the BSA. Of that amount, $500,000 will go to the OCC, the bank’s primary regulator, for BSA violations. According to FinCEN, the bank admitted failing to file suspicious activity reports on transactions involving a former state judge who received over $2.6 million in personal payments in connection with a judicial scheme involving the construction, operation, and expansion of juvenile detention centers.