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  • 10th Circuit: Bank not obligated to post real-time balances

    Courts

    On April 8, the U.S. Court of Appeals for the 10th Circuit affirmed a lower court’s dismissal of a consumer’s suit arising out of overdraft fees charged by an Arkansas-based bank. The consumer alleged, among other things, that the bank breached its Electronic Fund Transfer Agreement (EFT Agreement) by failing to provide accurate, real-time account balance information online, which caused her to “incur unexpected overdraft fees.” According to the opinion, the consumer claimed that she frequently relied on her online account balance when making purchases, and that the bank’s alleged debiting practices—such as “batching by transaction type,” processing transactions out of chronological order, and “failing to show real-time balance information online [or] intra-bank transfers instantaneously”—sometimes caused her to pay insufficient funds and overdraft fees. The consumer filed suit asserting claims for “actual fraud; constructive fraud; false representation/deceit; breach of fiduciary duty; breach of contract (namely, the EFT Agreement) . . . breach of the implied covenant of good faith and fair dealing; and unjust enrichment.” The consumer appealed following a dismissal of all claims by the district court. In 2017, the 10th Circuit reversed and remanded the dismissal of the breach of contract claim, and affirmed the dismissal of the other claims. The district court granted summary judgment to the bank, determining that the EFT Agreement promised accuracy only to posted amounts and not to pending or unprocessed transactions. 

    On appeal, the 10th Circuit agreed with the district court, holding that the plain language of the EFT Agreement only promised accuracy of posted amounts, and authorized the bank to collect overdraft fees on insufficient funds items even if an ATM card or check card transaction “was preauthorized based on sufficient funds in the account at the time of withdrawal, transfer or purchase.” Moreover, the court noted that the EFT Agreement specifically stated that there was a 7:00 p.m. cut-off for transfers to be posted. Therefore, it was clear that the bank was not “contractually obligated to make intra-bank transfers instantaneously.” Furthermore, the court pointed out that the consumer failed to provide evidence demonstrating that the bank provided inaccurate balances.

    Courts Appellate Tenth Circuit Overdraft Electronic Fund Transfer

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  • Arkansas law stiffens criminal penalties for spoofing, robocalls

    State Issues

    On April 4, the Arkansas governor signed SB 514, which establishes a process for state regulation of telecommunications service providers and third-party spoofing providers, and stiffens criminal penalties for persons who engage in illegal robocalling and spoofing practices. The act reclassifies “spoofing”—defined in the act as “displaying fictitious or misleading names or telephone numbers—and illegal robocalls as Class D felonies. Arkansas law previously classified these actions as misdemeanors. The act requires telecommunications providers to report, on an annual basis, to the Arkansas Public Service Commission, implemented measures for identifying and combating the illegal calls.

    The Arkansas Attorney General issued a press release in which she noted that the legislation “reinforces how determined Arkansans are to stop these illegal calls and creates a path for enforcement to hold the bad actors accountable.” The act takes effect 90 days after adjournment of the legislature.

    State Issues State Legislation Privacy/Cyber Risk & Data Security Robocalls State Attorney General

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  • Virginia provides eviction and foreclosure relief to federal employees impacted by shutdowns

    State Issues

    On April 3, the Virginia governor signed SB 1737, which provides a 30-day stay of eviction and foreclosure proceedings for furloughed federal employees and contractors during a partial closure of the federal government. The law grants a tenant or homeowner who defaults on a housing payment after December 22, 2018, a 30-day stay on eviction or foreclosure proceedings. The tenant or homeowner must provide “written proof” that they were subject to a furlough, or were not otherwise receiving wages, as a result of the partial government shutdown that began on December 22, 2018. The tenant or homeowner must be an (i) employee of the federal government; (ii) a federal government contractor; or (iii) an employee of a contractor for the federal government. The law is effective immediately and expires on September 30.

    State Issues State Legislation Shutdown Relief Foreclosure Mortgages

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  • Minnesota clarifies definition of “sales finance company” for licensing purposes

    State Issues

    On April 5, the Minnesota Department of Commerce (Department) issued guidance clarifying the types of entities meeting the definition of “sales finance company” under Minnesota law for purposes of whether a license is needed to conduct business. The guidance requires “any company who purchases motor vehicle retail installment contracts from retail sellers located in Minnesota, and applies a finance charge,” to obtain a motor vehicle sales finance company license. Any company engaged in the business of a “sales finance company” is required to apply for and maintain a license under Minnesota law, regardless of whether the company has a physical presence in Minnesota or whether an in-state retail seller chooses to hold and collect retail installment contracts out-of-state.

    Completed applications by companies that purchase motor vehicle retail installment contracts are due to the Department by July 1. The license application requirement will only apply to those contracts entered into on or after July 1. Non-depository financial institution applicants must apply through the Nationwide Multistate Licensing System (NMLS).

    State Issues Auto Finance Licensing NMLS State Legislation

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  • 11th Circuit: Consumer’s repayment agreement not an escrow account

    Courts

    On April 9, the U.S. Court of Appeals for the 11th Circuit held that a consumer’s insurance repayment plan on her reverse mortgage did not qualify as an escrow account under RESPA’s Regulation X. According to the opinion, a consumer’s reverse mortgage required her to maintain hazard insurance on her property, which she elected to pay herself, and did not establish an escrow account with the mortgage servicer to pay her insurance and property taxes. After her insurance lapsed, the mortgage servicer advanced her over $5,000 in funds paid directly to her insurance carrier to ensure the property was covered, subject to a repayment agreement. After the consumer failed to make any payments under the agreement, the servicer initiated a foreclosure action against the consumer and obtained a forced-placed insurance policy when the insurance lapsed for a second time. Ultimately, a state-run forgivable loan program brought the consumer’s past due balance current and excess funds were placed in a trust to cover future insurance payments on the property. The consumer filed an action against the mortgage servicer alleging the servicer violated RESPA’s implementing Regulation X when it initiated forced-placed insurance, because the repayment agreement purportedly established an escrow account, which required the servicer to advance the funds for insurance. The district court entered judgment in favor of the servicer.

    On appeal, the 11th Circuit agreed with the district court, concluding that no escrow account existed between the consumer and the servicer, emphasizing that nothing in the repayment agreement set aside funds for the servicer to pay insurance or taxes on the property in the future. The 11th Circuit rejected the consumer’s characterization of the repayment agreement as an arrangement under Regulation X “where the servicer adds a portion of the borrower’s payment to principal and subsequently deducts from principal the disbursements for escrow account items.” The 11th Circuit reasoned that not only did the consumer never make a principal payment to the servicer, the consumer’s characterization is “entirely inconsistent” with the reverse mortgage security instrument. Because the servicer never deducted anything from the principal when it disbursed funds to pay the insurance, the repayment agreement did not qualify as an escrow agreement under Regulation X.

    Courts RESPA Force-placed Insurance Appellate Eleventh Circuit Regulation X Escrow Mortgages

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  • Ninth Circuit denies rehearing in Wadler FCPA whistleblower retaliation case

    Financial Crimes

    On April 8, the Ninth Circuit denied a petition to rehear its February order affirming most of the jury’s award – $8 million of the original $11 million – in a landmark FCPA whistleblower-retaliation case. The court denied the life sciences manufacturing company’s petition without explanation. 

    For prior coverage of the matter, including an analysis of the Ninth Circuit’s February opinion, please see hereherehere, and here.

    Financial Crimes FCPA Whistleblower

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  • Micronesian official pleads guilty to corruption-related money laundering conspiracy

    Financial Crimes

    On April 3, the DOJ announced that a Micronesian government official pleaded guilty in the District of Hawaii to a money laundering conspiracy “involving bribes made to corruptly secure engineering and project management contracts from the government of the Federated States of Micronesia (FSM), in violation of the” FCPA. The official was arrested in February after a Hawaiian executive pleaded guilty to a related FCPA conspiracy charge the prior month (see previous FCPA Scorecard coverage here). 

    According to the DOJ, the official "was a government official in the FSM Department of Transportation, Communications and Infrastructure who administered FSM’s aviation programs, including the management of its airports.” The official admitted that, between 2006 and 2016, a Hawaii-based engineering and consulting company “paid bribes to FSM officials, including [the official], to obtain and retain contracts with the FSM government valued at nearly $8 million.” The official’s sentencing is scheduled for July 29.

    Financial Crimes DOJ Anti-Money Laundering FCPA Of Interest to Non-US Persons

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  • District Court finds auto dealerships did not violate UTPA or financial elder abuse law

    Courts

    On March 30, the U.S. District Court for the District of Oregon granted a group of car dealerships’ (defendants) summary judgment motion in a putative class action involving claims that the dealership violated Oregon’s Unlawful Trade Practices Act (UTPA) as well as the state’s financial elder-abuse law. The plaintiffs, who all purchased vehicles along with other goods or services from one or more of the defendants, asserted that the defendants allegedly failed to “appropriately disclose [their] specific fees associated with arrangement of financing or the profit margins related to the sale of third-party products and services.” By failing to comply with these disclosure requirements, the plaintiffs alleged that the defendants “wrongfully appropriated money from elderly persons.” Concerning the alleged violations of UTPA, the defendants argued that its section titled “Undisclosed Fee Payments” only applies to referral fees greater than $100 paid to non-employee third-parties and not to other payments made by a dealership to a third party. The court agreed and stated that the defendants’ position was further supported by the state’s official commentary. With regard to the plaintiffs’ other claim concerning deficiencies in the disclosures, the court concluded that “strict recitation of the statute is not required to meet the clear and conspicuous standard,” and that the disclosures in question were clearly visible and easy to understand. Finally, the court granted summary dismissal on the plaintiffs’ claim of elder abuse because the claim was premised on the alleged violations of UTPA, which were dismissed.

    Courts Auto Finance Fees Elder Financial Exploitation Third-Party

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  • California Court of Appeal upholds return of $331 million to NMS Deposit Fund despite legislative efforts

    Courts

    On April 2, the California Third District Court of Appeal upheld its July 2018 ruling that the state is required to return $331 million to the National Mortgage Settlement Deposit Fund (NMS Deposit Fund), reaching the same conclusion as it did previously notwithstanding newly enacted legislation. As previously covered by InfoBytes, three groups filed a lawsuit in 2014 against California Governor Jerry Brown and the state’s director of finance and controller alleging they unlawfully diverted money from the NMS Deposit Fund to make bond payments and offset general fund expenditures. The groups sought a writ of mandate compelling the state government to pay back approximately $350 million in diverted funds. After the Superior Court denied the writ, the Third District Court of Appeal reversed, concluding that the money still belongs in the NMS Deposit Fund, and not in the state’s General Fund. The state petitioned to the State Supreme Court for review and while the petition was pending, the governor signed SB 861, which states, “It is the intent of the Legislature…to confirm that allocations and uses of funds made by the director of finance from the National Mortgage Special Deposit Fund pursuant to [section 12531] in the 2011-12, 2012-13, and 2013-14 fiscal years were consistent with legislative direction and intent and to abrogate the holding of the Court of Appeal in [this case]. The Legislature further declares that the allocations made by the director of finance pursuant to [section 12531] were made for purposes consistent with the National Mortgage Settlement.” The Supreme Court directed the Court of Appeal to vacate the July 2018 opinion and reconsider in light of SB 861.

    The Court of Appeal, having considered the views of the legislature in SB 861, confirmed its original conclusion from July 2018. Specifically, the court stated that the defendants’ reading of SB 861, “would effectively defeat the purpose of creating a special deposit fund to house the money” and would disregard the former Attorney General’s instructions for use of the settlement money, which was part of the National Mortgage Settlement. The Court of Appeal noted that in SB 861, the legislature declared that “the allocations…were made consistent with the National Mortgage Settlement,” but emphasized that “such a ‘belief is not binding on a court. . . .’” and the interpretation is “an exercise of the judicial power the Constitution assigns to the courts.” Therefore, upon second review, the Court of Appeal again held that the trial court erred when it did not issue a writ of mandate ordering the diverted funds to be returned to the NMS Deposit Fund.

    Courts State Issues State Legislation National Mortgage Settlement Appellate Mortgages

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  • Federal Reserve seeks comments on capital framework for U.S. subsidiaries of foreign banks

    Agency Rule-Making & Guidance

    On April 8, the Federal Reserve Board announced a notice of proposed rulemaking and request for comment (NPRM) seeking to modify its regulation of the regulatory capital requirements for U.S. subsidiaries of foreign banking organizations. Chairman Jerome Powell referred to a proposal issued last fall for refining regulations for domestic banking firms based on risk profiles (previously covered by InfoBytes here), and noted that “because the U.S. operations of most foreign banks tend to have a larger cross-border profile, greater capital markets activities, and higher levels of short-term funding, they often present greater risk than a simpler, more traditional domestic bank.”

    The NPRM builds upon the Federal Reserve’s framework for U.S. firms announced last fall, and states that foreign banking organizations with $100 billion or more in U.S. assets would be assigned to one of three categories based on the size of their U.S. operations as well as the following risk-based indicators: “cross-jurisdictional activity, nonbank assets, off-balance sheet exposure, and weighted short-term wholesale funding.” Under the proposal, foreign banking organizations would be classified into the following three categories: (i) Category II: foreign banking organizations with U.S. assets exceeding $700 billion or $75 billion in cross-border activity; (ii) Category III: foreign banking organizations with more than $250 billion in U.S. assets that also exceed certain risk thresholds; and (iii) Category IV: foreign banking organizations with U.S. assets between $100 billion and $250 billion and minimal risk factors. Category I would be reserved for U.S.-based global systemically important banks.

    A second proposal issued the same day by the Federal Reserve Board, the FDIC, and the OCC (collectively, the “Agencies”) requests comment on, among other things, whether the Agencies should extend standardized liquidity requirements to foreign banking organizations’ U.S.-based branches and agency networks as well as approaches for doing so.

    Comments on both proposals are due June 21.

    Agency Rule-Making & Guidance Federal Reserve FDIC OCC Of Interest to Non-US Persons

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