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Court denies attorney’s move for summary judgment against CFPB as premature
On June 4, the U.S. District Court for the District of Maryland issued a Memorandum to Counsel denying defendants’ dispositive motions in a UDAAP action brought by the CFPB alleging the defendants employed abusive practices when purchasing structured settlements from consumers in exchange for lump-sum payments. As previously covered by InfoBytes, in September 2017, the court allowed the CFPB to move forward with its UDAAP claim against the company, its affiliates, and its officers but dismissed claims related to an attorney, finding that he satisfied the requirements for an exemption under the Maryland Consumer Financial Protection Act (MCFPA) for attorneys engaged in the practice of law. In December 2017, the CFPB filed an amended complaint, arguing that the consumers typically did not know the defendant was an attorney or acting as their attorney. The court agreed, holding that “it is logically impossible for a ‘client’ to form an attorney-client relationship with someone she does not know is an ‘attorney,’” and allowed the CFPB to resume the actions against the attorney.
The attorney again moved to dismiss the amended complaint, or in the alternative for summary judgment on the claims. The court denied the motion to dismiss because it was based on the attorney’s disagreement with the CFPB’s allegation that the consumers were never informed he was an attorney—an inappropriate ground for such a motion. As for the motion for summary judgment, the court agreed with the CFPB that the motion was premature because discovery was ongoing.
NYDFS will continue to pursue litigation if OCC moves forward with fintech charter
On June 6, New York Department of Financial Services (NYDFS) Superintendent, Maria T. Vullo, spoke to the Exchequer Club in Washington, DC, emphasizing, among other things, her opposition to the OCC’s proposal for a fintech charter. Vullo noted that the OCC has not actually finalized plans for the new charter and Comptroller, Joseph Otting, is expected to announce his views on the pending proposal soon. As previously covered by InfoBytes, two legal challenges, one by NYDFS and one by the Conference of State Bank Supervisors, were recently dismissed in separate district courts for lack of subject matter jurisdiction and ripeness due to the fact that the OCC has not issued a fintech charter nor has it finalized its plans to issue one. In her speech, Vullo, acknowledged these lawsuits and her desire to continue the litigation “rather than accept the OCC’s lack of authority in the non-depository space and respect the states’ regulation of and consumer protections in this area.” Vullo noted that fintech, when done right, is a “very good thing” that can assist in bringing banking services to underserved customers. But she also stated that companies that use financial technology should not be granted “an exemption from the rules that banks and other financial institutions follow to manage risk and protect consumers.”
Vullo also touched on (i) her support for the CFPB’s final rule on payday loans, vehicle title loans, and certain other high-cost installment loans; (ii) her concerns over the dismantling of the Bureau’s Office for Students; (iii) her opposition to the Department of Education’s position that only the federal government may oversee student loan servicers (see InfoBytes coverage here); and (iv) the potential risks with the unregulated virtual currency market.
District Court grants preliminary injunction in FTC search engine suit
On June 6, the U.S. District Court for the Southern District of Florida granted the FTC’s request for preliminary injunction against an individual defendant and the company he owns and manages (stipulating defendants) for allegedly violating the FTC Act by making robocalls to small business owners claiming they represented a global search engine and could guarantee top search result placements. The stipulating defendants are part of a larger group of Florida-based companies, affiliates, and representatives (defendants) identified in the FTC’s 2018 complaint. According to the FTC’s May 23 press release, the defendants—who allegedly have no relationship with the search engine—threatened to remove companies from the search engine’s results or label them as “permanently closed” unless they accepted the robocall and paid a fee to participate in the defendants’ program. The complaint also claimed that the defendants—who lost the ability to accept payments by credit card after their merchant account was closed due to high chargeback rates—allegedly “took money, usually $100, from at least 250 of their prior or existing customers’ checking accounts without those customers’ advance knowledge, consent, or authorization, and with no apparent reason or justification.”
In granting the preliminary injunction, the court found that there exists “good cause” to believe the FTC’s allegations against the stipulating defendants, and that the FTC is “likely to prevail on the merits of this action.” The injunction, among other things, blocks the stipulating defendants from continuing with their business, freezes their assets and records, and orders the appointment of a receiver to take control over those assets. A temporary restraining order was also issued against all defendants on May 8.
11th Circuit vacates FTC data security cease and desist order issued against medical testing laboratory
On June 6, the U.S. Court of Appeals for the 11th Circuit vacated an FTC cease and desist order (Order) that directed a Georgia-based medical testing laboratory to overhaul its data security program, ruling that the Order was unenforceable because it lacked specifics on how the overhaul should be accomplished. In 2013, the FTC claimed that the laboratory’s violation of Section 5(a) of the FTC Act constituted an “unfair act or practice” by allegedly failing to implement and provide reasonable and appropriate data security for patient information. The now defunct laboratory argued, among other things, that the FTC did not have the authority under Section 5 to regulate how it handled its data security measures. But the three-judge panel chose not to rule on the broader question about the scope of the FTC’s Section 5 data security authority, choosing to focus its decision on the Order. As previously covered in InfoBytes, in 2016 the FTC reversed an Administrative Law Judge’s Initial Decision to dismiss the 2013 FTC complaint, ordering the laboratory to, among other things, employ reasonable security practices that complied with FTC standards.
After the Order was issued, the laboratory asked the 11th Circuit to decide whether the FTC’s Order was “unenforceable because it does not direct it to cease committing an unfair ‘act or practice’ within the meaning of Section 5(a).” The 11th Circuit agreed to stay enforcement of the Order and ultimately permanently vacated it. “In the case at hand, the cease and desist order contains no prohibitions,” the panel wrote. “It does not instruct [the laboratory] to stop committing a specific act or practice. Rather, it commands [the laboratory] to overhaul and replace its data security program to meet an indeterminable standard of reasonableness. This command is unenforceable.” The court concluded that “[t]his is a scheme that Congress could not have envisioned.”
CFPB dismisses PHH suit and removes all members of three advisory councils
On June 7, acting Director of the CFPB, Mick Mulvaney, dismissed the Bureau’s action against PHH, which spawned years of litigation and a constitutional challenge to the CFPB’s structure. In January, the U.S. Court of Appeals for the D.C. Circuit issued its en banc decision concluding the CFPB’s structure is constitutional but affirmed the October 2016 panel opinion that the CFPB misinterpreted RESPA and its statute of limitations (covered by a Buckley Sandler Special Alert). The $109 million penalty imposed on PHH by the CFPB was vacated and the case was sent back to CFPB leadership for review. On June 6, in response to an order by Mulvaney, PHH and the Bureau’s enforcement counsel filed a joint statement addressing whether further proceedings were necessary and jointly recommended dismissal of the matter.
On June 6, Mulvaney reportedly removed all current members of the Consumer Advisory Board (CAB), the Community Bank Advisory Council (CBAC), and the Credit Union Advisory Council (CUAC). In a blog post, the Bureau’s policy associate director for external affairs noted that the changes to the advisory boards were in response to the comments received from the Bureau’s Request for Information (RFI) on external engagements (previously covered by InfoBytes here). The comment period for the RFI closed on May 29. According to the blog, the Bureau will still continue its statutory obligation under the Dodd-Frank Act to convene the CAB and provide forums for the CBAC and the CUAC. The councils will be re-staffed with a smaller membership from the 2018 application and selection process. The changes come only a few days after it was reported that Mulvaney canceled his meeting with the CAB for the second time since he took on the acting director role.
Fannie Mae issues Selling Guide updates, announces MH Advantage program
On June 5, Fannie Mae issued Selling Guide update SEL-2018-05, which announces, among other things, the MH Advantage initiative. MH Advantage is a manufactured home that meets specific construction, design, and efficiency standards. Fannie Mae offers a number of flexibilities on loans secured by these properties, including higher loan-to-value ratios and standard mortgage insurance. The Selling Guide is updated to include the requirements for loans secured by MH Advantage homes, such as property eligibility, appraisal, and underwriting requirements. The requirements for MH Advantage loans are effective immediately. Additionally, the Selling Guide includes updates to (i) HomeStyle Energy loans in Desktop Underwriter; (ii) HomeStyle Renovation loan forms; and (iii) project standards updates to condo, co-op, and PUD project policies.
FTC files complaint against two operations allegedly responsible for making billions of illegal robocalls
On June 5, the FTC announced charges filed against two individuals and their related operations (defendants) for allegedly facilitating billions of robocalls to consumers across the country through a telephone dialing platform in violation of the FTC Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, and the Telemarketing Sales Rule. According to the complaint filed in the U.S. District Court for the Central District of California, the alleged misconduct—dating back to 2001—centered around the principal and owner of a group of companies that operated and developed a computer-based telephone dialing platform, and a second individual defendant and his group of call center businesses that paid for the development and use of software designed to make autodial telephone calls and deliver prerecorded messages. The FTC alleged that for many years the two individual defendants jointly owned and operated businesses that resold access to a “bundle of services”—referred to as a “one-stop-shop for illegal telemarketers”—that provided, among other things, (i) servers to host the autodialing software, as well as the physical space housing the servers; and (ii) the ability to make calls using “spoofed” caller ID numbers, which made it look as if the calls came from a consumer’s local area code. According to the FTC, this “bundle of services” became so widely used within the industry that it has been named in at least eight other FTC lawsuits centered on the facilitation of unlawful calls. Among other things, the charges against the defendants include assisting with illegal robocalls, calling with prerecorded messages, calling numbers on the National Do Not Call Registry, calling with spoofed caller IDs, and abandoning calls. The FTC seeks civil monetary penalties, a permanent injunction against the defendants to prevent future violations, and reimbursement of costs for bringing the action.
Sixteen State Attorneys General urge the CFPB to maintain the public consumer complaint database
On June 4, the New York Attorney General, Barbara Underwood, along with fourteen other state Attorneys General submitted a comment letter in response to the CFPB’s Request for Information (RFI) on the public reporting of consumer complaints, previously covered by InfoBytes here. The Attorneys General highlight the utility of the CFPB’s consumer complaint database, stating it “has been an invaluable resource for identifying trends and patterns,” and noting its usefulness in investigations into certain companies “whose misconduct was initially brought to [their] attention through a critical mass of complaints filed with the CFPB.” The letter also comments on the database’s benefit to the public for (i) empowering consumers to educate themselves; (ii) incentivizing companies to treat consumers fairly; and (iii) potentially revealing patterns of widespread misconduct. The coalition concludes the letter by urging the CFPB to maintain the public database.
Additionally, on the same day, the New Jersey Attorney General, Gurbir Grewal, responded to the same RFI with similar sentiments but also emphasized that eliminating or reducing the public availability of the database “would conflict with the open-government principles of the Freedom of Information Act” (FOIA) because FOIA requires government agencies to proactively disclose frequently requested records. According to Grewal, the Bureau receives a substantial number of requests for consumer complaint records and this number will likely increase without the public database.
NCUA proposes additional payday loan alternative option
On June 4, the National Credit Union Administration (NCUA) published in the Federal Register a proposal to create a new payday alternative loan product (PAL II) in addition to the current payday alternative loan product (PAL I), which has been available since 2010. According to the NCUA announcement, the goal of PAL II is to expand access to safe and affordable short-term, small-dollar loans for consumers of modest means. PAL II would include most features of PAL I, with four changes: (i) eliminating a loan minimum while setting the maximum at $2,000; (ii) setting a term maximum of 12 months; (iii) eliminating the requirement for membership minimum length; and (iv) as long as the consumer only has one outstanding loan at the time, eliminating the time restriction on the number of loans a credit union can make to the borrower in a six month period.
The proposal also requests input on the potential features of a possible third option, PAL III, including lending restrictions, associated fees, and underwriting guidelines.
As previously covered by InfoBytes, the OCC recently issued a bulletin encouraging banks to offer short-term, small dollar installment lending.
FTC reports on certain 2017 enforcement activities to the CFPB
On May 17, in response to a request from the CFPB, the FTC transmitted a letter summarizing its 2017 enforcement activities related to Regulation Z (TILA), Regulation M (Consumer Leasing Act), and Regulation E (Electronic Fund Transfer Act) for the CFPB’s use in preparing its 2017 Annual Report to Congress. The FTC highlighted numerous activities related to the enforcement of the pertinent regulations, including:
- Payday Lending. The FTC acknowledged the continued litigation against two Kansas-based operations and their owner for allegedly selling lists of counterfeit payday loan debt portfolios to debt collectors in violation of the FTC Act, previously covered by InfoBytes here.
- Military Protection. The FTC identified the July 2017 military consumer financial workshop and the launch of the new Military Task Force (previously covered by InfoBytes here and here) among the activities the agency engaged in related to protecting the finances of current and former members of the military. The FTC also noted continued participation in the interagency group working with the Department of Defense on amendments to its rule implementing the Military Lending Act.
- “Negative Option.” For actions under the Regulation E/EFTA, the FTC highlighted numerous “negative option” enforcement actions, in which the consumer agrees to receive goods or services from a company for a free trial option, but if the consumer does not cancel before the trial period ends, the consumer will incur recurring charges for continued goods or services. Among the actions highlighted is a case in which the FTC imposed a $179 million judgment (suspended upon the payment of $6.4 million) settling allegations that the online marketers’ offers of “free” and “risk free” monthly programs for certain weight loss and other products were deceptive.
- Auto Loans. The letter highlighted, among others, the FTC action against a Southern California-based group of auto dealerships that allegedly violated a prior consent order with the FTC by misrepresenting the cost to finance or lease a vehicle, previously covered by InfoBytes here.