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DOJ Announces Five Indictments in Largest Known Data Breach Case
On July 25, the DOJ announced the indictment of five individuals accused of conspiring in a worldwide hacking and data breach scheme that targeted major corporate networks, stole more than 160 million credit card numbers and resulted in hundreds of millions of dollars in losses. The DOJ believes the defendants and others conspired to use a “SQL injection attack” to penetrate the computer networks of several of the largest payment processing companies, retailers and financial institutions in the world. Once started, the attacks could last months while the defendants worked to steal user names and passwords, means of identification, credit and debit card numbers and other corresponding personal identification information of cardholders, and subsequently sell the data to end-users who used the data to make fraudulent ATM withdrawals or credit card purchases. The DOJ’s action was based on the findings of an extensive Secret Service investigation.
Senate Committee on Aging Scrutinizes Short-Term, Small Dollar Loans
On July 24, the Senate Special Committee on Aging held a hearing titled “Payday Loans: Short-term Solution or Long-term Problem?” that included discussion of several short-term, small-dollar credit products. Although the Committee’s jurisdiction is intended to cover policy issues related to older Americans, the hearing reviewed small dollar products more generally. Numerous Senators, including committee Chairman Sen. Bill Nelson (D-FL) and Sen. Elizabeth Warren (D-MA) scrutinized bank deposit advance products and, building off the CFPB’s testimony and earlier white paper, characterized them as payday loans that trap consumers in a cycle of debt. Sen. Nelson suggested that banks have an obligation to provide customers with alternatives and a range of options to meet their needs, while Sen. Donnelly (D-IN) and others repeatedly raised the concept of a 36% national usury cap. Committee members, with the help of a representative from Maine’s financial regulator, tried to build a record in support of federal legislation to address alleged practices of online lenders, including charges that such lenders often avoid state licensing requirements to circumvent state usury caps. Committee members and witnesses also discussed the role of banks in assuring debits from customer accounts are compliant with state law.
California Appeals Court Holds Foreclosure Deficiency Judgment Protections Apply to Short Sales
On July 23, the California Court of Appeal, Fourth Appellate District, held in a case of first impression that a section of California law that prohibits a deficiency judgment following a foreclosure on a purchase money loan similarly protects borrowers in short sales. Coker v. JP Morgan Chase Bank, N.A., No. D061720, 2013 WL 3816978 (Cal. Ct. App. Jul. 23, 2013). In this case, the lender approved a short sale subject to several conditions, including that the sale proceeds paid to the lender released the lender’s security interest, but that the borrower still was responsible for any deficiency balance. After the sale closed, the lender sought to collect from the borrower the unsatisfied portion of the loan. The borrower filed suit claiming that state law and common law prevented the lender from collecting. On appeal, the court reversed the trial court’s dismissal and held that a state law that has been applied to prohibit deficiency judgments following foreclosure sales also prohibits deficiency judgments following short sales. The court explained that there is nothing in the statute to modify or limit the term “sale” and no other requirement in the statute that a foreclosure must occur to trigger the deficiency judgment protections. Further, the court rejected the lender’s argument that the borrower waived the protection by agreeing as a condition of the sale to be liable for any deficiency after the sale. The court reversed the trial court and remanded for further proceedings.
Virginia AG Sues Online Payday Lender to Enforce State Licensing Law
On July 18, Virginia Attorney General Ken Cuccinelli (AG) announced a lawsuit against an online lender for allegedly making illegal payday loans in the state. The AG explained that the Virginia State Corporation Commission requires every payday loan lender to obtain a license before conducting business in Virginia. The AG asserts that the lender did not obtain the required license. State law limits unlicensed lenders to charging no more 12% in annual interest on a loan. The AG alleges that the rates on the online lender’s loans range from 438% annually for a 25-day loan to 1,369% annually for an eight-day loan. The AG stated that the company instructs customers to apply for loans through its website, and after the loan applications are approved, the company wires funds directly to the consumers' bank accounts in exchange for authorizing the company to directly debit loan payments from the customers’ bank accounts. The suit seeks to enjoin the company from collecting interest over the 12% state limit, and seeks consumer reimbursement of certain interest paid and civil penalties in the amount of $2,500 for each violation.
Magistrate Judge Finds Tribal Payday Lender Subject to FTC Act; Lender Agrees to Settle Some FTC Charges
On July 22, the FTC announced that it obtained a partial settlement of claims it filed last year against a Native American Tribe-affiliated payday lending operation that allegedly charged undisclosed and inflated fees, and collected on loans illegally by threatening borrowers with arrest and lawsuits. FTC v. AMG Servs, Inc. No. 12-536 (D. Nev.). The agreement does not include any monetary resolution of the claims, but (i) prohibits the defendants from certain collection practices, (ii) prohibits the defendants from conditioning the extension of credit on preauthorized electronic fund transfers, and (iii) requires the defendants to implement enhanced compliance policies that are subject to new reporting requirements. The settlement follows a report and recommendation issued last week by the magistrate judge assigned to the case in which he concluded that the FTC has authority under the FTC Act to regulate “Indian Tribes, Arms of Indian Tribes, employees of Arms of Indian Tribes and contractors of Arms of Indian Tribes” with regard to the payday lending activities at issue in the case. Relying on Ninth Circuit precedent, the magistrate judge held that while the FTC Act does not expressly apply to Indian Tribes, it is a statute of general applicability with reach sufficient to cover the Tribal entities. Further, the magistrate judge concluded that “both TILA and EFTA provide the FTC the power to enforce the statutes without regard for any jurisdictional limitations contained in the FTC Act.” The FTC will continue litigating other charges against the defendants, including allegations that they deceived consumers about the cost of their loans by charging undisclosed charges and inflated fees.
Florida District Court Orders Disgorgement of Profits from Unfair, Deceptive Online Payday Loan Referral Practices
On July 18, the U.S. District Court for the Middle District of Florida held that an online payday loan referral business engaged in unfair and deceptive billing practices and failed to provide adequate disclosures to its customers. FTC v. Direct Benefits Group, LLC, No. 11-1186, 2013 WL 3771322 (M.D. Fla. Jul. 18, 2013). The FTC alleged that the defendants violated the FTC Act by obtaining consumers’ bank account information through payday loan referral websites and debiting their accounts without their consent. The FTC also alleged that the defendants failed to adequately disclose that, in addition to using consumers’ financial information for a payday loan application, they would use it to charge them for enrollments in unrelated programs and services. During a bench trial, the parties presented evidence and arguments regarding the content and operation of the websites and whether consumers could enroll in the referral programs without taking affirmative steps to do so. The court agreed with the FTC’s claims that the defendants’ practices were deceptive and held that the “pop-up box” used to enroll consumers in the programs at issue was misleading. The court explained that the defendants’ website and the online payday loan application form created the overall impression that they were intended for applying for payday loans and that the bank account information that applicants were asked to enter would be used for deposit of the payday loan—not so that the account could or would be debited for the purchase of an unrelated product or service. Further, the court held that the defendants’ disclosures were not clear and conspicuous under the principles included in the FTC’s “.com disclosures guidance.” The court also held that the FTC established that the billing practices were unfair, and ordered the defendants to disgorge over $9.5 million and permanently cease the practices at issue.
Housing Finance Reform Bills Advance in Congress
On July 24, the House Financial Services Committee approved a comprehensive housing finance reform bill, outlined recently by Committee Chairman Jeb Hensarling (R-TX). The Chairman has indicated that the bill could move to the House floor for consideration by the full body shortly after the August recess and that in the interim he will work to explain the bill to his conference and build support. The House bill differs in several substantial ways from a Senate proposal. For instance, the House bill provides for an overhaul of the Federal Housing Administration while the Senate Banking Committee intends to address the FHA separately from, and in advance of, the Senate’s broader housing finance reform bill. The Senate Banking Committee held a hearing this week on its FHA legislation and intends to amend and vote on the bill next week.
NIST Releases Minor Updates to Digital Signature Standard
On July 23, the National Institute of Standards and Technology released a revised digital standard used to ensure the integrity of electronic documents and the identity of the signer. The revised standard includes no major changes, but does update the standard to align it with other publications so that all NIST documents offer consistent guidance regarding the use of random number generators. Another revision concerns the use of prime number generators, which requires random initial values for searching for prime numbers.
Rhode Island Adopts Foreclosure Mediation
On July 15, Rhode Island enacted HB 5335 to create a temporary foreclosure mediation program. Effective September 1, 2013 through July 1, 2018, the new law requires mortgagees or their servicers or agents to provide borrowers who are not more than 120 days delinquent written notice that foreclosure cannot proceed without the borrower first having an opportunity to participate in a mediation conference. The law establishes the procedures and requirements for such conferences and prohibits a mortgagee from proceeding with a foreclosure action until the mediator certifies that, after good faith effort by the mortgagee, the parties could not reach agreement.
FINRA To Begin Sharing Additional MBS Information
On July 22, FINRA announced that it will begin to disseminate information for so-called specified pool transactions in agency pass-through mortgage-backed securities and SBA-backed securities, including transaction information such as the time of the trade, price and volume. Transactions must be reported to within two hours of execution (the reporting period is reduced to one hour after a six month implementation period), and are disseminated as soon as received. Combined with FINRA’s action last year to begin disseminating transaction information for agency pass-through mortgage-backed securities traded "to-be-announced" (TBA), FINRA now will be sharing information for securities that represent over 90 percent of the par value traded in all asset- and mortgage-backed securities.