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New Mexico amends provisions related to installment and small dollar loans
On April 3, the New Mexico governor signed HB 150, which amends the New Mexico Bank Installment Loan Act of 1959 and the New Mexico Small Loan Act of 1955 to, among other things, change provisions relating to financial institutions and (i) clarify that unfair or deceptive trade practices, or unconscionable trade practices, are considered violations of the Unfair Practices Act; (ii) expand annual lender reporting requirements, including identifying secured and unsecured loan products, fees and interests paid by the borrowers, loan terms, and default rates; (iii) clarify allowable loan insurance, including provisions related to licensing requirements for lenders; and (iv) expand state and federal disclosure requirements. The amendments also limit interest and other charges (permitted finance charges cannot exceed the lesser of $200 or 10 percent of the principal with outlined exceptions); grant rights of rescission within specified time frames to allow borrowers to return the full amount of funds advanced by the lender without being charged fees; and provide for penalties for lenders who willfully violate any of the provisions. Specifically, the act applies to installment loans covered by the Installment Loan Act and the Small Loan Act, and does not apply to federally insured depository institutions. The act takes effect January 1, 2020, and is applicable to loans subject to the aforementioned acts that are executed on or after the effective date.
New York requires student loan servicers to be licensed in broad legislation
On March 31, the New York governor announced the passage of the state’s FY 2020 Budget, which includes an amendment (known as “Article 14-A” or “the Act”) to the state’s banking law with respect to the licensing of private student loan servicers. Article 14-A requires student loan servicers to be licensed by the New York Department of Financial Services (NYDFS) in order to service student loans owned by residents of New York. The licensing provisions do not apply to the servicers of federal student loans—defined as, “(a) any student loan issued pursuant William D. Ford Federal Direct Loan Program; (b) any student loan issued pursuant to the Federal Family Education Loan Program, which was purchased by the government of the United States pursuant to the federal Ensuring Continued Access to Student Loans Act and is presently owned by government of the United States; and (c) any other student loan issued pursuant to a federal program that is identified by the superintendent as a ‘federal student loan’ in a regulation”—as the Act treats federal servicers as though they are a licensed student loan servicer. Banking organizations, foreign banking organizations, national banks, federal savings associations, federal credit unions, or any bank or credit union organized under the laws of any other state, are also considered exempt from the new state licensing requirements.
In addition to the licensing requirements, Article 14-A also prohibits any student loan servicer—including those exempt from licensing requirements or deemed automatically licensed—from, among other things, (i) engaging in any unfair, deceptive, or predatory act or practice with regard to the servicing of student loans, including making any material misrepresentations about loan terms; (ii) misapplying payments to the balance of any student loan; (iii) providing inaccurate information to a consumer credit reporting agency; and (iv) making false representations or failing to respond to communications from NYDFS within fifteen calendar days. Article 14-A requires student loan servicers (not including exempt organizations) to accurately report a borrower’s payment performance to at least one credit reporting agency if the organization regularly reports information to a credit reporting agency. Additionally, the Act specifies that a student loan servicer shall inquire on how a borrower would like nonconforming payments to be applied and continue that application until the borrower provides different directions. Article 14-A also outlines examination and recordkeeping requirements and allows for the NYDFS Superintendent to penalize servicers the greater of (i) up to $10,000 for each offense; (ii) a multiple of two times the violation’s aggregate damages; or (iii) a multiple of two times the violation’s aggregate economic gain. Article 14-A takes effect 180 days after becoming law.
London-based financial institution to pay $1.1 billion for U.S. sanctions violations
On April 9, U.S. and U.K regulators announced that a London-based global financial institution would pay $1.1 billion to settle allegations by the DOJ, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), the Federal Reserve Board, the New York Department of Financial Services (NYDFS), the Manhattan District Attorney, and the U.K.’s Financial Conduct Authority (FCA) for allegedly violating multiple sanctions programs, including those related to Burma, Cuba, Iran, Sudan, and Syria. According to the OFAC announcement, from June 2009 until May 2014, the institution processed thousands of transactions involving persons or countries subject to sanctions programs administered by OFAC, but the majority of the actions at issue concern Iran-related accounts maintained by the institution’s Dubai branches. OFAC alleged the Dubai branches processed transactions through the institution’s New York branches on behalf of customers that were physically located or ordinarily resident in Iran.
According to the $639 million settlement agreement, OFAC noted, among other things, that the institution “acted with reckless disregard and failed to exercise a minimal degree of caution or care” with respect to the actions at issue. Moreover, OFAC alleged that the institution had actual knowledge or reason to know its compliance program was “inadequate to manage the [the institution]’s risk.” OFAC considered numerous mitigating factors, including that the institution’s substantial cooperation throughout the investigation and its undertaking of remedial efforts to avoid similar violations from occurring in the future.
The $639 million penalty will be deemed satisfied by the institution’s payments to other U.S. regulators, which includes, $240 million forfeiture and $480 million fine to the DOJ, $164 million fine to the Federal Reserve, and $180 million fine to the NYDFS. The institution also settled with the FCA for $133 million. The settlement illustrates the risks to foreign financial institutions associated with compliance lapses when processing transactions through the U.S. financial system.
Utah applies RESPA provisions to title entity affiliated business arrangements
On March 29, the Utah governor signed SB 121, which modifies certain title insurance definitions and provisions and adopts, with certain exceptions, Section 8 of RESPA for the purposes of state law governing affiliated business arrangements involving title entities. SB 121 “repeals existing provisions governing controlled business relationships in the title industry,” and permits an “affiliated business arrangement” as defined under 12 U.S. Code § 2602, with the exception that the “services that are the subject of the arrangement do not need to involve a federally related mortgage loan.”
Specifically, title entities with affiliated-business arrangements will be regulated by the state’s Division of Real Estate (Division), which has enforcement authority over the bill’s provisions, including over certain RESPA provisions against real estate licensees such as “failing to timely disclose to a buyer or seller an affiliated business relationship.” Title companies are also required to file annual reports to the Division related to affiliated business arrangements as well as capitalization for the previous calendar year. SB 121 further provides a specific list of RESPA violations pertaining to affiliated business arrangements. The amendments take effect 60 days after adjournment of the legislature.
10th Circuit: Bank not obligated to post real-time balances
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.
Arkansas law stiffens criminal penalties for spoofing, robocalls
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.
Virginia provides eviction and foreclosure relief to federal employees impacted by shutdowns
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.
Minnesota clarifies definition of “sales finance company” for licensing purposes
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).
11th Circuit: Consumer’s repayment agreement not an escrow account
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.
Ninth Circuit denies rehearing in Wadler FCPA whistleblower retaliation case
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 here, here, here, and here.