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CONSUMER FINANCE MONITOR
CFPB, Federal Agencies, State Agencies, and Attorneys General
CONNECTICUT DEPARTMENT OF BANKING ISSUES CONSUMER AND INDUSTRY ADVISORY ON MONEY
TRANSMISSION
By Lisa Lanham & Andrew N. D'Aversa on July 29, 2022
Posted in Money Transmission, State Licensing
On July 20, 2022, the Connecticut Department of Banking (the “Department”)
issued a Consumer and Industry Advisory on Money Transmission (the “Advisory”).
The Department believes the Advisory was necessary for two reasons. First, the
Department notes the “significant disruption to traditional money transmission
systems” caused by the “increased use of technology to enable immediate payment
mechanisms” and “the explosion of virtual currency.” Second, the Department
acknowledges that many consumers do “not realize or understand the regulatory
landscape that applies” to using money transmitters.
Although the Department cautions that “[e]ach circumstance is unique,” the
Advisory provides general guidance on what types of activities and entities must
be licensed. The Advisory lists entities that traditionally provide
transmission services like bill payers, payroll processors, and issuers and
sellers of prepaid cards and money orders. It also explains that transmission
can occur whenever “a person takes possession or control of monetary value
belonging to another person” and either holds it for “a period of time” or
transmits it to a third party. In other words, unless a company falls within an
exemption or exception, if it engages in the above activity in Connecticut or
with Connecticut companies or individuals, it may need to first obtain a
license.
The definition of money transmission was further broadened in 2018 when
Connecticut amended its money transmitter statute to encompass transmission
activities involving virtual currency. In the advisory, the Department
emphasizes that these statutory amendments cover all types of virtual
currencies, stablecoins, and “any other digital asset that is used as a medium
of exchange.” Moreover, the Department points out that providing a virtual
currency custodial wallet (i.e., holding virtual currency on behalf of another)
or virtual currency ATMs that serve as an intermediary between a buyer or seller
are also engaging in money transmission.
Finally, the Department discusses Connecticut’s license application and
penalties for unlicensed transmission. Like many states, licensure goes through
the Nationwide Mortgage Licensing System, NMLS, and involves submitting
applications for both the entity seeking licensure and all “control persons.”
Beyond these applications and related fees, Connecticut also requires submission
of financials, a business plan, the proposed flow of funds, and an Anti-Money
Laundering and Bank Secrecy Act policy, among other documents. Posting of a
surety bond valued at between $300,000 and $1 million is also required.
Seemingly in response to a noted uptick “in the number of entities engaged in
unlicensed money transmission activity”—especially Internet transmission
services and virtual currency companies—the Advisory ends with a warning:
unlicensed transmission brings with it the risk of a $100,000 fine per violation
and a felony charge. Companies based in Connecticut or serving customers in
Connecticut should be careful to examine this Advisory and their activities to
ensure that they are not engaging in money transmission activities that would
require licensure.
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FTC AND 18 STATE ATTORNEYS GENERAL SETTLE ACTION AGAINST NATIONAL RETAIL CHAIN
ACCUSED OF UNLAWFUL PRACTICES TARGETING SERVICEMEMBERS
By Brian Turetsky on July 29, 2022
Posted in FTC, Military Issues, Regulatory and Enforcement
On July 20, 2022, the Federal Trade Commission (“FTC”) and 18 state attorneys
general led by New York Attorney General Letitia James announced that they have
entered into a settlement with Harris Originals of NY, Inc. and related entities
(collectively, “Harris Jewelry”), a national jewelry retailer that markets and
sells military-themed gifts, to resolve their lawsuit which alleged that Harris
Jewelry had engaged in unlawful sales and credit practices targeting
servicemembers. The action is notable in that it is the first time the FTC has
brought an action under the Military Lending Act (“MLA”).
The complaint filed against Harris Jewelry – which used the slogan “Serving
Those Who Serve” – alleged that it strategically located its stores on or near
military bases and actively pushed its customers to finance purchases through
retail installment contracts (RICs), telling customers, without any review of an
individual customer’s circumstances, that this was a way for customers to
improve their credit scores. This practice, referred to and marketed as the
“Harris Program,” was alleged to be pervasive in Harris Jewelry’s sales
practices and to have resulted in customers using financing for approximately
90% of Harris Jewelry’s sales. The complaint further alleged that in-store
credit specialists assisting customers were instructed to add a protection plan
to a RIC for each item of merchandise purchased, without first obtaining express
informed consent. These credit improvement representations and the
misrepresentations regarding protection plans formed the basis for claims of
deceptive acts or practices in violation of Section 5(a) of the FTC Act and
various state UDAP statutes.
Beyond its alleged deceptive practices, the complaint alleged the following
violations by Harris Jewelry:
* Failing to clearly and conspicuously state financing terms in its
advertisements or provide all mandated disclosures within its closed-end
retail installment contracts in violation of the Truth in Lending Act. For
closed-end credit, TILA and Regulation Z require creditors to disclose,
before the credit is extended, clearly and conspicuously in writing, specific
financing terms, including the identity of the creditor, the amount financed,
the itemization of the amount financed, the finance charge, the annual
percentage rate, and the payment schedule. Collecting payments from
customers by electronic fund transfers (“EFTs”), including debit cards and
ACH payments, using EFT customer preauthorizations that were sometimes
incomplete or incorrect, often conflicted with the TILA payment schedule
provided in the retail installment contract, and were not clear and readily
understandable, as required under the Electronic Funds Transfer Act and
Regulation E.
* Failing to make required disclosures under the MLA and the implementing
Department of Defense (“DoD”) regulation based on Harris Jewelry’s alleged
failure to provide disclosures in accordance with TILA, including the
Itemization of the Amount Financed. While the mandatory loan disclosures
under the DoD regulation require creditors to provide “any disclosure
required by Regulation Z, which shall be provided only in accordance with the
requirements of Regulation Z that apply to that disclosure” (12 C.F.R. §
232.6(a)(2)), it is rare to see a claim that an alleged violation of TILA
constitutes a MLA violation.
* Failing to provide servicemembers with oral disclosure of the military annual
percentage rate (“MAPR”) or provide a toll-free number to obtain a statement
of the MAPR in violation of the MLA.
* Failing to include the required FTC Holder Rule notice in its RICs. The
notice advises consumers of their right to assert against a RIC purchaser any
claims and defenses that the consumer could assert against the original
creditor.
Under the terms of the stipulated settlement order filed with the U.S. District
Court for the Eastern District of New York, Harris Jewelry will issue
approximately $10.9 million in refunds to 46,000 customers who paid for
protection plans and provide additional refunds for overpayments. The company
will place an additional $2.725 million in escrow to provide additional
restitution, pay $1 million to the state attorneys general for law enforcement
and education efforts, cease collections on $21 million in loans made to 13,000
servicemembers, and assist with the deletion of any negative credit entries.
Having already closed all of its stores last year, the company will cease all
business and dissolve following completion of its settlement obligations. A
judgment in the amount of $24 million is suspended pending Harris Jewelry’s
compliance with the terms of the stipulated settlement order.
In a blog post on the FTC website accompanying the announcement of the
settlement, the FTC highlighted lessons learned from the Harris Jewelry action
that it believes apply to other businesses. These include that (i) claims about
credit improvement require substantiation, (ii) add-on products require
consumers’ express informed consent, and (iii) aiming illegal sales practices at
members of the military will arouse law enforcement ire. While none of these
lessons are new, the FTC’s use of its MLA enforcement authority is somewhat
new. Amendments to the MLA in 2013 granted enforcement authority to the FTC and
the other agencies specified in Section 108 of TILA, including the Federal
Reserve Board, the Consumer Financial Protection Bureau, the Federal Deposit
Insurance Corporation, the National Credit Union Administration, and the Office
of the Comptroller of the Currency. (State regulators may also supervise MLA
requirements pursuant to state law).
Milani Mithal, the head of the FTC’s Bureau of Consumer Practices Division of
Financial Practices recently testified as to the FTC’s enforcement efforts to
address the financial exploitation of servicemembers before the House Committee
on Oversight and Reform, Subcommittee on National Security.
The FTC commissioners approved the stipulated final order by a 5-0 vote. We
expect the settlement to be approved by the court.
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DIRECTOR CHOPRA GOES ON THE RECORD WITH MEDIA
By Michael Gordon & John L. Culhane, Jr. on July 28, 2022
Posted in CFPB, Regulatory and Enforcement
Director Chopra gave interviews this week to several news reporting outlets
including American Banker, Law 360, Politico, and Bloomberg. Below are some of
highlights of the interviews as reported by those outlets, several of which also
provided interview transcripts. We also share our reactions to Director
Chopra’s comments.
CFPB priorities and status of rulemaking activity. A persistent theme in all of
Director Chopra’s interviews is his concern about the entry of big tech
companies into financial services, particularly in connection with payments and
the companies’ ability to collect and monetize data about consumers. He labeled
this “the highest-stakes issue for us to deal with.” In October 2021, using its
authority under Section 1022 of the Consumer Financial Protection Act (CFPA) to
send market monitoring orders, the CFPB requested information from six large
technology platforms offering payment services. Director Chopra indicated that
the CFPB “will have more to say this Fall about some of what we’re learning
[from the 1022 orders.]” He also indicated that the CFPB will likely issue a
report based on the 1022 orders.
Director Chopra linked the CFPB’s concerns about big tech with its rulemaking to
implement Section 1033 of the CFPA. Section 1033 requires consumer financial
services providers to give consumers access to certain financial information.
In October 2020, the CFPB issued an Advance Notice of Proposed Rulemaking in
connection with its 1033 rulemaking. Director Chopra stated that he expected
“the linkage between the big tech payments piece and how transaction data is
used…to impact how we’re looking at the [1033] rulemaking quite a bit.” He
indicated that the CFPB hoped to take the next step in the 1033 rulemaking
process by convening a SBREFA panel by the end of 2022.
Director Chopra also linked the CFPB’s concerns with big tech to its concerns
about technologies that allow for real-time consumer payments and the increased
potential for fraud. He identified “preparing for real-time payments” as the
CFPB’s “primary focus” in the payments arena. In response to a question asking
if he could provide more insight on Regulation E and what the CFPB plans to do
about payment apps, Director Chopra indicated that the CFPB “is trying to look
[at fraud risk] holistically, beyond any one single app, [to see] what really
can be done both by consumers, the industry and policymakers to really rein in
some of this. We have made no final decisions on any specific regulatory
approach.”
We assume the interviewer’s question to Director Chopra was prompted by the
recent WSJ report that the CFPB is preparing to release new guidance that would
require banks to make refunds to victims of scammers who defraud consumers into
sending money to a third party using an online money-transfer platform. As we
commented, such guidance would conflict with the text of the Electronic Fund
Transfer Act by requiring banks to treat fraudulently induced transactions as
unauthorized EFTs even when they are initiated by the consumer, with the result
that banks would be required to repay the amount of such transactions to
consumers. Because the issuance of such an interpretation would represent a
significant change in the application of EFTA/Regulation E liability
protections, we believe such a change should be the subject of
notice-and-comment rulemaking procedures, either as an amendment to Regulation E
or to the Official Staff Commentary, or both.
In December 2021, also using its Section 1022 authority, the CFPB sent orders to
five companies that offer buy-now-pay-later (BNPL) products directing them to
provide information to the Bureau. Director Chopra indicated that the CFPB
would likely release its initial findings on BNPL before taking next steps in
its big tech inquiry. His estimated timing for those next steps (end of 2022)
suggests the CFPB’s initial BNPL findings could be released this Fall.
Director Chopra also made the following comments on other CFPB rulemaking
activity:
* Qualified mortgages. The CFPB is not likely to revisit the recent change to
its QM rule, and no decision has been made whether to revisit seasoned QMs,
but the CFPB is exploring changes that would help streamlined modifications
and refinancings.
* Payday lending. While leaving the door open for rulemaking (stating “it’s
too early to tell”), Director Chopra indicated that the CFPB’s current focus
is on supervision and enforcement. He observed that because state rate caps
have changed many of the state-based marketplaces, the CFPB will “continue to
look at the data and see where it takes us.”
* Overdraft/NSF fees. The CFPB is directing its examiners “to focus more
attention on the institutions that have an aberrant level of their deposit
account fee revenue coming from [overdraft and NSF fees].” He did not
mention rulemaking.
Enforcement. Director Chopra identified the Military Lending Act as a CFPB
enforcement focus, including in connection with loans made through bank/nonbank
partnerships. In response to a question asking why the Bureau has brought so
few enforcement actions in his first year as Director, Director Chopra stated
that instead of focusing on the number of actions, the Bureau would be focusing
on the impact of those actions and remedying harm and stopping it from occurring
again. As a result, the Bureau’s focus is more on larger actors and repeat
offenders.
Director Chopra indicated that in his view, the Bureau gains credibility by
“litigat[ing] cases against well-sourced firms that will not easily just back
down and, in fact, will be willing to spend the money to litigate.” However, he
acknowledged that most matters would be resolved through settlements. He also
expressed the belief that the Bureau “will be litigating perhaps more than
others have been willing to.” If the CFPB does in fact ramp up its enforcement
activity, we hope that it uses its enforcement authority to target those who
have violated established and clear “rules of the road” rather than to engage in
rulemaking by enforcement as it did in its recent action challenging a national
bank’s procedures for handling garnishment orders.
Approach to rulemaking. Director Chopra fielded several questions about the
CFPB’s recent updates to the UDAAP section of its Supervision and Examination
Manual that instruct examiners to consider discrimination in connection with
non-credit products and services as an unfair act or practice. We have
expressed the view that this change represents an expansion of the Bureau’s
UDAAP authority that requires notice-and-comment rulemaking. It seems that
Director Chopra may agree that our view is well-founded. In response to a
question asking about the process that led up to the manual update, he stated
that “in a hearing I was asked why we didn’t put it on this other kind of
procedural notice, and I actually acknowledged maybe we should have.” We assume
the “other kind of procedural notice” Director Chopra was referring to was a
notice of proposed rulemaking. And if Director Chopra indeed agrees that the
manual update was a subject for rulemaking, there is nothing preventing him from
withdrawing the action and initiating a rulemaking.
Also with regard to the manual update, in response to a question asking about
industry concerns as to whether the update means the CFPB will start using a
disparate impact theory when alleging UDAAP violations based on non-credit
discrimination, Director Chopra distinguished disparate impact from unfairness
as a “different doctrine that is aligned with the Equal Credit Opportunity Act,
Fair Housing Act and others.” To the extent Director Chopra is suggesting that
the CFPB does not intend to use a disparate impact theory when using UDAAP to
challenge discrimination, this would appear to be inconsistent with the new
directives to examiners in the manual update as well as the CFPB’s blog post
about the manual update.
Director Chopra commented that he has “not heard of a robust rebuttal that
discrimination may not meet the criteria under the unfairness standard.” His
comment misses the mark. The validity of the CFPB’s interpretation does not
turn on whether discrimination meets those criteria. The critical question is
whether those criteria are properly applied to discrimination and the clear
answer to that question is that they are not. As discussed in the White Paper
on the manual update sent to Director Chopra by several trade groups, the
primary legal flaws with the CFPB’s interpretation include that by conflating
the concepts of “unfairness” and “discrimination,” the CFPB ignores the CFPA’s
text, structure, and legislative history and that its treatment of “unfairness”
is inconsistent with decades of understanding and usage of that term in the
Federal Trade Commission Act (recent statements by FTC Chair Lisa Kahn and
Commissioner Rebecca Kelly Slaughter notwithstanding ) and with the enactment of
ECOA.
Director Chopra was also asked about industry criticism regarding the CFPB’s
issuance of guidance and other communications in lieu of using
notice-and-comment rulemaking. He commented that, other than the exam manual
change, “no one will give me specifics.” We are glad to provide the following
specific examples to Director Chopra: the CFPB’s advisory opinion interpreting
the FDCPA’s application to “convenience fees” charged by debt collectors; its
advisory opinion interpreting the FCRA’s permissible purpose requirement in
connection with name-only matching procedures; and its interpretive rule
regarding the authority of state attorneys general and state regulators to
enforce the CFPA.
We recently called on Director Chopra to restart use of the official staff
commentaries to interpret federal consumer financial laws rather than continue
its current practice of using a potpourri of methods that lack transparency and
predictability as well as certainty that they will be binding.
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THIS WEEK’S PODCAST EPISODE: TAKEAWAYS FOR BANKS FROM THE CFPB’S RECENT CONSENT
ORDER ON GARNISHMENT ORDERS
By Barbara S. Mishkin on July 28, 2022
Posted in CFPB, Regulatory and Enforcement
In a recent consent order with a national bank, the CFPB found that the bank
committed UDAAP violations in its process for handling garnishment orders and by
including certain waiver language in its deposit account agreements. We discuss
the specific aspects of the bank’s process that the CFPB found to be improper
and what banks should consider when reviewing their own garnishment procedures
in light of the consent order. We also look at what the consent order means for
how banks can address liability concerns arising out of the handling of
garnishment orders in deposit account agreements.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by
Mike Gordon, a partner in the firm’s Consumer Financial Services Group, and
Jessica Simon, Of Counsel in the firm’s Bankruptcy and Restructuring Group.
To listen to the episode, click here.
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CFPB ENCOURAGES FEDERAL STUDENT LOAN SERVICERS TO CONDUCT OUTREACH TO MILITARY
BORROWERS ON PUBLIC SERVICE LOAN FORGIVENESS
By Brian Turetsky on July 27, 2022
Posted in CFPB, Military Issues, Student Loans
The Consumer Financial Protection Bureau (CFPB) is “encouraging” student loan
servicers to identify their military borrowers in order to conduct proactive
outreach encouraging them to consolidate their loans and submit applications for
forgiveness under the Public Service Loan Forgiveness Program (PSLF).
Servicemembers (and any other eligible public service applicants) must apply for
PSLF by October 31, 2022 to be considered for relief under a limited waiver that
temporarily relaxes program rules allowing more borrowers to qualify. In
October 2021, the Department of Education (ED) announced that certain program
rules under the PSLF would be waived for a limited time due to the COVID-19
emergency. Normally, only borrowers with Direct Loans who have made on-time
payments on their loans and are employed full-time at the time of application
would be eligible. Under the limited waiver, borrowers who consolidate Perkins
or Federal Family Education Loans (FFEL) into Direct Consolidation Loans in
advance of the deadline may receive credit for periods of repayment on those
loans, even if they have been late on payments or were not on a qualifying
repayment plan, such as an income-driven repayment plan. Additionally,
borrowers may be eligible for forgiveness even if they are not employed by a
qualifying employer at the time of application and forgiveness. (Some
requirements are unchanged, such as the need to make 120 qualifying payments and
full-time qualified employment with the government, a 501(c)(3), or other
qualifying not-for-profit.)
In a new blog post published on July 25, the CFPB highlighted the upcoming
deadline for servicemembers to consolidate their federal loans and seek
forgiveness under the limited waiver. It cited two of its own reports from 2012
and 2015 regarding servicing issues allegedly experienced by military borrowers
and a 2020 GAO report that found 176,906 active-duty servicemembers had federal
loans eligible for the PSLF program (or that could be made eligible through
consolidation), but that only 124 servicemembers had received forgiveness. In
the new blog post, without explanation as to where this additional servicing
obligation arises from, the CFPB concludes that servicers must conduct
additional outreach to increase the rate of servicemember participation in PSLF,
including through loan consolidation.
According to the CFPB, “[w]ith servicemembers’ loan forgiveness hanging in the
balance, servicers must use all the tools at their disposal to identify military
borrowers and ensure they get the credit towards PSLF they deserve under the
program.” (emphasis added.) To accomplish this, the CFPB is “encouraging”
federal student loan servicers to identify military borrowers in their
portfolio, as they would to review for borrowers who may be covered under the
Servicemembers Civil Relief Act (SCRA), and conduct outreach and provide
assistance to those with FFEL or Perkins Loans who may be able to qualify for
PSLF by consolidating those loans owned by third parties into Direct
Consolidation Loans. A June 2022 letter from former CFPB Director and current
Federal Student Aid Chief Operating Officer Richard Cordray advised “Fellow
Public Service Worker[s]” that they “may have a chance to clear out your student
loans” and to act soon. It should also be viewed in the larger context of
broader student loan forgiveness being considered by the Biden Administration
and the hold on federal student loan repayments, which has been in place since
March 2020 but will expire on August 31, 2022, unless extended. (Qualifying
PSLF applicants will receive credit for periods of this COVID-19 Administrative
Forbearance as if they had made on-time monthly payments.)
More than a dozen bills have been introduced in Congress this session regarding
public service loan forgiveness, including S.4345, the “Simplifying and
Strengthening Public Service Loan Forgiveness Act,” which seeks to codify many
of the changes from the limited waiver and also cut the period of time a
borrower must work in public service in half (from ten years to five), and
H.R.3486, the “Recognizing Military Service in PSLF Act,” which would require ED
to count periods of deferment or forbearance during active duty as qualifying
periods. To date, none of the bills have made it out of committee.
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ILLINOIS PROVIDES GUIDES AND TEMPLATES FOR KNOW BEFORE YOU OWE PRIVATE EDUCATION
LOAN ACT REPORTING REQUIREMENTS
By Lisa Lanham & Tanner Horton-Jones on July 27, 2022
Posted in State regulation, Student Loans
Private education lenders doing business in Illinois now have access to official
informational guides and templates for meeting the November 1, 2022, reporting
requirements under the state’s new Know Before You Owe Private Education Loan
Act (“KBYO”).
Promoted as a means to make borrowers aware of federal student loan options
before they turn to private loans, KBYO also seeks to collect and publicize data
on private educational lending through an annual reporting obligation imposed on
lenders. The requirement applies to any “private educational lender” as defined
in Section 140(a)(7) of the Truth in Lending Act (“TILA”), 15 U.S.C. §
1650(a)(7). Lenders who make more than 10 “private education loans” (as defined
in Section 140(a)(8) of TILA) per year must submit a detailed Annual Report to
the Illinois Student Loan Ombudsman, which sits within the Attorney General’s
Office. Lenders issuing 10 or fewer such loans must still submit a simplified
Annual Statement in lieu of the full report. Both the Annual Report and the
Annual Statement take the form of Excel spreadsheet templates.
For lenders disbursing more than 10 private education loans in the year, the
Annual Report template is accompanied by a five-page Annual Reporting
Information Guide. While KBYO specifies five categories of information to be
included in the report, the Attorney General’s Office breaks out the categories
into discrete parts on the template, as follows:
* Information about the Lender—some of which may be pre-populated using a
drop-down list on the form—along with comprehensive data that includes:
* The total number of private education loans originated in the calendar
year; and
* The historical lifetime default rate on the Lender’s private education
loans, calculated from August 26, 2021, the date KBYO was signed into law.
* Information about loan volume, broken out for each institution of higher
education disbursed to, including the following data points:
* Number of private educational loans disbursed to the institution;
* Number of unique borrowers disbursed to at the institution;
* Total dollar value of private educational loans disbursed to the
institution;
* Number of loans disbursed to the institution without the certification
required by Section 10(a) of KBYO;
* Total dollar value of loans disbursed to the institution without the 10(a)
certification;
* Number of loans disbursed without 10(a) certification where the institution
refused to certify; and
* Number of loans disbursed without 10(a) certification where the institution
notified the Lender it would need more than the statutory 15 days to reply.
* Information corresponding to each model or template promissory note,
agreement, contract, or other instrument used during the previous year—copies
of which must be submitted separately via email as PDF attachments—including
the following identifiers:
* Dates the model document was used;
* Number of borrowers provided with substantially similar documents; and
* Category of borrowers for whom the document was used.
The Annual Statement template is accompanied by a two-page Annual Statement
Information Guide. In contrast to the report, the Annual Statement requires
only identifying information about the Lender and a certification of the number
of private education loans disbursed during the year.
The Attorney General’s Office states that applicable submissions must be sent
via e-mail no later than November 1, 2022. Deadlines for future years have not
yet been made public.
Links to the guides and templates and additional information can be found in the
Attorney General’s July 21 press release, as well as on its Student Lending
page.
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DELAWARE FEDERAL DISTRICT COURT HOLDS USE OF OVERDRAFT NOTICE TEMPLATE DID NOT
SHIELD CREDIT UNION FROM REGULATION E OR STATE LAW LIABILITY
By John L. Culhane, Jr. & Michael R. Guerrero on July 26, 2022
Posted in Litigation and Court Decisions, Overdrafts
A Delaware federal court has refused to dismiss a class action complaint filed
against a credit union that alleges the credit union violated Regulation E and
the Delaware Consumer Fraud Act (CFA) even though the credit union’s overdraft
opt-in notice tracked the language in the Regulation E model notice. The
decision should serve as a reminder to financial institutions of the need to
make sure their opt-in notices accurately and fully describe their overdraft
policies. This is particularly imperative in the current environment where
overdraft practices are the subject of heightened scrutiny by the CFPB and state
banking regulators.
In Miller v. Del-One Federal Credit Union, the credit union charged an overdraft
fee in two circumstances. One circumstance was where a customer did not have
sufficient funds in his or her account to cover a transaction and the credit
union paid the transaction. The second circumstance was where a customer had
sufficient funds in his or her account to cover a transaction but, after
subtracting the amount of future payments such as a monthly water bill or
mortgage payment, the credit union determined that the remaining balance
available to the customer would not be sufficient to cover the transaction. In
that second circumstance, the credit union charged the customer an overdraft fee
even if he or she deposited sufficient funds to cover the future payments and
even if the credit union did not pay the transaction. The credit union had
provided the plaintiff with an opt-in notice that tracked the language in the
model notice found in Regulation E, Appendix A-9. That language states that “An
overdraft occurs when you do not have sufficient money in your account to cover
a transaction, but we pay it anyway.”
The plaintiff alleged that the credit union violated the requirements in
Regulation E that an opt-in notice must “describ[e] the institution’s overdraft
service” and required disclosures must be “clear and readily understandable.” 12
C.F.R. Sections 1005.17(b)(1)(i), 1005.4(a)(1). As an initial matter, the court
rejected the credit union’s argument that the court should consider other
documents it gave to the plaintiff that, according to the credit union, clearly
explained its overdraft policy even if the notice was ambiguous. The court
stated that it could not consider the documents because they were not integral
to the plaintiff’s complaint and that, in any event, they could not be integral
because Regulation E requires the opt-in notice to be “segregated from all other
information.” 12 C.F.R. Section 1005.17(b)(1)(i). The court read this
requirement to mean that all relevant information about the credit union’s
overdraft policy had to be in the body of the notice.
The district court concluded that the plaintiff had stated a plausible claim
that the notice did not accurately describe the credit union’s overdraft service
in a clear and readily understandable way. According to the court, “[o]rdinary
consumers would likely understand the phrase ‘do not have enough money in your
account’ to refer to a literal shortfall of cash, not the possibility of one.”
The court observed that Regulation E did not require the credit union to quote
the model form verbatim but only required it to use a notice that was
“substantially similar” to the model notice. The court commented that the model
language might be accurate if a bank charged overdraft fees “only when the
customer spends more money than she has in her account.” However, according to
the court, the template would not be accurate “when, as here, a bank looks at
upcoming payments to calculate overdraft.”
The court rejected the credit union’s argument that it could not be held liable
for using the model language because 15 U.S.C. Section 1693m(d)(2) shields bank
from liability for “any failure to make disclosure in proper form if [they]
utilized an appropriate model clause. According to the court, the credit
union’s argument “confuse[d] form with substance.” While the credit union might
be shielded from a lawsuit about the notice’s configuration, the plaintiff was
challenging the notice’s content or substance.
The district court also concluded that the plaintiff had stated a plausible
claim under the Delaware CFA. The court rejected the credit union’s argument
that the plaintiff’s claim should be treated as one for breach of contract
rather than fraud because the plaintiff was effectively objecting to having been
charged an overdraft fee that was not authorized by the opt-in notice.
According to the court, the plaintiff’s claim was based on an alleged failure to
disclose important information rather than a broken promise. As such, the court
considered it to be a “classic fraud argument, not a breach of contract one.”
In light of this decision, we recommend that financial institutions examine
their opt-in notices to determine if the language used in the notices
accurately describes the circumstances under which an overdraft fee is charged.
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CFPB PROVIDES DATA ON OVERDRAFT/NSF FEE REVENUES; NY ENACTS LAW REQUIRING DFS TO
STUDY OVERDRAFT FEES
By John L. Culhane, Jr. & Michael R. Guerrero on July 25, 2022
Posted in CFPB, NYDFS, Overdrafts
Overdraft and NSF fees remain very much on the radar of the CFPB, the federal
banking agencies, and certain state banking agencies. The very fact that the
CFPB continues to closely monitor bank call reports with respect to overdraft
and NSF fee revenues demonstrates the Bureau’s ongoing focus on this issue.
While we do not expect the CFPB to launch a rulemaking to curb certain
practices, we do anticipate that the Bureau will closely scrutinize overdraft
and NSF practices during examinations and refer matters to enforcement as UDAAP
violations if its examiners dislike certain practices.
CFPB overdraft/NSF fee data. In a new blog post, the CFPB looks at how
overdraft and NSF fee revenues have changed since it published its December 2021
report, “Overdraft/NSF Fee Reliance Since 2015 – Evidence from Bank Call
Reports.” The blog post uses data from call reports from the third quarter of
2021 through the first quarter of 2022. The CFPB indicates that these quarters
“represented important times for the overdraft market” because several banks
announced changes to their overdraft programs in late 2021 and early 2022. It
also indicates that it is an “open question” how these program changes, once
implemented, translate into changes in overdraft/NSF fee revenues and that the
analysis is “further complicated by the fact that some of the pandemic-era
declines in overdraft/NSF fee revenues may be reversed as the economy and
checking account balances return to a more usual course.”
The CFPB’s December 2021 report showed a 26.2 percent decline in overdraft/NSF
fee revenues between 2019 and 2020. The new data used in the blog post shows
that overdraft/NSF fee revenues continued to be depressed in 2021 and stayed
below their 2019 volume by 27.4 percent. It also shows that in the first
quarter of 2022, overdraft/NSF fee revenues stopped declining and reversed
somewhat and were 20.1 percent below their corresponding 2019 levels.
The CFPB makes several other observations based on the new data. First, it
observes that the fact that some large banks had significantly larger declines
in overdraft/NSF fee revenues compared to other banks in 2021 could reflect an
effect of their overdraft program changes. Second, it observes that the fact
that some banks experienced less reversal in overdraft/NSF fee revenues than the
market overall in early 2022 could be evidence of changing overdraft policies at
these banks. Third, it observes that while some banks, particularly those with
the largest decline in overdraft/NSF fee revenue, experienced an increase in
revenues from other fees listed on their call reports (i.e., maintenance and ATM
fees), such increases have not been large enough to offset the loss of revenues
from overdraft/NSF fees.
In discussing the data, the CFPB defines banks as “small” or “midsized” based on
their overdraft/NSF fee revenues. Small banks are divided into those collecting
under $2 million and those collecting $2 million to $10 million in overdraft/NSF
fee revenue in 2021, and midsized banks are divided into those collecting $10
million to $50 million and those collecting $50 million to $200 million in
overdraft/NSF fee revenue in 2021. The data presented by the CFPB shows that in
2021 small and midsized banks collected 20 to 25 percent less in overdraft/NSF
revenues than in 2019. The CFPB notes that “one factor contributing to this
decline in overdraft/NSF revenues was the increase in consumer deposits, which
was sustained through the first quarter of 2022 according to call report data.”
The CFPB finds that small banks have recovered a significant part of their
pre-pandemic overdraft/NSF revenues in the first quarter of 2022, while some
midsize banks, especially larger midsize banks, continued to report the same
differences in overdraft/NSF revenues in early 2022 compared to pre-pandemic
levels as in 2021. The CFPB observes that “[s]ome of these differences may be
due to the possibility that midsize banks have implemented more overdraft policy
changes than small banks.” It concludes the blog post with the following
comment:
> While many factors beyond overdraft program settings affect overdraft/NSF
> revenues reported in call reports – such as the number, composition, or
> behavior of checking account accountholders –, these figures give suggestive
> evidence that changes in overdraft program settings and in other checking
> account policies are making [a] meaningful difference in the amount consumers
> incur in various fees while using their checking accounts at their banks.
NY enacts bill requiring DFS to study overdraft fees. On July 15, New York
Governor Hochul signed into law Senate Bill S9348 which requires the state’s
Department of Financial Services (DFS) to conduct a study of overdraft fees and
provide a report to the Governor within one year. The report is to be posted on
the DFS website.
The law mandates certain subjects that the study must examine. They are:
* total amount of overdraft fees paid in New York;
* geographical distribution of overdraft fees;
* which communities have high rates of overdraft fees and the possible reason
for such high rates;
* percentage of overdraft fees reduced through direct or indirect
negotiation; and
* enumeration of consumer rights relating to fee negotiations.
Earlier this month, the DFS issued an Industry Letter providing guidance on
overdraft and non-sufficient funds (NSF) fees to depository institutions that it
supervises.
We continue to follow developments on the federal and state level involving
overdraft and NSF fees and are consulting with clients on best practices.
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FEDERAL RESERVE BOARD ISSUES PROPOSAL ON BENCHMARK REPLACEMENTS FOR CONTRACTS
THAT USE LIBOR
By John L. Culhane, Jr. & Richard J. Andreano, Jr. on July 25, 2022
Posted in Federal Reserve Board, Regulatory and Enforcement
The Federal Reserve Board issued a proposal last week that would establish
default rules for benchmark replacements in certain contracts that use as a
reference rate the London Interbank Offered Rate (LIBOR), which will be
discontinued in 2023. The proposal implements the Adjustable Interest Rate
(LIBOR) Act, which was enacted in March 2022. Comments on the proposal must be
filed no later than 30 days after the date the proposal is published in the
Federal Register.
In response to the discontinuation of LIBOR, Congress enacted the LIBOR Act to
provide a uniform, nationwide solution for replacing references to LIBOR in
existing contracts with inadequate fallback provisions, meaning inadequate
contract provisions for determining an alternative reference rate. For these
contracts, the Board’s proposal would replace references to LIBOR in the
contracts with the applicable Board-selected replacement rate after June 30,
2023. The proposal identifies separate Board-selected replacement reference
rates for different types of contracts, including consumer credit transactions.
As required by the LIBOR Act, each proposed replacement reference rate is based
on the Secured Overnight Financing Rate (SOFR).
The CFPB has addressed the discontinuation of LIBOR through Regulation Z and
Official Staff Commentary amendments issued in December 2021. The final rule
became effective on April 1, 2022, with the exception of certain changes to two
post-consummation disclosure forms that are effective on October 1, 2023. The
mandatory compliance date for revisions to Regulation Z change-in-terms notice
requirements is October 1, 2022 and the mandatory compliance date for all other
provisions of the final rule was April 1, 2022.
Before the amendments, Regulation Z’s open-end credit provisions only allowed
HELOC creditors and card issuers to change an index and margin used to set the
APR on a variable-rate account when the original index “becomes unavailable” or
“is no longer available” and certain other conditions are met. Having
determined that all parties would benefit if creditors and issuers could replace
a LIBOR-based index before LIBOR becomes unavailable at the end of 2023, the
final rule added a new provision that allows HELOC creditors and card issuers
(subject to contractual limitations) to replace a LIBOR-based index with a
replacement index and margin on or after April 1, 2021, including an index based
on the SOFR.
For closed-end credit, Regulation Z provides that a refinancing subject to new
disclosures results if a creditor adds a variable-rate feature to a closed-end
credit product but that a variable-rate feature is not added when a creditor
changes the index to one that is “comparable.” The final rule added new
commentary that provides examples of the types of factors to be considered in
determining whether a replacement index is a “comparable” index to a particular
LIBOR-based index.
For consumer loans subject to Regulation Z that give the creditor or card issuer
authority to replace a LIBOR-based index with a new index that is not based on
LIBOR, the LIBOR Act would not require the creditor or card issuer to use a
SOFR-based replacement index. However, pursuant to the LIBOR Act, the
Fed-selected SOFR-based index will automatically replace a LIBOR-based index if
the creditor or card issuer has not selected a replacement index by the earlier
of the date LIBOR is discontinued or the latest date for selecting a replacement
index under the terms of the credit contract.
The LIBOR Act provides a number of safe harbor provisions that protect a
creditor that selects the SOFR-based rates designated in the Fed’s proposal as a
replacement for a LIBOR-based index. For more recent closed-end adjustable-rate
notes that use a LIBOR-based index, Fannie Mae and Freddie Mac adopted fallback
language that would require the noteholder to replace a LIBOR-based index with
the SOFR-based index designated in the Fed’s proposal. Even if not required by
the LIBOR Act, Regulation Z, or contract to replace a LIBOR-based index with a
SOFR-based index, HELOC lenders and card issuers should consider whether to take
advantage of the LIBOR Act’s safe harbor provisions when selecting a replacement
index. In addition, the safe harbor provisions should also be considered by
noteholders or other creditors before selecting a replacement index for
closed-end adjustable-rate mortgages or other closed-end variable-rate credit
products that do not contractually require use of a SOFR-based replacement
index.
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CLOSING THE GATE: HOUSE ADOPTS ENABLERS ACT AMENDMENT TO 2023 NDAA
By Peter D. Hardy & James Mangiaracina on July 21, 2022
Posted in BSA/AML, FinCEN
On July 13, 2022, the House of Representatives (the “House”) adopted
an amendment to the 2023 National Defense Authorization Act (“NDAA”) offered by
Maxine Waters (D. CA), inserting into the NDAA a version of the “Establishing
New Authorities for Business Laundering and Enabling Risks to Security Act,”
otherwise more commonly known as the ENABLERS Act. If ultimately enacted as
law, even a scaled-back version of this amendment could significantly alter the
Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) regulatory framework in the
United States. Of course, the sweeping AML Act of 2020 was passed because it
also was tucked into the massive defense spending authorization bill for that
year—so backers of BSA/AML expansion appear to be reverting to tactics which
previously bore fruit.
Arguably, this amendment is even more sweeping than the AML Act. As we will
discuss, it applies the BSA to persons providing corporate formation, trust,
third-party payment, or similar legal or accounting services. Although much
digital ink will be spilled regarding the amendment’s application to lawyers—and
we certainly emphasize here that potential sea change in AML regulation—the
amendment’s application to third-party payment processors, depending upon how
that term ultimately gets defined if the amendment becomes law, also could be a
very significant development affecting many businesses and financial technology
companies (“fintechs”). Currently, and depending on the facts, the BSA often
does not apply to payment processors, who often fit into an exemption under the
BSA’s definition of a “money services business,” or MSBs, subject to AML
requirements. However, the amendment is “scaled back” from the original version
of the ENABLERS Act, introduced last year, which had included investment
advisors, art and antiquities dealers, and public relations firms. Finally, the
ambitious agenda of the amendment does not appear to acknowledge the current
reality of actual government resources: the fact remains that the Financial
Crimes Enforcement Network (“FinCEN”), which implements the BSA, has been
struggling to implement the huge array of tasks and deadlines already foisted
upon it by Congress through the AML Act and the recently-passed Corporate
Transparency Act (“CTA”)—and FinCEN has been stating repeatedly that it needs
increased funding.
PURPOSE
The amendment’s “findings” section catalogues various instances of alleged
kleptocratic and corrupt behavior, including but not limited to: the disclosures
of the Pandora Papers; a notorious instance of investigative journalism in which
an investigator for a non-profit posed as an adviser to an apparent African
kleptocrat and enticed, on audio and video tape, various New York lawyers to
provide alleged advice on the use of so-called shell companies; a company owning
a $15 million mansion in Washington, D.C. linked to an ally of Vladimir Putin;
and the fact that the 2021 “United States Strategy on Countering Corruption”
stressed AML deficiencies tied to lawyers, accountants, trust and company
service providers, and incorporators. According to the amendment, it addresses
these problems by providing “the authorities needed to require that professional
services providers who serve as key gatekeepers to the U.S. financial system
adopt anti-money laundering procedures that can help detect and prevent the
laundering of corrupt funds.”
THE NEW GATEKEEPERS
The amendment would broaden 31 U.S.C. § 5312(a)(2)(Z) to include a wide variety
of individuals and entities under the definition of a “financial institution”
covered by the BSA. Specifically, the amendment, which we block quote, would
expand the BSA to apply to:
[A]ny person, excluding any governmental entity, employee, or agent, who
engages in any activity which the Secretary determines, by regulation pursuant
to section 5337(a), to be the provision, with or without compensation, of—
(i) corporate or other legal entity arrangement, association, or formation
services;
(ii) trust services;
(iii) third party payment services; or
(iv) legal or accounting services that—
(I) involve financial activities that facilitate—
(aa) corporate or other legal entity arrangement, association, or
formation services;
(bb) trust services; or
(cc) third party payment services; and
(II) are not direct payments or compensation for civil or criminal
defense matters.
In other words, if you provide corporate formation, trust, third-party payment,
or similar legal or accounting services, you could be considered a “financial
institution” under the BSA, and therefore have various AML responsibilities
including—possibly—the duty to maintain an AML program and file Suspicious
Activity Reports (“SARs”) regarding your customers and clients.
But, it goes broader than that. Within a year of the bill’s enactment, the
Secretary of the Treasury (the “Secretary”) “shall” issue a rule to determine
which persons fall within Section 5312(a)(2)(Z) and prescribe appropriate AML
requirements for those persons. Moreover, the amendment limits the typical
discretion accorded to the Secretary and FinCEN in formulating regulations: the
amendment provides that when determining which persons fall within Section
5312(a)(2)(Z), the Secretary “shall include” the following persons, as well as
any persons who own, control, or act as agents or instrumentalities of such
persons. Again, we block quote the amendment, which resists easy summarization:
(A) any person involved in—
(i) the formation or registration of a corporation, limited liability
company, trust, foundation, limited liability partnership, partnership, or other
similar entity;
(ii) the acquisition or disposition of an interest in a corporation, limited
liability company, trust, foundation, limited liability partnership,
partnership, or other similar entity;
(iii) providing a registered office, address or accommodation,
correspondence or administrative address for a corporation, limited liability
company, trust, foundation, limited liability partnership, partnership, or other
similar entity;
(iv) acting as, or arranging for another person to act as, a nominee
shareholder for another person;
(v) the managing, advising, or consulting with respect to money or other
assets;
(vi) the processing of payments;
(vii) the provision of cash vault services;
(viii) the wiring of money;
(ix) the exchange of foreign currency, digital currency, or digital assets;
or
(x) the sourcing, pooling, organization, or management of capital in
association with the formation, operation, or management of, or investment in, a
corporation, limited liability company, trust, foundation, limited liability
partnership, partnership, or other similar entity;
(B) any person who, in connection with filing any return, directly or
indirectly, on behalf of a foreign individual, trust or fiduciary with respect
to direct or indirect, United States investment, transaction, trade or business,
or similar activities—
(i) obtains or uses a preparer tax identification number; or
(ii) would be required to use or obtain a preparer tax identification
number, if such person were compensated for services rendered; [and]
(C) any person acting as, or arranging for another person to act as, a
registered agent, trustee, director, secretary, partner of a company, a partner
of a partnership, or similar position in relation to a corporation, limited
liability company, trust, foundation, limited liability partnership,
partnership, or other similar entity[.]
Clearly: if eventually passed, this amendment will change the landscape of
professional service providers, including tax return preparers with foreign
clients, and payment processors.
REQUIREMENTS
Here, the amendment does provide the Secretary and FinCEN with its typical
discretion. When deciding what kind of BSA/AML requirements each newly defined
“financial institution” must adhere to, the Secretary must require each type of
financial institution to be subject to at least one (or more) of five typical
BSA obligations: a customer identification program (“CIP”) and customer due
diligence (“CDD”); the establishment of a “full” (and onerous) AML program under
31 U.S.C. § 5318(h); the filing of SARs; other potential record-keeping and
reporting obligations; and enhanced due diligence for private banking and
correspondent banking relationships with foreign persons. Thus, different
gatekeepers could have different AML responsibilities. Presumably, the baseline
requirement for almost every newly covered gatekeeper would be CIP and CDD. The
notion that certain attorneys could be subject to SAR filing requirements
regarding their clients will be controversial, to say the least.
ENFORCEMENT
In addition to widening the applicability of the BSA to so-called “gatekeepers,”
the amendment—which provides that gatekeepers will be subject to the
extraterritorial jurisdiction of the U.S.—states that the Secretary will enforce
this amendment through “random audits.” Specifically, one year after the
Secretary determines who falls into Section 5312(a)(2)(Z), “the Secretary shall
conduct random audits [of those persons] . . . in a manner that the Secretary
determines appropriate to assess compliance” with the amendment. After the
random audits, the Secretary will submit reports to the Committee on Financial
Services of the House of Representatives and the Committee on Banking, Housing,
and Urban Affairs of the Senate. These reports will describe the results of the
random audits and include recommendations for improving the requirements
explained above.
This is arguably the most puzzling provision of the amendment. It provides no
insight into how such random audits will occur, or who will perform them. Of
course, financial institutions currently covered by the BSA are examined for AML
compliance through an established and elaborate system involving multiple
agencies, such as the OCC, the SEC and the IRS (another agency stretched thin
due to budget constraints), executed through examiners who have at least some
experience with BSA/AML compliance (a complex topic) and the particular industry
regulated by their agency. It is unclear if Congress expects FinCEN to conduct
these audits. FinCEN, however, does not actually conduct BSA/AML examinations
of regulated businesses. Further, as noted at the very beginning of this post,
FinCEN currently is underfunded and unable to meet the deadlines already imposed
by the many obligations of the AML Act and CTA—not the least of which is the
CTA’s establishment of a massive national database regarding the beneficial
owners of companies.
For now, the amendment is obviously just proposed legislation that still would
need to be accepted by the U.S. Senate. There is a national election coming up,
so the amendment’s passage is hardly a pre-ordained conclusion. Nonetheless,
and as exemplified by the AML Act and the CTA, proposed legislation that dies in
its initial stages can return and become law a few years later.
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