Tuesday, January 17, 2017

Supreme Court hears arguments on constitutionality of New York law banning credit card surcharges

By Thomas G. Wolfe, J.D.

Recently, the U.S. Supreme Court, in Expressions Hair Design v. Schneiderman, heard competing arguments about whether a New York law that prohibits the imposition of surcharges on customers who use credit cards but allows “discounts” for customers who use cash is an unconstitutional abridgment of the First Amendment’s guarantee of free speech.

In the underlying case, the U.S. Court of Appeals for the Second Circuit ruled that New York’s credit card “no surcharge” law does not violate the First Amendment because the state law is directed more toward price regulation and conduct than toward “speech” and does not regulate speech as applied to “single-sticker-price” sellers.

New York law. Among other things, New York’s credit card “no surcharge” law provides that “[n]o seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means.”

Petitioners. At the outset of the oral argument, on behalf of the petitioning New York merchants who are challenging the state law, attorney Deepak Gupta clarified that one of the merchants has engaged in “dual pricing”—charging one price for cash and another price for credit. That merchant focuses on communicating only the cash discount to comply with New York’s “no surcharge” law, Gupta related. The other merchants have refrained from dual pricing altogether because they don’t want to run the risk of “failing to comply with this regime.”

“As applied” challenge. During questioning by the Justices, Gupta emphasized that the merchants “want to engage in truthful speech. They want to disclose more.” However, some of the Justices questioned the anchor for the constitutional challenge, given the language of the New York law.

For instance, Justice Breyer maintained that the statute states only that a merchant “can’t charge a surcharge” for credit and is silent about any cash discount. Similarly, Justice Sotomayor commented, “I just don’t see anything about speech in the statute.” Later, Justice Kagan remarked that Gupta’s stance placed a lot of emphasis “on a few cases in which prosecutors describe the law in a certain way,” but that the New York law, “as written, doesn’t really do any of the things that you’re saying.” Further, Justice Alito indicated he was not entirely comfortable about ruling on the state law’s constitutionality without knowing how New York’s highest court would interpret the statute.

In response, Gupta emphasized that the merchants were raising an “as applied” constitutional challenge, which focuses on how the law has been applied and on the way the law has been enforced by New York officials. He also pointed out that the state law provides a criminal penalty for its violation.

In response to Justice Breyer’s comment that, on its face, the state law appeared to be “a form of price regulation,” Gupta asserted that New York officials told various merchants that they didn’t need to change what they charged but needed to change what they said. According to Gupta, “that’s not price regulation. That’s the regulation of how prices are communicated.”

Assistant Solicitor General. Next, Eric Feigin, Assistant to the Solicitor General, spoke as amicus curiae on behalf of the United States. Feigin suggested that the Court analyze the case by consulting precedents on “speech regulation.” He also suggested that the Court use the former federal law on credit card surcharges as a makeshift “baseline” for discussing the issue.

Notably, Feigin ultimately recommended that the Court remand the case to the Second Circuit “and allow for the New York Court of Appeals to have a definitive interpretation of the law, because there's clearly some dispute about what the New York law does.”

Price regulation. On behalf of the Attorney General of New York, Steven Wu, Deputy Solicitor General of New York, argued that the “plain text of New York's statute refers only to a pricing practice and not to any speech.”

In an exchange with Wu, Justice Alito expressed his concern about the fact that individual attorneys general or district attorneys in New York could arrive at different interpretations of the law’s prohibition against credit card surcharges. In addition, Justice Kagan remarked that New York’s “enforcement history” of the state law appeared to be at odds with Wu’s argument that as long as a merchant’s listed price is the credit card price, the merchant’s cashier “can call it whatever she wants.”

In response to Wu’s statement that the case involved “direct price regulation” that was not subject to First Amendment scrutiny, Justice Ginsburg commented that the New York law “doesn't set any price at all. It lets the merchant set the price. And the question is how that price is described.”

After further questioning by the Justices about hypothetical pricing scenarios and how the state law would be engaged in those scenarios, Justice Kennedy wondered whether these “complicated” pricing schemes might support the notion that the New York law is too vague. Wu disagreed, contending that the state law would withstand a “vagueness” challenge under the Due Process Clause.

In an exchange with Justice Kagan, Wu indicated that a “dual pricing scheme” would be legal under the state statute. Kagan noted that the Second Circuit had “abstained” from deciding that issue.

Rebuttal. In his rebuttal, Gupta underscored that the case involved a “criminal speech restriction.” According to Gupta, while a typical governmental “disclosure regime” tells a merchant “precisely what to say,” serious constitutional issues arise in the New York law’s situation because the governmental disclosure regime “does not tell the merchant precisely what to say.” Further, Gupta queried whether the cost of credit card usage was being suppressed as part of the law’s mix.

For more information about the interpretation of state laws governing credit cards, subscribe to the Banking and Finance Law Daily.

Friday, January 13, 2017

CFPB survey finds over 27 percent of consumers feel threatened by debt collectors

By Stephanie K. Mann, J.D.

A Consumer Financial Protection Bureau report found that over one-in-four consumers contacted by debt collectors feel threatened by the interaction. The report was drawn from the first-ever national survey of consumer experiences with debt collectors in which over 40 percent of consumers who said they were approached about a debt in collection requested that a creditor or collector stop contacting them. Of these consumers, three-in-four report that debt collectors did not honor their request to cease contact. The CFPB also released a study of potential risks in the online debt marketplace, where consumer debts and personal information are for sale for fractions of pennies on the dollar. Finally, the CFPB is unveiling an online series of consumers’ stories about their debt collection experiences.

"The Bureau today casts light on troubling problems in the debt collection industry," said CFPB Director Rich Cordray. "More than one-in-four consumers report feeling threatened by a debt collector, and a majority of those contacted about debt say the calls persist even after requests to stop. The Bureau is working to clean up abuses in this industry, and to see that all consumers are treated with fairness, decency, and respect."

Survey results. The CFPB survey provides an in-depth analysis of consumers’ encounters with the debt collection industry. The national survey is part of an ongoing CFPB effort to explore industry practices and consumer experiences with debt collectors. Consumers were asked about their encounters with debt collectors for loans and unpaid bills. Questions included whether consumers had been contacted by debt collectors in the past year, how frequently, and the nature of the debt.

According to the debt collection survey, about one-third of consumers—more than 70 million Americans—were contacted by a creditor or debt collector about a debt in the previous 12 months. Consumers are most often contacted about medical and credit card debt.

Collection stories. To illustrate consumers’ experiences with debt collection, the CFPB is sharing personal debt collection stories from consumers in an ongoing effort to highlight issues in the debt collection marketplace and to inform consumers about their rights.

Online debt sales market. In order to better inform public understanding of the debt collection industry, the bureau is also releasing a white paper highlighting potential risks to consumers’ personal information posed by debt sales online. Many debts sold in online marketplaces come with sensitive personal information attached, and are easily available at extremely low prices. The report raises questions about protections for that information and the dangers of it falling into the wrong hands.

Blog post. In the accompanying blog post, the CFPB emphasized that "you are not alone." In the United States, debt collection is a $13.7 billion dollar industry with more than 6,000 debt collection firms operating in the United States, said the post. Debt collection affects 70 million consumers who have or are contacted about a debt in collection. To date, the CFPB has published more than 129,000 debt collection complaints in its Consumer Complaint Database.

For more information about the study, subscribe to the Banking and Finance Law Daily.

Thursday, January 12, 2017

New York Governor Cuomo proposes comprehensive consumer financial protections

By Charles A. Menke, J.D.

New York Governor Andrew C. Cuomo used his 2017 regional state of the state addresses to unveil a series of proposals targeting cybercrime, elder financial abuse, and misconduct in the financial services industries. Cuomo proposed a comprehensive package of new legislation, as well as additional regulatory programs and oversight.
Cybercrime. Cuomo’s fourth proposal of his state of the state addresses seeks to better protect New York residents and government entities from cyber-attack threats through the strengthening and modernization of cybercrime and identity theft laws. “This proposal will give police and prosecutors the authority and the tools they need to bring cyber thieves to justice and protect New Yorkers,” he said.
Cuomo proposed a three-pronged approach to strengthen the state’s cybercrime penalties, including:
  • gradating cybercrimes to ensure that the penalties reflect their severity, such as creating a new Class B felony to punish those responsible for causing over $1 million in damage by computer tampering;
  • updating current identity theft laws to address mass-identity theft through gradated criminal punishments ranging from an A misdemeanor to a D felony, and expanding aggravated identity theft protections to other vulnerable groups outside of military service members, such as seniors and the mentally and physically disabled; and
  • expanding computer intrusion laws to better protect private citizens.
Cuomo also directed the state’s Division of Homeland Security and Emergency Services to establish a Cyber Incident Response Team within the office of Counter Terrorism. According to Cuomo, the team will serve as a go-to resource for non-executive agencies, local governments, and public authorities in how to better protect their information technology assets, critical operating systems and data from cyberattacks, malware, and ransomware. 
Elder financial abuse. In his fifth proposal of the addresses, Cuomo submitted a comprehensive plan aimed at better protecting senior citizens in the state from financial exploitation and foreclosure. The plan includes amending New York’s banking law to empower banks to place holds on potentially fraudulent transactions.
Cuomo also requested strengthening legislation to protect senior homeowners with reverse mortgages. He further stated that he intends to direct the Department of Financial Services (DFS) to revisit and revise any rules and regulations pertaining to reverse mortgages.
In addition, Cuomo proposed the creation of an Elder Abuse Certification Program for banks located in the state. According to the Governor, the DFS will design the program, which will include training bank employees on how to recognize the signs of financial abuse.
Financial industry misconduct. The Governor’s sixth proposal of the addresses aims to further protect consumers from egregious and deceptive behavior in the financial services industry. Cuomo proposed new legislation empowering the DFS to ban individuals from the financial services industry if it is determined that they have engaged in conduct that directly bears on their fitness or ability to continue participating in the industry. The proposal builds upon guidance previously issued by the DFS after the Wells Fargo scandal where bank employees secretly opened new accounts and funded them with transfers from existing ones without the knowledge or consent of the account holder.
For more information about state regulation of financial services, subscribe to the Banking and Finance Law Daily.

Wednesday, January 11, 2017

Tribal immunity test set by California high court

By J. Preston Carter, J.D., LL.M.

California payday lenders’ affiliation with federally recognized Indian tribes was insufficient to entitle them to the tribes’ sovereign immunity from complying with state licensing and consumer protection laws, the Supreme Court of California determined. The California high court set out a five-part analysis for determining when affiliated entities are rightfully entitled to a tribe’s sovereign immunity (The People ex rel. Jan Lynn Owen v. Miami Nation Enterprises, Dec. 22, 2016, Liu, G.).
"This ruling is an important win for California’s payday loan consumers," said the California Department of Business Oversight (DBO) Commissioner Jan Lynn Owen. "It strengthens our ability to enforce laws prohibiting excessive fees and unlicensed activity by denying payday lenders’ ability to inappropriately use tribes’ sovereign immunity to avoid complying with state law."
Affiliated payday lending entities. The Miami Tribe of Oklahoma and Santee Sioux Nation of Nebraska had formed affiliated payday lending entities that did business in California. Those entities contracted with a private firm run by brothers Scott and Blaine Tucker to operate the payday lending businesses. The businesses operated under the following names: Ameriloan, United Cash Loans, U.S. Fast Cash, Preferred Cash, and One Click Cash.
In 2006, the DBO issued an order against the five payday lending entities to stop them from engaging in unlicensed activity. After the businesses ignored the order, the DBO filed suit alleging that the businesses were violating several provisions of the state’s payday lending statute, the California Deferred Deposit Transaction Law (Fin. Code, § 23000 et seq.). The alleged violations included: charging unlawfully high fees, with some APRs reaching 845 percent; making transactions that exceeded the $300 statutory cap; using threats and harassment to collect payments; and unlicensed activity.
Lower court decision. The state Court of Appeal found in favor of immunity. Although the Tuckers signed all the businesses’ checks, and the tribes exercised little or no control over the day-to-day operations, the court concluded that, "Absent an extraordinary set of circumstances not present here, a tribal entity functions as an arm of the tribe if it has been formed by tribal resolution and according to tribal law, for the stated purpose of tribal economic development and with the clearly expressed intent by the sovereign tribe to convey its immunity to that entity, and has a governing structure both appointed by and ultimately overseen by the tribe."
High court response. The high court determined that the lower court gave "inordinate weight" to formal considerations. Here, the court continued, the language of the management agreements is not, by itself, sufficient to warrant the lower court’s conclusion that the lending entities "are not merely passive bystanders to the challenged lending activities."
Test for immunity. The high court said the main legal question in the case is how to determine whether a tribally affiliated entity shares in a tribe‘s immunity from suit. It concluded that an entity asserting immunity bears the burden of showing by a preponderance of the evidence that it is an "arm of the tribe" entitled to tribal immunity. In making that determination, courts should apply a five-factor test that considers (1) the entity‘s method of creation, (2) whether the tribe intended the entity to share in its immunity, (3) the entity‘s purpose, (4) the tribe‘s control over the entity, and (5) the financial relationship between the tribe and the entity.
Applying those five factors, the court held that the affiliated lending entities did not show that they were entitled to tribal immunity as an arm of its affiliated tribe. "Having clarified the legal standard and burden of proof for establishing arm-of-the-tribe immunity," the court concluded, "we express no view on whether the parties have had the opportunity to fully litigate their claims under that standard. The trial court may examine that issue on remand."

For more information about payday lenders, subscribe to the Banking and Finance Law Daily.

Tuesday, January 10, 2017

Rescission not available for purchase money mortgage, homeowners told

By Richard Roth, J.D.

Homeowners could not invoke the Truth in Lending Act to rescind a mortgage loan because the loan was a residential mortgage transaction that was exempt from TILA’s rescission provisions, according to the U.S. Court of Appeals for the Eighth Circuit. A document attached to the homeowners’ complaint and another presented by the creditor made clear the loan had funded the purchase of the home, which made it an exempt residential mortgage transaction (Dunn v. Bank of America N.A.).

The loan was consummated on Oct. 5, 2009. In a rescission demand dated more than 16 months later, the homeowners claimed they had not been given the notice of their right to cancel that was required by TILA and Reg. Z—Truth in Lending (12 CFR Part 1026). After a later foreclosure, they sued both the original lender, Bank of America, and the foreclosing creditor, Nationstar Mortgage, for failing to accede to their rescission demand.

Rescission under TILA. TILA and Reg. Z generally give a borrower a three-business day period to rescind a loan transaction secured by the borrower’s home (15 U.S.C. §1635). The three-day time limit can be extended under some circumstances, such as if the creditor does not give the required notice of the right to rescind.

However, not all loan transactions can be rescinded. If the loan finances the borrower’s original acquisition or construction of the home, the loan is a residential mortgage transaction that is exempt from rescission.

What the documents revealed. The court noted that the homeowners attached a copy of the loan agreement to their complaint and that the agreement was dated Oct. 5, 2009. B of A and Nationstar provided a copy of the deed that transferred ownership of the property to the homeowners, and that deed carried the same date as the mortgage. The two documents also were recorded on the same day.

That left no doubt that the loan was a residential mortgage transaction that could not be rescinded, the court said.

For more information about the Truth in Lending Act, subscribe to the Banking and Finance Law Daily.

Monday, January 9, 2017

State AGs seek disbursement of remaining funds in CFPB’s action against Sprint

By Thomas G. Wolfe, J.D.

The Attorneys General for the states of Connecticut, Indiana, Kansas, and Vermont have jointly requested to intervene in the Consumer Financial Protection Bureau’s enforcement action against Sprint Corporation in New York federal district court to ensure that the approximately $14 million of Sprint’s remaining, unused “consumer redress funds” are used for “consumer protection purposes.” Noting that neither Sprint nor the CFPB plans on objecting to its intervention, the state AGs are specifically asking the court to direct the CFPB to disburse the remaining funds to the National Association of Attorneys General (NAAG) so as to continue and complete the development of the NAAG Training and Research Institute Center for Consumer Protection.

The CFPB filed its enforcement action against Sprint in U.S. District Court for the Southern District of New York, alleging that Sprint knowingly allowed unauthorized third-party charges to be billed to its wireless telephone customers between 2004 and 2013.

As observed by the state AGs, the CFPB claimed that Sprint’s third-party billing system elicited the unauthorized charges by: “(i) enrolling customers in third-party billing without their authorization; (ii) giving third-parties access to Sprint's customers and billing system without implementing adequate compliance controls; (iii) failing to adequately resolve customer disputes; and (iv) ignoring warnings from customers, government agencies, and public-interest groups about the increasing incidence of unauthorized wireless charges.”

During 2015, in addition to Sprint entering into separate multi-million dollar settlements with the Federal Communications Commission and with all 50 states and the District of Columbia to resolve charges stemming from its third-party billing practices, the CFPB similarly obtained a “Stipulated Final Judgment and Order” in the New York federal court. Among other things, the stipulated judgment’s “Redress Plan” has required Sprint to provide up to $50 million in refunds to its affected customers through a specified claims process.

Unused funds. In their Jan. 3, 2017, “Memorandum in Support of Joint Motion to Intervene to Modify Stipulated Final Judgment and Order,” the state AGs note that the claims period for Sprint consumers has expired, and approximately $14 million of the Sprint “consumer redress funds remain unused.” According to the state AGs, “Absent modification of the Stipulated Judgment, the Remaining Funds will therefore be deposited in the U.S. Treasury as disgorgement.”

Accordingly, in support of their intervention request to modify the existing stipulated judgment, the state AGs underscore that: (i) along with the CFPB, they also are government officials charged with enforcement of the Consumer Financial Protection Act and have adopted the same claims asserted by the CFPB against Sprint; and (ii) by disbursing the unused funds to the NAAG Training and Research Institute Center for Consumer Protection, the remaining funds would be used to “train, support and improve the coordination of the state consumer protection attorneys charged with enforcement of the laws prohibiting the type of unfair and deceptive practices alleged by the CFPB in this Action.”

For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.

Friday, January 6, 2017

CFPB FY 2016 in review

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published its annual report to the Senate and House Committees on Appropriations for 2016. The report, required by Section 1017(e)(4) of the Dodd-Frank Act, provides a detailed roadmap on the steps the bureau undertook during the year to promote transparency and accountability and meet its statutory responsibilities. It covers the period of Oct. 1, 2015 through Sept. 30, 2016, the CFPB’s 2016 fiscal year.
The report lists the specific responsibilities tasked to the CFPB by the Dodd-Frank Act and explains how the bureau has met those responsibilities. Components of the 2016 report include:
  • listening to consumers;
  • the CFPB’s budget;
  • diversity and inclusion, including the areas of recruitment and hiring;
  • staff education and training; and
  • consumer resources developed by the bureau.
Regulations and upcoming rulemaking. The CFPB report describes in detail bureau regulations and guidance intended to implement statutory protections. In the last fiscal year, the CFPB issued a number of proposed and final rules that relate to the Dodd-Frank Act, including, but not limited to:
  • a proposed rule on arbitration clauses included in certain contracts for a consumer financial product or service;
  • a proposed rule on payday loans, vehicle title loans, and other similar credit products intended to address consumer harm;
  • a final rule to amend various provisions of the mortgage servicing rules implementing the Real Estate Settlement Procedures Act and the Truth in Lending Act; and 
  • a final rule amending Regulation C, implementing the Home Mortgage Disclosure Act.
The CFPB notes in the report that Section 1071 of the Dodd-Frank Act amends the Equal Credit Opportunity Act to require financial institutions to report information concerning credit applications made by women-owned, minority-owned, and small businesses. The bureau is in its early stages with respect to implementing Section 1071 and is currently focused on outreach and research. In addition, the bureau is working on a proposed rule concerning debt collection practices. Currently, the bureau is continuing to analyze the results of a survey to obtain information from consumers about their experiences with debt collection and plans to publish a report in the coming months.
Other research in preparation of rulemaking includes an analysis of overdraft programs on checking accounts and possible methods to streamline and modernize regulations inherited from other federal agencies.
The report also includes details on materials the CFPB has developed to aid implementation of its rules, such as small entity compliance guides, a HMDA implementation page, and a webinar on the final HMDA rule.
Supervision. During the 2016 fiscal year, the CFPB issued the following public supervisory documents:
The report provides an opportunity to review CFPB guidance issued in FY 2016.
Enforcement activity. The report includes a list of enforcement actions undertaken by the CFPB in the 2016 fiscal year. The bureau took action against a number of companies for consumer protection violations, including actions against an online lender, a credit repair company, a for-profit college chain, auto title lenders, indirect auto lenders, and Wells Fargo Bank, N.A. Violations charged by the CFPB included, among others, unfair or deceptive practices, illegal debt collection practices, and misleading advertising practices. 
A full list of enforcement actions can be found in the report.
For more information about CFPB Dodd-Frank Act activities, subscribe to the Banking and Finance Law Daily.