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.

 

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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."

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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.

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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.”

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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:

 

•  Supervisory Highlights;
•  interagency guidance on deposit reconciliation practices;
•  guidance on submission of credit card agreements under TILA;
•  a compliance bulletin on furnishers’ responsibilities under the Fair Credit Reporting Act (Compliance Bulletin 2016-01);
•  a compliance bulletin to provide guidance to creditors, debt buyers, and third-party collectors about compliance with Sections 1031 and 1036 of the Dodd-Frank Act and the Fair Debt Collection Practices Act when collecting debt from consumers (Compliance Bulletin 2015-07); 
• a compliance bulletin to remind entities of their obligations under the Electronic Fund Transfer Act and Regulation E when obtaining consumer authorizations for preauthorized electronic fund transfers from a consumer’s account (Compliance Bulletin 2015-06); 
• the revised supervisory matter appeals process;
•  a compliance bulletin on RESPA compliance and marketing services agreements (Compliance Bulletin 2015-05); and
• guidance for service providers (Compliance Bulletin 2016-02).

 

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.

 

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CFPB charges credit reporting companies with deceptive marketing practices

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has charged credit reporting companies Equifax, Inc. and TransUnion, as well as their subsidiaries, with deceiving consumers about credit scores the companies sold to consumers. According to the bureau, the companies not only misrepresented the usefulness and actual cost of the credit scores but "lured consumers into costly recurring payments for credit-related products with false promises." The CFPB entered separate consent orders against Chicago-based TransUnion and Atlanta-based Equifax that require the companies to pay a total of more than $17.6 million in restitution to consumers and fines totaling $5.5 million to the CFPB.

 

“TransUnion and Equifax deceived consumers about the usefulness of the credit scores they marketed, and lured consumers into expensive recurring payments with false promises,” said CFPB Director Richard Cordray. “Credit scores are central to a consumer’s financial life and people deserve honest and accurate information about them.”

 

Charges. The CFPB alleged that from at least July 2011 until March 2014, both TransUnion and Equifax violated the Dodd-Frank Act by falsely representing that the credit scores they marketed and provided to consumers were the same scores lenders typically use to make credit decisions. The bureau also charged that the credit reporting companies falsely claimed that their credit scores and credit-related products were free or, in the case of TransUnion, cost only "$1." Finally, the CFPB alleged that Equifax violated the annual free credit report provisions of the Fair Credit Reporting Act by requiring consumers to view Equifax advertisements before receiving their free credit reports.

 

Consent orders. Under the terms of its consent order, Equifax, along with its subsidiary Equifax Consumer Services, LLC, must provide almost $3.8 million in restitution to affected consumers. The consent order for TransUnion, and its subsidiaries TransUnion Interactive, Inc., and TransUnion LLC, requires payment of $13.9 million in restitution to affected consumers.

 

Under the consent orders, both credit reporting companies also must:

• clearly inform consumers about the nature of the scores they are selling to consumers;
• obtain the express informed consent of consumers before enrolling them in any credit-related product with a negative option feature; and
• give consumers a simple, easy-to-understand way to cancel the purchase of any credit-related product, and stop billing and collecting payments for any recurring charge when a consumer cancels.

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Fed seeks comment on proposed guidelines for evaluating joint account requests

By Thomas G. Wolfe, J.D.

The Federal Reserve Board is requesting public comment on its proposed guidelines to evaluate requests for joint accounts at Federal Reserve Banks by private-sector arrangements within the U.S. payment system. As indicated by the Fed’s recent release, requests for joint accounts usually are intended to facilitate settlement between depository institutions participating in U.S. payment systems. Comments to the Fed must be received by Feb. 21, 2017.

As observed by the Fed, the FRBanks “typically permit a single master account per eligible depository institution.” In the past, the FRBanks opened joint accounts on a limited basis and for specific purposes. These joint accounts have been held for the benefit of multiple depository institutions and have been managed by an agent on behalf of those depository institutions. Noting a growing interest in joint accounts, the Fed explains that, in light of “ongoing developments to improve the U.S. payment system,” it “anticipates interest by industry participants in establishing joint accounts to facilitate settlement.”

Proposed guidelines. According to the Fed’s “Proposed Guidelines for Evaluating Joint Account Requests” (Docket No. OP-1557), the requests “would be evaluated on a case-by-case basis, and evaluating a particular request would likely require more-specific considerations and information based on the complexity of the arrangement and other factors.” Moreover, the proposed guidelines are centered on several core principles, including:

• each joint account holder must meet all applicable legal requirements to have a Federal Reserve account, and the FRBank will not have any obligation to any non-account holder with respect to the account funds;
• the private-sector arrangement must demonstrate that it has a sound legal and operational basis for its payment system;
• the design and rules of a private-sector arrangement must be consistent with the Fed’s policy objectives to promote a “safe, efficient, and accessible payment system for U.S. dollar transactions” and must be consistent with the “intended use” of the arrangement;
• a joint account must not create undue credit, settlement, or other risks to the FRBanks; and
• a joint account must not create undue risk to the overall payment system and must not adversely affect monetary policy operations.

Specific feedback sought. Notably, the Fed is seeking specific comments on certain aspects of the proposed guidelines. The Fed asks:

• What information, if any, about the establishment of an individual joint account should be made public?
• If the FRBanks reserved the right to set limits on balances in joint accounts, to require information on projected balances or volatility of balances, or to further restrict or close joint accounts, how, if at all, would the possibility of such limits affect interest in establishing a joint account, or use of the account once opened?
• Are there other types of restrictions or conditions that, while equally effective in attaining the same objectives, might be less burdensome to a private-sector arrangement if placed on joint accounts once in use?
• Are there additional criteria or information that may be relevant to evaluate joint account requests for U.S. depository institutions to provide services to foreign clearing and settlement arrangements?
• Should the Fed or the FRBanks consider other steps or actions to facilitate settlement for private-sector arrangements in light of market participants’ efforts to develop faster retail payment solutions?

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