consumer financial services q3 2021 update, powerpoint slides

CFPB Update

• CFPB Director and leadership status

• Second round of Prioritized Assessments completed by CFPB

supervision

• Supervision shifting more focus to fair lending

• Enforcement staffing up with new hires and detailees from

other federal agencies

• Significantly increased enforcement activity

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CFPB Update (continued)

• Notable recent enforcement actions:

• Libre (immigration bail bonds)

• Credit Repair Cloud (technology provider for credit repair organizations)

• Better Future Forward (income share agreements)

• Recent 7th Circuit decision on Bureau recovery of restitution

and civil monetary penalties (CFPB v. Consumer First Legal

Group)

• Impact on parties’ willingness to litigate with the CFPB

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Small Business Data Collection Rule (Dodd-Frank § 1071)

• The Bureau released its proposed rule on Sept. 1, 2021

• 90-day comment period from publication in Federal Register

• Two significant takeaways:

• Similar to HMDA, complying with the rule will be challenging for industry

participants, and we expect significant supervisory and enforcement

activity around compliance with the rule once it becomes effective

• Also similar to HMDA, we expect the rule to be the overture to significant

fair lending enforcement activity in small business lending, once data

starts to be reported

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State Regulatory Update

• Debt Collection

• Housing / Mortgage Lending and Servicing

• Alternative Lending Products

• Automobile Sales and Finance

• Student Lending and Servicing

• Data Privacy

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Developments in

Consumer Finance Law

Standing to Seek Statutory Damages

• Many federal statutes authorize private litigation for actual damages or statutory damages:

• Fair Credit Reporting Act

• Truth in Lending Act

• Fair Debt Collection Practices Act

• Real Estate Settlement Procedures Act

• Telephone Consumers Protection Act

• … and many others.

• But is the purpose of statutory damages meant to create a minimum recovery when actual damages might be just a few dollars or even pennies?

• Or is the purpose to provide a bounty to those who find technical violations?

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Standing to Seek Statutory Damages

• In class cases, even minor violations can lead to potentially huge statutory damages awards.

• Long history of litigation in appellate courts to limit statutory damages to those with real-world harm: injury-in-fact.

• Does “de minimis non curat lex” (the law disregards trifles) apply in federal court?

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Standing – TransUnion v. Ramirez

• TransUnion v. Ramirez, 594 U.S. ___, 2021 WL 2599472 (June 25, 2021)

• Fair Credit Reporting Act case, but with broader implications.

• Court certified a class of approximately 8,000 people who supposedly received faulty disclosures of their rights to dispute inaccurate information in their credit files.

• However, only approximately 2,000 class members had credit reports sold to third parties during the class period.

• Case was tried to a $60MM jury verdict in federal court in San Francisco. Ninth Circuit reduced the verdict to $40MM.

• No economic damages proved; entire verdict was statutory and punitive damages.

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• Supreme Court ruling: No class member had standing to pursue the disclosure claims.

• Only technical format violations shown. All required information was provided in two separate letters, rather than in a single letter. No proof that any class member failed to understand his or her dispute rights.

• Not discussed by the Supreme Court – the defendant presented unrebutted evidence at trial that the two-letter format was actually more effective at informing consumers of their rights.

• No evidence that the alleged disclosure violations imposed any “downstream” harm on any class member.

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• Supreme Court ruling: Only class members who had reports sold could pursue accuracy claims.

• No standing to sue based on potential risk of harm alone.

• Inaccurate information in a computer file does not create harm unless and until it is distributed to a third party.

• Standing rule is consistent with common-law defamation rule.

• 80% of the class had no claim at all.

• Typicality also was challenged on appeal, because there was no evidence any class member (except the named plaintiff) suffered any adverse impact from the supposedly inaccurate report. Supreme Court remanded for this issue to be addressed in the lower courts in the first instance.

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TransUnion v. Ramirez – Rationale

• Case is about more than Article III standing

• Article III: Federal courts only have power to hear actual “Cases or Controversies.” Where a civil plaintiff has no injury in fact, there is no bona fide “controversy” a court can address.

• No harm no foul… and no statutory damages.

• An attempt by Congress to expand courts’ power to rule on non-controversies violates Article III and improperly distracts courts from their Constitutional function – to decide genuine controversies.

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Standing – Article III and State Courts

• Article III of the U.S. Constitution does not apply to state courts.

• Federal courts are “limited jurisdiction” and state courts are “general jurisdiction,” although many states apply standing rules like those under Article III.

• Still, there can be cases where standing is lacking in federal court but present in state courts.

• Stover v. Experian Holdings, Inc., 978 F.3d 1082 (9th Cir. 2020) (claim solely for public injunctive relief may not be pursued in federal court, where plaintiff otherwise lacks Article III standing).

• Post-Stover, many plaintiffs are filing in state court and/or seeking remand of removed cases removed on the grounds that there is standing to pursue the claim in state court, but not in federal court.

• These are usually claims asserted only under state statutes.

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TransUnion v. Ramirez – State Court Standing?

• TU v. Ramirez may also bar federal claims, even when filed in state court, on the grounds that Congress exceeded its power in authorizing statutory damages.

• The Supreme Court based its decision on more than Article III, which describes the Judicial power.

• Article I: Congress has no power to “elevate” non-injuries into compensable injuries.

• Article II: Congress cannot delegate to private citizens a general law-enforcement power; impairs Executive Branch.

• Not discussed in TU v. Ramirez, but may matter in state court litigation: 10th Amendment limits Congress’s ability to commandeer state government for federal regulatory goals.

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TransUnion v. Ramirez – Implications

• Case has been remanded to the District Court, where litigation is ongoing. Ninth Circuit simply directed the District Court to conduct further proceedings consistent with the Supreme Court’s decisions.

• Some District Court judges issued OSCs re: dismissal, sua sponte, requiring plaintiffs to provide proof of concrete injury sufficient to satisfy the TransUnion v. Ramirez standard. E.g., Poremba v. Discover Fin. Servs., Inc., No. 2:21-cv-1407 (E.D.N.Y. Aug. 25, 2021) (dismissing case; claim that plaintiff “refrained for applying for credit based upon fear of rejection” did not show injury, despite claim credit data in file was inaccurate).

• Recent appellate ruling dismissing FDCPA case: Wadsworth v. Kross, Lieberman & Stone, Inc., 2021 WL 3877930 (7th Cir. Aug. 31, 2021) (emotional distress supposedly resulting from defective collection notice was insufficiently concrete to support standing).

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TransUnion v. Ramirez – Open Questions

• How broadly will TransUnion v. Ramirez sweep?• FDCPA? Likely. Casillas, Wadsworth (7th Cir.).

• TILA? Likely, if no financial loss to borrower can be tied to the allegedly improper disclosure. Zevon v. American Express Co., No. 1:20-cv-4938 (S.D.N.Y. Sept. 22, 2021).

• TCPA? Maybe not, if claim is like a common-law privacy tort.

• How will plaintiffs seek to prove that a disclosure violation results in “downstream” injury?

• Greater use of expert testimony.

• Greater need by plaintiffs to show materiality of alleged consumer disclosure violations.

• Unclear how to prove injury from an allegedly incomplete disclosure or from omitted information.

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Fair Lending: Lots of Activity

• HUD re-adoption of 2013 Fair Housing Act disparate impact

rule

• OCC and FDIC emphasis on redlining in examinations

• NYDFS consent orders relating to auto dealer finance charge

participation (Adirondack Trust and Chemung Canal) – with

remedial provisions that go beyond comparable CFPB

consent orders

• Federal agencies’ RFI on artificial intelligence / machine

learning

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Fair Lending Focus Areas: Old and New

• Existing, continuing areas of focus:

• Redlining

• Judgmental underwriting/pricing

• Steering

• Equal treatment of Limited English Proficiency Consumers

• Potential New Areas of Focus:

• Model development and testing

• Alternative data

• Targeted advertising

• Fair lending analysis of servicing activities, especially loss mitigation

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Notable Litigation Updates

• DACA/Citizenship Cases

Arbitration – “Public Injunctive Relief” Claims Avoid

Enforcement of Agreement to Arbitrate Individually

• McGill v. Citibank, 2 Cal. 5th 945 (2017) (arbitration agreement is invalid to the extent it forbids a consumer from seeking “public injunctive relief” in any forum).

• DiCarlo v. MoneyLion, Inc., 988 F.3d 1148 (9th Cir. 2021) (applying McGill: arbitration agreement that does not address public injunctive relief construed to allow the arbitrator to award it).

• Defendants argue that as a practical matter, McGill allows plaintiffs to obtain class-like relief, thereby evading agreements to arbitrate on an individual basis and undermining the federal policy in favor of arbitration.

• Ninth Circuit upheld the McGill rule in Blair v. Rent-A-Center, 928 F.3d 819 (9th Cir. 2019). In 2020, the U.S. Supreme Court rejected two cert. petitions challenging McGill (Tillage, McArdle).

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Arbitration – Public Injunctive Relief Defined Broadly

Under McGill

• California state courts tend to define public injunctive relief broadly, to avoid enforcing arbitration agreements, per McGill.

• Mejia v. DACM Inc., 268 Cal. Rptr. 3d 642 (Cal. Ct. App. 2020) (claim against small motorcycle dealership seeks public injunctive relief because even though the shop had a small customer base, it advertised to the public at large).

• Maldonado v. Fast Auto Loans, Inc., 275 Cal. Rptr. 3d 82 (Cal. Ct. App. 2021) (preventing the making of usurious loans is a sufficiently public purpose to justify a public injunctive relief claim).

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Arbitration – Public Injunctive Relief Defined

Narrowly

• Federal district courts are more likely to require that the case actually impact many members of the public, rather than just a distinct group.

• Johnson v. JP Morgan Chase Bank, N.A., No. EDCV 17-2477 JGB (SPx), 2018 WL 4726042 (C.D. Cal. Sept. 18, 2018) (claim challenging fees allowed under account agreement seeks only private relief because relief would benefit only particular bank customers).

• Kim v. Tinder, Inc., No. CV 18-03093 JFW (AS), 2018 WL 6694923, at * 3 (C.D. Cal. July 12, 2018) (claim challenging fees imposed on dating app users over age 30 seeks only private relief because the claim “is clearly one that would not affect the public at large”).

• Ajzenman v. Office of the Commissioner, 2020 WL 6037140 (C.D. Cal. Sept. 14, 2020) (claims based on loss of ability to use baseball tickets during the 2020 season due to coronavirus were pursued only on behalf of “a limited group of people,” and hence did not seek public injunctive relief; arbitration agreement enforced).

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Narrowly

• Hodges v. Comcast Cable Comm’ns, LLC (9th Cir. Sept. 10, 2021)

• Plaintiff sought wide-ranging relief for Comcast cable television subscribers, based on alleged privacy and data sharing violations.

• Major recent Ninth Circuit ruling on McGill and public injunctive relief, limiting the scope of McGill and enforcing an arbitration agreement.

• McGill rule is not triggered unless a public injunctive relief claim is actually pleaded in the case before the court.

• Courts should not seek out hypothetical or potential McGill violations and use them as an excuse to avoid arbitration.

• McGill is a narrow exception to the broad federal policy in favor of arbitration.

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Narrowly

• Hodges – Departs from state appellate jurisprudence; follows federal district court cases.

• To be public injunctive relief, the claim must seek only:

• Prospective relief

• In favor of the public at large, rather than an identifiable population: “cable subscribers” is not sufficiently “public”

• Public injunctive relief claim may not be used as a vehicle for other claims (such as statutory damages claims) to escape individual arbitration.

• Retrospective claims for compensation or disgorgement are not public injunctive relief claims.

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Narrowly

• Hodges

• Narrow definition of “public injunctive relief” necessary to protect McGill rule from FAA preemption.

• “If California’s McGill rule had sought to preserve, as non-waivable, the right to formally represent the claims of others, to seek retrospective relief for a particular class of persons, or to request relief that requires consideration of the individualized claims of non-parties, then such a rule would plainly interfere with the informal, bilateral nature of traditional consumer arbitration.”

• Rejects Mejia and Maldonado as contrary to McGill itself.

• Judge Berzon dissents. If case goes en banc, en banc 9th Circuit potentially can certify question to the California Supreme Court.

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More Recent 9th Circuit Arbitration Rulings (Brice)

• Brice v. Plain Green, LLC (9th Cir. Sept. 16, 2021)

• Upholding arbitration provision in tribal lending agreement.

• Plaintiff borrower sued on the grounds that the tribal lender made a usurious loan in violation of state and federal law.

• Agreement selected tribal law and the arbitration provision delegated authority to the arbitrator to decide issue of validity of the loan agreement and of the arbitration provision.

• Borrower argued that the prospective waiver of all rights except those under tribal law rendered both the loan agreement and the arbitration provision unconscionable.

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More Recent 9th Circuit Arbitration Rulings (Brice)

• Brice v. Plain Green, LLC (9th Cir. Sept. 16, 2021)

• Ninth Circuit held that the agreement properly delegated to the arbitrator the ability to decide in the first instance whether the arbitration provision was enforceable.

• Arbitration provision permitted the arbitrator to employ “any legal or equitable theory” in examining the enforceability of the arbitration provision. Accordingly, there was no improper prospective waiver of federal (or other) rights.

• Judge Fletcher dissented, noting that other circuits reached different conclusions when evaluating similar agreements. E.g., Gibbs v. Haynes Invs., LLC, 967 F.3d 332 (4th Cir. 2020); Williams v. Medley Opportunity Fund II, LP, 965 F.3d 229 (3d Cir. 2020); Gingras v. Think Fin., Inc., 922 F.3d 112 (2d Cir. 2019).

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Recent 9th Circuit Arbitration Rulings (Chamber v.

Bonta)

• Chamber of Commerce v. Bonta (9th Cir. Sept. 15, 2021)

• California Labor Code provision makes certain claims non-arbitrable.

• Employer subject to criminal exposure for including an invalid arbitration provision in an employment agreement.

• Ninth Circuit upheld most of the statute’s restrictions on arbitration, but struck down the criminal penalties.

• Dissenting, Judge Ikuta would have struck down more of the statute, and criticized the majority for encouraging state legislative efforts to circumvent the Federal Arbitration Act.

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Regulation F: Regulatory and Litigation Impacts

• The CFPB’s final Debt Collection Rule (Reg. F) becomes

effective November 30, 2021

• For debt collectors, the rule will bring a raft of new requirements

and operational changes to implement, including new

requirements for validation notices and the rule’s call frequency

limits

• For creditors, new processes will need to be built to support

debt collectors, and some aspects of the rule may be applied to

creditors by analogy

• Expect significant new litigation to be spurred by the rule

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Consumer Banking Updates –

Deposit Account Agreements/Terms

• Pending class actions challenge practices and disclosures in deposit account agreements and fee schedules regarding fees assessed for transactions completed at out-of-network (“OON”) ATMs.

• Primarily challenge fees assessed for “balance inquiries” and instances where fees are assessed for multiple “balance inquiries” performed during a single transaction.

• Challenge meaning of terms in deposit account agreements as “ambiguous,” including terms like “each,” “balance inquiry,” “transaction.”

• Courts have denied motions to dismiss and for summary judgment.

• At least two class action settlements to date, for $5,200,000 and $13,000,000.

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• Galgano v. TD Bank, N.A., D.N.J. No. 20-05623 (June 17, 2021)• Court denied motion to dismiss breach of contract claim, finding use of the

term “each” in deposit agreement/fee schedule to be ambiguous.

• Fee schedule:

• “$3.00 For each withdrawal, transfer, and balance inquiry conducted at a non-TD ATM. The institution that owns the terminal (or network) may assess a fee (surcharge) at the time of your transaction, including balance inquiries.”

• Claim turned on disagreement over how “each” is interpreted in fee schedule.

• Plaintiff’s interpretation: “each” indicates that TD Bank will charge a single $3.00 fee when an account holder conducts any of the ATM functions.

• Defendant’s interpretation: “each” indicates that TD Bank will charge an account holder a separate $3.00 fee for every ATM function.

• Holding: Just as plausible to read “each” as applying to each transaction separately, as it is to read “each” and “and” in a way which would group the different types of transactions together. Because the language is ambiguous, the ambiguity must be read in plaintiffs’ favor at the motion to dismiss stage.

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• Schertzer, et al. v. Bank of America, N.A. et al., S.D. Cal. No. 3:19-cv-00264 (Sept. 28, 2020)

• Putative class against Bank of America (“BOA”), and Cardtronics, Inc., Cash Depot, Ltd., and FCTI, Inc. (the “ATM Defendants”).

• Plaintiffs’ theories of liability:

• ATM Defendants deceptively maximize the number of OON ATM balance inquiries customers perform by placing misleading disclosures on the screens and signs at ATMs they operate regarding balance inquiry fees.

• BOA charges its customers unwarranted OON fees for balance inquiries completed at the ATM Defendants’ ATMs, due to a “latent ambiguity” in BOA’s agreement regarding when fee will be charged.

• BOA agreement: $2.50 fee “may be charged” by the ATM operator and BOA “may also charge” fees for each withdrawal, transfer and balance inquiry completed at an OON ATM.

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• Schertzer, et al. v. Bank of America, N.A. et al., S.D. Cal. No. 3:19-cv-00264 (Sept. 28, 2020)

• Holding: BOA’s motion to dismiss denied, because agreement was imbued with a “latent ambiguity” regarding when an OON balance inquiry fee will be charged because “balance inquiry” was undefined and susceptible to two different meanings regarding when an OON fee may be assessed: (1) only when a customer knowingly authorizes a balance inquiry; or (2) any time a customer knowingly consents to a balance inquiry and all other times when they do not.

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• Class Settlements• Figueroa, et al. v. Capital One, N.A., S.D. Cal., No. 18-0692

• Court denied summary judgment, finding that agreement was ambiguous regarding when and what fees will be charged for balance inquiries at OON ATMs because Cap One combined in a single paragraph two sentences regarding onscreen fee warnings and the right to cancel with fees charged by OON ATM operators and fees that Cap One may assess

• $13,000,000 class settlement; final approval granted Jan. 2021.

• Smith, et al. v. Fifth Third Bank, S.D. OH, No. 18-cv-0464

• Court denied motion to dismiss, finding that term “transaction” was ambiguous as to whether it encompassed balance inquiries because “transaction” was not defined in deposit agreement, whereas “Electronic Banking services,” for which customers must pay a “per transaction fee,” were specifically defined as “deposits, transfers, or withdrawals”

• $5,200,000 class action settlement; final approval granted Aug. 2021.

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Retail Banking Updates –

Cases Alleging Bank Liability For Third Party Scams

• Uptick in cases against banks alleging liability for financial scams perpetrated by third parties, including wire fraud and/or financial elder abuse.

• Recurring themes: • Bank customer requests that the bank send funds to third party (sometimes in

foreign country), finds out later third party is a scammer and alleges the bank should not have approved or processed the transaction because uncharacteristic for that customer or raised “red flags.”

• Bank customer provides account or login information to scammer and scammer then uses customer’s information to initiate a transfer of funds.

• If elderly customer, potential allegations that bank “assisted” the financial elder abuse perpetrated by third party (e.g., CA Welf. & Inst. Code § 15610.30(a)(2)).

• Fund transfers – UCC or EFTA/Reg E, depending on type.• UCC Article 4A does not apply to a funds transfer any part of which is governed

by the EFTA. UCC § 4A-108.§

• Reg E does not apply to "[w]ire or other similar transfers." 12 C.F.R. §1005.3(c)(3) ("The term `electronic fund transfer' does not include . . . [a]nytransfer of funds through Fedwire or through a similar wire transfer system that is used primarily for transfers between financial institutions or between businesses.").

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Recent CFPB FAQs re: Electronic Fund Transfers

• Recent CFPB guidance on Electronic Fund Transfers (FAQs published June 4, 2021):

• “Unauthorized electronic fund transfer” includes the situation where a third party fraudulently induces a customer into sharing account access information that is used to initiate an electronic fund transfer from the consumer’s account,

• A financial institution cannot consider a consumer’s negligence when determining liability for unauthorized electronic fund transfers under Reg E.

• A financial institution cannot rely on a consumer agreement that “includes a provision that modifies or waives certain protections granted by Regulation E, such as waiving Regulation E liability protections if a consumer has shared account information with a third party” when determining whether the EFT was unauthorized and what liability provisions apply.

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consumer financial services q3 2021 update, powerpoint slides

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