State Update: Enforcement, Oversight by States Continues

Financial Services Law

State attorneys general continue to fill the federal enforcement void, with the Pennsylvania attorney general soliciting redlining complaints and the attorney general in New York reaching a $65 million deal with a bank over incentivized compensation.

In addition, more participants have joined Arizona’s fintech sandbox, and Colorado voters enacted a new payday lending rate cap in the state.

What happened

  • Redlining in Pennsylvania. Been the “victim” of redlining? Pennsylvania Attorney General Josh Shapiro wants to know, and his investigation has been ongoing for most of 2018. The AG’s office launched an investigation in early 2018 after an Associated Press report purported to identify a pattern of discrimination against African-American borrowers, who the report said were 2.7 times more likely to be denied a home mortgage in Philadelphia than white borrowers. Moreover, said the report, white applicants received 10 times as many loans as black applicants, despite similar demographic proportions.

    As part of his investigation, Shapiro called on residents to file complaints with his office if they have “experienced irregularities when looking for a mortgage or home loan.”

    Shapiro provided examples of possible redlining such as difficulty getting an in-person appointment with a loan officer; not receiving a written preapproval or quote promised by the loan officer; not receiving return phone calls from a loan officer; and a refusal to provide a loan application after the loan officer learns of the applicant’s race, the racial makeup of the neighborhood where the applicant intends to buy the home, or other information relating to the area’s racial or ethnic characteristics.

    “No one is above the law,” Shapiro said in a statement. “If any financial institution or lender is engaging in illegal redlining in the Philadelphia area—or anywhere across our Commonwealth—we want to hear about it.” Neither Shapiro nor his office has offered any actual evidence of actionable disparate treatment.

  • New York settlement. Following an investigation into fraudulent statements to investors, New York Attorney General Barbara D. Underwood has reached a $65 million deal with a national bank. According to the AG, the bank represented to investors its ability to increase revenues and better serve customers with a superior cross-sell strategy.

    In reality, the bank was using “strict and unrealistic sales goals” to put pressure on employees to increase their cross-selling, resulting in widespread fraudulent sales practices including the opening of millions of fake deposit and credit card accounts without customers’ knowledge, the AG said, and employees who failed to meet their sales targets faced termination.

    Although the bank’s former CEO allegedly acknowledged that he became aware of the issue in 2013, the institution allegedly failed to disclose the purported misconduct to investors. When the actions became public, New York investors lost millions of dollars, the AG alleged.

    “The misconduct at [the bank] was widespread and across the bank and at every level of management—impacting both customers and investors who were misled,” Underwood said in a statement. “[M]y office will continue to do what’s necessary to protect the public and the integrity of our markets.”

    While the bank neither admitted to nor denied committing the actions in the AG’s findings, it agreed to pay $65 million to settle the action. Earlier this year, the bank reached an agreement in principle to pay $480 million to investors in a civil suit based on the same allegations. Underwood noted that her office is continuing its investigation in connection with the opening of the unauthorized accounts.

  • Arizona sandbox fills up. Two more participants have jumped into the Arizona fintech sandbox, a program created earlier this year that allows participants to obtain access to the state’s market to test innovative financial products or services without first obtaining full state licensure.

    Attorney General Mark Brnovich’s office began accepting applications in August, with Omni Mobile Inc. the first to climb in.

    Now joining the sandbox: Grain Technology, Inc., and Sweetbridge NFP, Ltd. New York-based Grain will test a savings and credit product using proprietary technology to offer consumers customized savings plans and credit opportunities, the AG said. Arizona consumers who elect to participate in the program will have access to a small line of credit aimed primarily at providing overdraft protection for bank accounts.

    The annual percentage rate (APR) for loans obtained through the line of credit may be as low as 12 percent for consumers who agree to follow a recommended repayment plan calculated using Grain’s technology. Consumers who adopt a different repayment plan will have a standard APR of 15.99 percent.

    By reporting the loans and payments occurring through the line of credit to major credit reporting agencies, Grain hopes to help consumers build their credit profiles.

    The third participant, Sweetbridge, has plans to test a lending product using proprietary blockchain technology with an APR cap of 20 percent, the AG said, a rate that will allow consumers to obtain credit at up to one-tenth of the cost allowed under state law.

    Several additional applications from both established businesses and startups are currently being reviewed by the attorney general’s office, Brnovich said, covering “a diverse variety of money transmission and lending products.”

  • Payday loan cap in Colorado. On election day, voters overwhelmingly approved a ballot measure establishing a 36 percent APR cap on payday loans in Colorado. Proposition 111 asked voters: “Shall there be an amendment to the Colorado Revised Statutes concerning limitations on payday lenders, and, in connection therewith, reducing allowable charges on payday loans to an annual percentage rate of no more than thirty-six percent?”

    Roughly 1.4 million voters answered in the affirmative, with just 433,000 voting against. The measure also eliminated all other finance charges and fees associated with payday lending in the state.

    With the passage of Proposition 111—which takes effect February 1, 2019—Colorado joins Arizona, Montana, Ohio and South Dakota in imposing rate caps on payday loans via voter referendum.

To read the Pennsylvania AG’s press release, click here.

To read the New York AG’s settlement agreement, click here.

To read the Arizona AG’s announcement, click here.

To read Colorado’s Proposition 111, click here.

Why it matters

As the Bureau of Consumer Financial Protection (CFPB) and DOJ have scaled back their enforcement efforts, states have stepped up in response. But deregulation efforts have likewise allowed many of those same states to look for ways to innovate. On the enforcement front, the pitfall of a weaker CFPB is inconsistent enforcement by the states. And states will continue to fill the void on issues ranging from short-term lending to cryptocurrency and digital lending to unauthorized mortgage fees in the wake of that relaxed federal enforcement.