Consumer Financial Services Law

Court to CFPB: Unconstitutional and Wrong on RESPA

The U.S. Court of Appeals for the D.C. Circuit has declared unconstitutional a core component of the structure of the Consumer Financial Protection Bureau (CFPB) and overturned a $109 million penalty against mortgage lender PHH Corporation (PHH), allegedly for improper kickbacks under the Real Estate Settlement Procedures Act (RESPA). A copy of the decision may be found here. Read our analysis of the decision here.

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California's DBO Hits LendUp With Action, Fine

California's Department of Business Oversight (DBO) reached a $2.68 million settlement with LendUp recently, a deal based on the regulator's allegations that the firm charged illegal fees and committed other "widespread" violations of state law.

What happened

California's financial regulator conducted an exam of San Francisco-based Flurish (doing business as LendUp) pursuant to the California Deferred Deposit Transaction Law (CDDTL) from July 2013 to May 2014 and under the California Finance Lenders Law (CFLL) from November 2013 to August 2014.

What did the Department of Business Oversight (DBO) find? A total of 385,050 individual violations and "a persistent failure" by LendUp to comply with California state laws.

Specifically, the company charged borrowers what it characterized as "expedited fees" to receive loan proceeds the same day they were approved and did not disclose these fees—which are illegal under both the CDDTL and CFLL—as finance charges to borrowers. As a result, LendUp understated annual percentage rates in violation of the CFLL as well as the federal Truth in Lending Act (TILA).

When borrowers sought to extend their payment period from 15 days to 30 days, LendUp tacked on a fee, the DBO said, in violation of the CDDTL. Further running afoul of both state statutes, the company required borrowers to take out both a payday loan and an installment loan, despite the fact that the laws "prohibit conditioning the provision of a loan on the customer buying other goods and services," the DBO noted.

Borrowers also faced overcharges because LendUp wrongly calculated interest rates in contravention of the CFLL, the regulator said.

To settle the charges, the company took corrective actions by identifying the customers impacted by the violations and refunding the fees the DBO highlighted as impermissible as well as the fees paid by customers whose interest rates were miscalculated.

LendUp also agreed to pay a total of $2.68 million. Of that amount, $1.62 million is slated for customer refunds. LendUp already paid $1.08 million in refunds but has been unable to issue refunds to customers with closed or inactive accounts. Pursuant to the deal, the company will e-mail a notice to borrowers about the settlement in order to provide the remaining $537,000.

The rest of the money will be paid to the DBO, including a $100,000 penalty and $965,462 to cover costs. "The illegal fees affected thousands of California borrowers and showed a persistent failure by LendUp to comply with California consumer protection laws," DBO Commissioner Jan Lynn Owen said in a statement. "This settlement will help ensure harmed borrowers are made whole and LendUp is held accountable."

The DBO's investigation was conducted in coordination with the Consumer Financial Protection Bureau (CFPB), which announced a separate settlement with the company for $1.83 million in refunds and a civil penalty of $1.8 million. The CFPB based its action on violations of the Dodd-Frank Wall Street Reform and Consumer Protection Act's prohibition on unfair or deceptive acts or practices, alleging that LendUp promised to help consumers build their credit by providing access to cheaper loans.

But the company failed to follow through, the Bureau said, misleading consumers about the availability to move up the "LendUp Ladder" and providing inaccurate information about the true costs of the loans offered. For example, banner ads on Facebook and other websites allowed consumers to view the repayment terms for various loan amounts but failed to disclose the annual percentage rates (APR) as required by law.

In addition to paying the CFPB a civil penalty of $1.8 million and providing $1.83 million in refunds to more than 50,000 customers, LendUp agreed to review its advertisements to ensure compliance with all regulations and perform regular tests of its APR calculations for accuracy. The company also said it will stop overstating the benefits of borrowing and what fees are charged to borrowers.

To read the consent order with the CFPB in In the Matter of Flurish, Inc., click here.

Why it matters

LendUp did not admit guilt in either action and attributed the regulator deals to the company's "early days … when we were a seed-stage startup with limited resources and as few as five employees," the company said in a statement on its website about the regulator actions. "In those days we didn't have a fully built out compliance department. We should have." The CFPB said the action should send a warning message to other startups, with a reminder that they "are just like established companies in that they must treat consumers fairly and comply with the law," Bureau Director Richard Cordray said.

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State Credit Card Surcharge Laws (Finally) Before Supreme Court

The U.S. Supreme Court has agreed to consider the validity of state credit card surcharge laws, granting certiorari in a case from the Second Circuit Court of Appeals.

What happened

To encourage credit card use, Congress added a provision to the Truth in Lending Act (TILA) in 1976 that prohibited credit card surcharges. The provision was based on a psychological phenomenon known as "loss aversion," meaning that losses loom larger for consumers than improvements or gains of an equivalent amount. In the context of surcharges, that translated into credit card surcharges proving more effective than cash discounts at discouraging credit card use.

When the TILA provision expired in 1984, ten states around the country enacted their own version of the law prohibiting credit card surcharges: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas. Enforcement of the laws varied over the years, in part due to standard provisions in credit card association rules that prohibited the use of surcharges.

After the card associations dropped their prohibitions on surcharges as a result of the settlement of litigation with merchants and state enforcement picked up, merchants began to challenge the state laws. In 2013, five businesses and their managers and owners filed suit in New York federal court, alleging that Section 518 of the state's General Business Law prohibiting surcharges violated both their First Amendment free speech rights as well as their due process rights under the Fourteenth Amendment, requesting the law be declared unconstitutional.

Enacted in 1984, Section 518 states: "No 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. Any seller who violates the provisions of this section shall be guilty of a misdemeanor punishable by a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both." Merchants are still permitted to offer cash discounts.

The plaintiffs told the court they would like to impose a credit card surcharge instead of offering a cash discount and display prominent signage to explain the dual pricing scheme without fear of state action.

A federal court judge sided with the plaintiffs, declaring Section 518 unconstitutional, but a panel of the Second Circuit reversed last year in Expressions Hair Design v. Schneiderman. Section 518 does not regulate speech, the court explained—it regulates conduct. Prices, although necessarily communicated through language, do not constitute "speech" within the meaning of the First Amendment.

"By its terms, Section 518 does not prohibit sellers from referring to credit-cash price differentials as credit-card surcharges, or from engaging in advocacy related to credit-card surcharges; it simply prohibits imposing credit-card surcharges," the panel wrote. "Whether a seller is imposing a credit-card surcharge—in other words, whether it is doing what the statute, by its plain terms, prohibits—can be determined wholly without reference to the words that the seller uses to describe its pricing scheme."

The merchants filed a writ of certiorari with the U.S. Supreme Court, citing a circuit split on the issue. While the Fifth Circuit reached a similar conclusion as the Second, the Eleventh Circuit found that Florida's prohibition on imposing a surcharge on credit card purchases while simultaneously permitting a discount for cash ran afoul of the First Amendment.

"[T]he conflict here is particularly undesirable because merchants need one clear answer to a question that affects the nation's economy: how they may present their prices to consumers," the merchants argued in their cert petition. "And until they get an answer, many merchants will refrain from dual pricing altogether, even though it is legal, because they cannot convey the cost of credit how they would like—as a credit-card surcharge."

In his brief in opposition, New York Attorney General Eric T. Schneiderman said the petition should be denied because "the decision below correctly held that a direct price regulation such as New York's surcharge prohibition does not implicate the First Amendment at all because it addresses conduct, rather than speech."

Granting the petition, the eight Justices agreed to answer the question of "[w]hether state no-surcharge laws unconstitutionally restrict speech conveying price information (as the Eleventh Circuit has held), or regulate economic conduct (as the Second and Fifth Circuits have held)."

Oral argument will be scheduled for later in the term.

To read the merchants' cert petition, click here.

To read the AG's brief in opposition, click here.

Why it matters

The Justices' decision before the term ends next June will have major implications for retailers across the country and particularly those in states with surcharge laws, such as California and New York.

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FTC Staff Perspective Expresses Concern About Lead Generation

In a new report, the Federal Trade Commission expressed concern about lead generation, particularly in the context of the payday lending industry.

What happened

Last October, the Federal Trade Commission (FTC) hosted a public workshop entitled "Follow the Lead," where stakeholders and experts discussed online lead generation practices and consumer protection issues.

To summarize the event, the agency published a Staff Perspective on the workshop. "Online lead generation is nearly ubiquitous in the modern marketplace, connecting consumers who are interested in goods or services with the merchants or providers who can offer them," the FTC wrote. "But because lead generators often operate behind the scenes in complex ways, consumers and many businesses may know little about what they do and how they do it."

The mechanics of online lead generation begin with a consumer expressing interest in a product or service, typically completing a website form. That information becomes a lead that is then sold directly to a merchant, collected with other leads and sold to an aggregator, or perhaps supplemented with additional information (often from data brokers).

A significant part of the lead marketplace, payday lending lead generation takes this process to another level with a "ping tree," the FTC explained. To immediately underwrite small-dollar, short-term loans, payday lenders ask their lead generators to collect detailed personal and financial information for a loan application, including data about the borrower's employment, financial accounts, and Social Security number.

Once the leads are collected and passed on to aggregators, the aggregators use an "automated, instantaneous, auction-style process" known as a ping tree to sell the leads, the agency said. Lenders with access to the ping tree provide specific criteria for borrowers and the prices they are willing to pay. "Using this information, the ping tree transmits leads through the automated lender network in real time—presenting leads to potential buyers electronically until the lead is matched with, and accepted by, a lender," according to the Staff Perspective.

The purchasing lender then presents the consumer with an offer for a loan or, if no lender expresses interest, the remnant lead may be sold to a client with alternative products, such as credit cards or debt relief programs, the FTC said.

While acknowledging potential benefits to consumers—such as quicker matchmaking with a broader range of businesses and more accurate underwriting decisions—the Staff Perspective expressed concern about the lack of transparency involved, aggressive or possibly deceptive marketing, and the potential misuse of consumers' sensitive information.

Consumers may have no idea that their information "can be sold and re-sold multiple times—and further that, as a result, they may be contacted by numerous marketers that are unfamiliar to them," the FTC wrote. "Additionally, consumers may not be aware that lead generators sometimes sell their information to the companies willing to pay for it (or pay the most for it), as opposed to those best suited to offering them the products or services they seek."

To combat this problem, companies "should disclose this type of information to consumers clearly and conspicuously to add transparency to the lead generation process, and allow consumers to make informed choices about when and how to share their personal information," the agency recommended.

The online lead generation marketplace also presents the potential for aggressive or potentially deceptive marketing, the FTC said. Lead buyers should review claims to consumers and keep an eye on consumer complaints to link specific entities to problematic practices, the agency advised, especially companies that deal in sensitive information such as Social Security or financial account numbers.

Specific to payday lending, the FTC noted "significant concern" that the collection and sharing of such sensitive information "increases the risk of misuse and harm to consumers. At the workshop, some speakers suggested that lead aggregators may be failing to ensure the companies purchasing their leads do not use the information for unauthorized or other unlawful purposes.

"Indeed, the FTC has filed several law enforcement actions alleging that fraudulent operators have been able to obtain payday loan leads for nefarious purposes, such as making fake debt collection calls or charging consumers' financial accounts without authorization," the Staff Perspective noted.

In addition, some lead generators are suspected of selling remnant leads to non-lenders that unlawfully target consumers, the agency said.

Lead sellers should be cautious when selling remnant leads, the FTC cautioned, as depending on the circumstances, "they could be liable under the FTC Act if the buyer has no legitimate need for the information. This is especially important given that participants also pointed out that the privacy policies on many publisher websites provide few restrictions on the use or sale of the consumer information they collect, leaving consumers vulnerable."

Further, publishers and aggregators should vet potential lead buyers before doing business with them, the agency added, and monitor their lead buyers for any misuse of consumer data. "Such vetting could include making sure that lead buyers have not been subject to an FTC action or other legal action for misusing consumer information," the FTC said. "Ignoring warning signs that third parties are violating the law and pleading ignorance will not shield companies from FTC actions."

To read the FTC Staff Perspective on the "Follow the Lead" Workshop, click here.

Why it matters

Online lead generation may be common in the marketplace, but the FTC is clearly keeping a close eye on the role of payday lending in the industry. Lenders should consider the Staff Perspective a warning, with recommendations from the agency to increase transparency in the lead generation process, avoid the sale of remnant leads to buyers with no legitimate need for sensitive data, and vet potential lead buyers and monitor them for misuse of consumer data. As the FTC cautioned, "[i]gnoring warning signs that third parties are violating the law and pleading ignorance will not shield companies from FTC actions," and the workshop discussion and resulting paper will "inform our ongoing law enforcement work to protect consumers from unlawful conduct."

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