Financial Services Law

Overdraft Service Program Costs Bank $10M in CFPB Fine

Overdraft services practices were the basis for a $10 million fine from the Bureau of Consumer Financial Protection (CFPB) in a recent action against a national bank operating primarily in the northeast.

What happened

The bank offered overdraft protection for ATM and onetime debit card transactions at a cost of $35 for each overdraft, and an additional fee if the account remained overdrawn for a certain number of days. To sign consumers up for the service, the bank used a telemarketer.

In July 2010, an amended Regulation E of the Electronic Fund Transfer Act (EFTA) took effect. Promulgated by the Board of Governors of the Federal Reserve System, the "Opt-In Rule" prohibited charges for overdraft fees on ATM and onetime debit card transactions unless consumers elected to affirmatively opt in. If a consumer does not opt in, then a bank or credit union is not permitted to charge an overdraft fee and the transaction may be declined.

The bank responded to the Rule by launching a series of "vigorous telemarketing campaigns" to convince consumers to opt in to the program in order to "protect" the bank's fee revenue, the CFPB alleged.

As part of the opt-in call campaigns, the bank hired a third-party telemarketer to provide a brief description of its program and then requested the last four digits of consumers' Social Security numbers, enrolling them in the program without their consent, the CFPB alleged. In some instances, consumers declined to sign up for the program but requested information about it and the telemarketer allegedly enrolled them anyway.

Telemarketing representatives led consumers to believe that the program was a free service, even though it had the potential to cost hundreds of dollars in fees, the CFPB said. For example, some reps suggested that a consumer who brought his or her account current within five business days of an overdraft would not be charged while others left consumers with the impression that fees would only be charged for emergency transactions.

Adding to the alleged deceptive actions of the telemarketer were implications about potential fees if consumers chose not to opt in. The CFPB claimed that consumers were told the bank would charge overdraft fees on onetime debit card and ATM transactions whether or not they signed up for SAP, even though the bank was not allowed to make such charges without consent. Moreover, some consumers were allegedly informed they faced the risk of additional fees if they did not sign up for the program. The CFPB further alleged that telemarketers also falsely claimed their calls were not sales pitches (on some occasions telling the consumer the call was because the bank had changed its name).

The bank not only failed, said the Bureau, to stop the telemarketers' deceptive tactics, but also effectively encouraged them by providing financial incentives for the telemarketers to hit sales targets based on the number of consumers enrolled in the program, violating the Dodd-Frank Act's prohibition on unfair, deceptive, or abusive practices, in addition to the EFTA. The CFPB alleged that the bank was not only aware of the vendor's tactics as far back as 2010, but created or approved the scripts to be used by the vendor as part of the opt-in call campaign.

The bank reached a deal, agreeing to pay a $10 million fine to the CFPB. In addition, the CFPB required the bank, among other things, to validate all opt-ins associated with the telemarketer used to promote the program, prohibited the bank from using a vendor to conduct outbound telemarking of overdraft service to consumers (with a ban on financial incentives in connection with opt-ins), and ordered the bank to increase oversight of all third-party telemarketers, with the creation of a new or revised policy governing vendor management for service providers engaged in telemarketing of consumer financial products or services.

To read the consent order in In the Matter of Santander Bank, click here.

Why it matters

The action provides an important reminder to banks to keep a close eye on vendors, and that financial institutions will shoulder the full blame when they don't. The bank "tricked consumers into signing up for an overdraft service they didn't want and charged them fees," CFPB Director Richard Cordray said in a statement about the action. Its "telemarketer used deceptive sales pitches to mislead customers into enrolling in overdraft service. We will put a stop to any such unlawful practices that harm consumers."

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California DBO Reports on Jump in Nonbank Installment Consumer Lending

According to a new report from the California Department of Business Oversight (DBO), installment consumer lending by nonbanks grew almost 50 percent in 2015, with the majority of loans between $2,500 and $5,000 featuring an annual percentage rate (APR) of more than 100 percent.

What happened

The 2015 Annual Report on Operation of Finance Companies under the California Finance Lenders Law examined data provided by licensed lenders for the calendar year ending December 31, 2015.

According to the report, the number of all consumer loans originated in 2015 increased 25.6 percent over the prior year, to 1,392,289 from 1,108,345. Over the same period, the aggregate principal amount increased 48.7 percent, from $22.9 billion to $34.1 billion.

What was driving the increases? Largely mortgage loans, the DBO said, which loans grew 61.7 percent (from 48,271 in 2014 to 78,073 in 2015). The aggregate principal of mortgage loans more than doubled, up 55.3 percent to $24.6 billion from $15.8 billion.

Installment consumer loans made by nonbanks also delivered bigger numbers, growing 48.7 percent in 2015 and increasing in dollar amount from $22.9 billion in 2014 to $34.1 billion in 2015.

The DBO further noted "interesting data" related to interest rates. The California Finance Lenders Law (CFLL) caps rates on loans under $2,500 but places no limits on loans valued at $2,500 or higher. The report found that more than half of the consumer loans valued at $2,500 to $4,999 had APRs of 100 percent or higher.

In that dollar range, licensed lenders made 535,585 secured and unsecured loans—the highest total for any loan value category, the regulator noted. Of those loans, 54.7 percent (or 293,248) had APRs of 100 percent or higher. The 411,822 unsecured consumer loans in the $2,500 to $4,999 range carried APRs of 100 percent or higher 57.7 percent of the time.

Unsecured loans falling under the rate caps also experienced a significant increase, according to the report. The number of loans under $2,500 grew 30.2 percent with an aggregate principal rise of 28.1 percent (to $312.1 million).

Other findings reported by the agency included slowed growth in the auto title loan sector, with upward movement of only 9.5 percent, a drop from the 16.2 percent growth seen in 2014. Aggregative principal on such loans demonstrated similar slowed growth, up 10.9 percent last year (to $423.5 million) as compared to a 14.1 percent increase in 2014.

Why it matters

The California DBO report on loans made under the CFLL triggered concern about the small loan rates with APRs in excess of 100 percent. "The good news is the increased lending activity reflects continued improvement in California's economic health," DBO Commissioner Jan Lynn Owen said in a statement about the report. "Less heartening is the data that show hundreds of thousands of borrowers facing triple-digit APRs. We will continue to work with policymakers and hope they find the report helpful as they consider reforms of California's small-dollar loan market." Lenders may see legislation or proposed regulation as a result.

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Regulators Publish Updates to CRA Guidance

The federal bank regulatory agencies adopted revisions to the interagency guidance on the Community Reinvestment Act, focusing on alternative systems for delivering retail banking services, innovative or flexible lending practices and community development-related activities.

What happened

The Community Reinvestment Act (CRA) requires the federal banking agencies to assess the record of financial institutions in meeting the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods. First published in 1996, the agencies' Interagency Questions and Answers Regarding Community Reinvestment offer guidance to financial institutions, bank examiners and the public about agencies' implementation of the CRA.

After reviewing 126 comment letters and more than 900 form letter submissions based on a 2014 proposal, the Federal Reserve Board, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency adopted revisions and additions to the CRA Q&A addressing alternative systems for delivering retail banking services, community development-related issues, innovative or flexible lending practices and the responsiveness and innovativeness of an institution's loans, qualified investments, and community development services. The updates include six new questions and answers, nine substantive changes to existing questions and answers and an array of technical revisions.

One major area of focus was the role of financial institutions' "innovativeness" in CRA assessments. The Q&A describes how innovativeness is considered in the CRA rating process. Innovative practices may "be responsive to community needs but are not required if existing products, services, or delivery systems effectively address the needs of all segments of the community." The use of innovative lending practices, innovative or complex qualified investments, and innovative community development services may augment the consideration given to an institution's performance, resulting in a higher CRA rating. Smaller institutions or those institutions that have historically offered only traditional products, services, or delivery systems may be viewed as "innovative" by adopting innovative products and services already in the market. The Q&A clarifies, however, that a lack of innovative lending practices or innovative community development services alone will not result in a "needs to improve" CRA rating.

Also on the radar of the Federal Reserve, OCC, and FDIC: community development-related issues. In particular, the new Q&A attempts to address "inconsistencies in how community development services have been evaluated quantitatively" and concerns that "qualitative factors, such as whether community development services are effective or responsive to community needs, receive inadequate consideration."

The Q&A explains that agencies will evaluate community development-related activities both quantitatively and qualitatively, although without a specific formula.

With regard to qualitative factors, the finalized guidance states that examiners will assess the degree to which community development services are innovative or responsive to community needs. Qualitative evaluation criteria will include an assessment of the impact of a particular activity on community needs and the benefits received by a community.

For quantitative factors, the guidance offers examples of measures that examiners may assess to determine the extent to which community development services are offered and used, such as the number of low- and moderate-income individuals participating in a community development activity, the number of organizations served by a community development activity, and the number of sessions of a community development service activity.

Why it matters

Financial institutions should review the revised interagency guidance, paying particular attention to "innovativeness" in the ratings process and community development-related issues, both the qualitative aspects of performance as well as the quantitative factors to be considered by examiners.

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Lawmakers Question Regulators on Fintech Oversight

What are federal regulators doing with regard to oversight of emerging financial technology? That question is at the heart of a letter Sens. Sherrod Brown (D-Ohio) and Jeff Merkley (D-Ore.) recently sent to the leaders of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC), and the National Credit Union Administration (NCUA).

What happened

Fintech firms have expanded their presence and products in the financial system in recent years, the lawmakers wrote, with offerings ranging from alternative payment systems to mobile payments to cash advance products, some with new structures and business models and others that largely resemble those of existing federally regulated firms.

While applauding the work of the financial regulators keeping an eye on the burgeoning industry so far, Sens. Brown and Merkley wondered what more could be done, asking about "the tools the regulators have to ensure effective oversight of fintech companies" in order for members of Congress to better understand their enforcement.

The diversity of business models found in fintech firms presents a challenge to regulation, the legislators noted, with research suggesting there are at least 4,000 fintech firms providing financial services (compared with 5,289 commercial banks with FDIC insurance).

"Some fintech companies have formed formal partnerships with financial institutions while others may interact with depository institutions less formally, such as through the payment system," according to the letter. "Some companies aim to form partnerships with small community banks and credit unions, while some small financial institutions have voiced concerns that they view fintech companies as competitors. Some fintech companies sell loans or securities to financial institutions."

Given this range, the Senators asked the regulators to share what each agency has done to study and understand the various types of fintech firms (such as marketplace lending, alternative payments, consumer lending, blockchain and distributed ledger, virtual currencies, personal finance management, robo-investing or saving, small business financing, merchant cash advances, education financing, crowdfunding, or invoice financing) and the agency's role in supervising or regulating the firms, including the possible considerations that should be given to nonbank companies to obtain a full or limited federal banking charter.

One possible avenue for regulating fintech firms could be via the regulation of third-party service providers, the lawmakers noted, as the agencies have issued guidance on the regulatory expectations for management of third-party relationships with enforcement power in place.

Recent events "raise questions" about the relationship between regulators, financial institutions, and third-party service providers, Sens. Brown and Merkley said, "specifically the policies and internal controls put in place to address possible risks associated with certain lending practices and transactions with financial institutions. Depository institutions were among the institutional investors that purchased loans from online marketplace lenders."

Details about the agencies' guidance and expectations for financial institutions that partner or otherwise engage with fintech companies were requested, as well as the factors considered by the agencies when determining whether and how to use their authority to examine and regulate third-party service providers and the steps being taken to ensure financial institutions understand the risks and benefits to partnering with or acquiring fintech companies. How often has each agency directly examined third-party service providers that are fintech companies, the Senators asked.

A third option raised additional questions for the lawmakers. If a fintech company is neither regulated directly by the agencies nor as a third-party service provider, "there are concerns that applicable federal consumer laws may not extend to consumers engaging with fintech companies, and that consumers or small business owners may not understand that protections provided by federal financial institutions do not apply to the products and services offered by these companies."

Further, the use of alternative data and proprietary algorithms to underwrite loans poses the potential for violations of fair lending laws and consumer protection statutes such as the Fair Credit Reporting Act, the letter added, not to mention issues with the portability of data. Equally at risk: small businesses, which may also be lacking protections.

To address these concerns, the Senators requested "a description of the direct and indirect authority that your agency has to supervise companies that make consumer and small business loans and advances; your views on alternative data to underwrite loans or advances, and the ability of your agency to enforce consumer protection and fair lending laws," among other questions.

Finally, Sens. Brown and Merkley asked the regulators to consider the global nature of fintech and the need for both interagency cooperation as well as international coordination. "While fintech may increase the availability of financial services across borders, there may also be complicated implications for international law," they wrote, asking what types of coordination and cooperation already exist both within the United States and internationally.

To read the letter from Sens. Brown and Merkley, click here.

Why it matters

Fintech oversight remains a hot topic, as demonstrated by the letter from the lawmakers, who expressed concern about the adequacy of the current patchwork of regulations, with some companies directly regulated by the agencies, others the subject of indirect oversight as a third-party service provider to a regulated entity, the potential for coverage by consumer protection laws, or—most troublingly for the Senators—nothing at all. As fintech continues to grow and evolve, legislative inquiries and concerns may expand pressure on regulatory agencies to craft more focused and direct rules which balance oversight and compliance against a desire to refrain from significantly impeding innovation.

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Spokeo Can't Help Bank Avoid $6.2M Settlement

Invoking the recent U.S. Supreme Court decision in Spokeo v. Robins, a federal court in New York held that a bank remained on the hook for a $6.2 million class action settlement.

What happened

Plaintiffs were borrowers who accused the bank of systematically failing to file timely mortgage satisfaction notice for recording in violation of Section 275 of the New York Real Property Law as well as Section 1921 of the New York Real Property Actions and Proceedings Law. The statutes require that a lender present within 30 days of payoff a certificate of discharge or satisfaction of mortgage to the recording officer of the county. In March, U.S. District Judge Vincent L. Briccetti preliminarily approved a class action settlement of the consolidated litigation and preliminarily certified a class for settlement purposes.

But in June, the Supreme Court of the United States issued its decision in Spokeo v. Robins, addressing the injury-in-fact requirement for Article III standing and how it is affected by claims for purely statutory damages.

Recognizing its "ongoing obligation to scrutinize its own subject matter jurisdiction," the court then reevaluated plaintiffs' standing in light of Spokeo.

Under the statutes, "a mortgagee shall be liable to a mortgagor for statutory damages in an amount that increases depending on how much time elapsed between the mortgagor fully paying off the mortgage and the mortgagee filing the mortgage satisfaction notice," the court explained, $500 if between 31 and 60 days, $1,000 if between 61 and 90 days, and $1,500 if 91 days or more.

The requirement that mortgagees file timely mortgage satisfaction notices is "no mere procedural peccadillo," the plaintiffs told the court, as the failure to do so can frustrate landowners who need a marketable title to complete a property sale. They alleged they were entitled to statutory damages based solely on the bank's alleged violation of the statutes and that they did not need to allege they suffered any additional harm based on the defendant's failure to timely file the proper documentation. (Notice how this argument evokes the rejected Ninth Circuit position in Spokeo?) Plaintiffs likewise argued that the failure timely to file mortgage satisfaction notices with the county constituted sufficient concrete injury because the statutes establish a mortgagor's legal right to the mortgagee's timely filing of such a notice. As one would expect after Spokeo, the bank countered that a mere violation of the statutes was a "bare procedural violation, divorced from any concrete harm."

Judge Briccetti then looked to the language of Spokeo. "To establish injury in fact, a plaintiff must show that he or she suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent, not conjectural or hypothetical," Justice Samuel Alito wrote, clarifying that "concreteness" and "particularization" are two separate inquiries.

"One factor in determining whether an intangible injury is nevertheless concrete is whether Congress, via statute, has 'define[d the] injur[y] and articulate[d] chains of causation that [] give rise to a case or controversy where none existed before,' " the court said. "That is, a statute may grant an individual a statutory right he or she would not otherwise have, the violation of which constitutes an injury in fact. In such a case, a plaintiff 'need not allege any additional harm' beyond the violation of the right."

The court held that the New York statutes create a procedural right; that is, the right to a timely filed mortgage satisfaction notice, the violation of which is a concrete injury. While Judge Briccetti acknowledged it remains an open question in the Second Circuit whether a state statute can define a concrete injury for the purposes of Article III standing, he said both the Seventh and Ninth Circuits have held that state statutes can do so.

Finding the reasoning of those circuits persuasive, he held that "a state statute, like a federal statute, may create a legal right, the invasion of which may constitute a concrete injury for Article III purposes. Moreover, the Court holds the state statutes at issue here create a legal right, the invasion of which constitutes a concrete injury."

Doubling down on an argument that the Supreme Court seemingly rejected, the court continued: When the defendant failed timely to file a mortgage satisfaction notice, "it created a 'real risk of harm' by clouding the titles to their respective properties," the court explained. In other words, a plaintiff need not have suffered any harm at all, but merely be at risk of harm to invoke sufficient Article III standing.

"The types of harm the statutes protect against are real. Because to the public, these mortgages appeared not to have been satisfied, plaintiffs could have realized that harm if they had, for example, tried to sell or encumber the subject property, or tried to finance another property and been subjected to a credit check. Through no fault of their own, plaintiffs would have faced unnecessary obstacles to their goals. Whether such harm actually was realized is of no moment, because a plaintiff 'need not allege any additional harm' beyond the violation of the statutory right."

The injury recognized by the New York statutes was no less concrete than the examples of intangible concrete injuries given by the Supreme Court in Spokeo, the court argued. This, it ruled, includes the common-law tort of slander per se and a group of voters' inability to obtain information that Congress has decided to make public. " 'Timely, clear title' is a right just as recognizable as one's good name or one's ability to be an informed voter," Judge Briccetti said.

Turning to the question of particularity, the court was "untroubled" by this component as applied to these facts. "Each plaintiff claims his or her individual right to a timely filed mortgage satisfaction notice was violated, because defendant failed to timely file such a document for each property after each individual had fully paid off his or her mortgage," the court wrote. "Therefore, the injury is particular to each plaintiff."

To read the opinion and order in Jaffe v. Bank of America, click here.

Why it matters

While many in the defense bar hoped that Spokeo would operate to reduce class actions based on the standing requirement, the New York federal court opinion indicates that plaintiffs may still be able to demonstrate injury in fact even for the most intangible of injuries, including mere risk of injury. A statute may grant an individual a right he or she would not otherwise have, a violation of which constitutes an injury in fact, Judge Briccetti wrote, without the plaintiff having to allege any additional harm beyond the violation of that right, a proposition seemingly rejected in Spokeo. For one bank defendant, the decision equates to a $6.2 million settlement, paying between $180 and $780 each for an estimated 17,000 class members.

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