Last Week, This Morning

July 15, 2024

Below you will find several key developments in the financial services industry, including related developments in information privacy and data security, from the past week. We add an "Amicus Brief(ly)¹" comment to each item, where we briefly (see what we did there?) note for friends (and again?) of CounselorLibrary the important takeaways from the developments outlined in the email. Our legal reporters - CARLAW, HouseLaw, InstallmentLaw, PrivacyLaw, and BizFinLaw - provide more comprehensive, real-time updates of federal and state laws, regulations, litigation, and other industry items of interest. For a personal guided tour and free trial of any of these legal reporters, please contact Michael Willer at 614-855-0505 or mwiller@counselorlibrary.com.

On July 2, the Federal Trade Commission reached a proposed settlement with an online used car dealer to resolve allegations that the company violated the FTC Act, the Used Car Rule, the Pre-Sale Availability Rule, and the Mail, Internet, and Telephone Order Rule ("MITOR"). The FTC alleged that the company failed to deliver purchased cars within the advertised timeframe, failed to conduct the thorough inspection process as advertised, and failed to provide the requisite Buyers Guide until late in the purchase process.

The FTC filed a joint motion for entry of the FTC and the company's stipulated order for permanent injunction, monetary judgment, and other relief to resolve allegations of misleading consumers who purchased used vehicles through the company's website. Specifically, the FTC alleged that the company misrepresented that it thoroughly examined the vehicles before listing them for sale, in violation of Section 5(a) of the FTC Act. The FTC also alleged that the company's website and advertising told consumers that cars would be delivered in 14 days or less, but the company often did not meet this delivery timeline and regularly failed to give consumers the opportunity to consent to a longer delivery timeline or to cancel their purchase and receive a refund, as required by the MITOR. The FTC's Used Car Rule requires that the dealer prominently display on each used car a Buyers Guide, which discloses warranty information. The FTC alleged that the company failed to provide the Buyers Guide until late in the purchase process and that the Buyers Guides were often missing required information. The FTC further alleged that the company violated the Pre-Sale Availability Rule by failing to post the terms of its warranty on the company's website in close proximity to the warranted used vehicle offered for sale.

The company neither admitted nor denied the allegations but agreed to pay $1 million to the FTC for consumer refunds, to document all claims about promises it makes regarding shipping times, to refrain from making misleading claims about inspections and shipping times, and to comply with the MITOR, the Used Car Rule, and the Pre-Sale Availability Rule. The proposed order is with the U.S. District Court for the Southern District of Texas for consideration and entry.

Amicus brief(ly): Dealers, pay attention. The FTC has broad enforcement authority under Section 5 of the FTC Act, and this is just the most recent in a long line of cases the FTC has brought against dealers who the FTC says were misleading consumers. If the allegations in the complaint are true (the dealer did not admit them in the proposed order), the dealer promised to inspect the cars it sold but, in at least some cases, did not. It promised delivery in 14 days and, in some cases, allegedly took three months. These are avoidable, unforced errors that can be expensive to resolve. And remember that states also have UDAP laws that prohibit deception in business practices. If you cannot fulfill promises made in advertising, it's time to change the advertising.

On July 2, the Consumer Financial Protection Bureau published its Summer 2024 edition of Supervisory Highlights, which, among other topics, focuses on the collection of consumer debt and the servicing of student loans and vehicle financing contracts. The current edition shares key findings from recent examinations completed by the CFPB from April 1, 2023, through December 31, 2023.

Recent CFPB examinations of debt collectors identified violations of the Fair Debt Collection Practices Act and its implementing Regulation F. Some of the CFPB's findings concerning debt collection included:

• failing to provide debt validation notices to consumers;
• using false, deceptive, or misleading representations in connection with the collection of a debt by: (1) using a business, company, or organization name other than the true name of the debt collector's business, company, or organization, and (2) failing to disclose in initial communications with consumers that the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose;
• communicating with consumers at inconvenient or unusual times or places, such as communicating with a consumer before 8 a.m. in the consumer's time zone and continuing a conversation with a consumer after the consumer informed the debt collector that it was an inconvenient time to talk to discuss the debt in question;
• harassing, oppressive, or abusive conduct in connection with the collection of a debt, such as using verbally abusive language in a phone call with a consumer and placing over 100 phone calls to a consumer after being asked to stop collection communications;
• failing to cease communicating with a consumer through a specific medium after the consumer requested that the debt collector not use that medium to communicate; and
• failing to disclose, in each communication after the initial communication with a consumer, that the communication is from a debt collector.

In addition, recent CFPB examinations of credit card issuers found that they engaged in an unfair act or practice when they sold thousands of credit card debts to debt buyers that included incorrect documentation regarding the statute of limitations for filing a collection lawsuit.

Recent CFPB examinations of auto loan servicers identified unfair acts or practices in violation of the Consumer Financial Protection Act related to collecting a consumer's final payment under a vehicle financing contract. Specifically, examiners found that, for consumers enrolled in a preauthorized electronic fund transfer payment system to pay their regular monthly payments, the servicers did not debit consumers' final payments when they were a different amount from their regular monthly payments. Servicers failed to adequately communicate to consumers that they must remit the final payment manually, despite being enrolled in autopay.

Finally, with respect to student loan servicing, CFPB examiners found that servicers had excessive phone hold times, understaffed call centers and problems with their interactive voice response systems and also disabled consumers' access to their online account management portals. In addition, servicers provided inaccurate information about the forms borrowers were required to submit to qualify for loan programs with certain benefits such as forbearance and failed to provide written notice to consumers if a preauthorized electronic fund transfer exceeded a previous transfer under the same authorization, as required by the Electronic Fund Transfer Act and its implementing Regulation E.

Amicus brief(ly): If there is a lesson in these findings from the CFPB's exams, it's that debt collectors and servicers ought to be auditing and testing systems, controls, and procedures to ensure that the kinds of exam findings described are not happening under their roofs. There are no novel legal interpretations in these findings. The bullet list of findings outlined above should all be covered in regulatory compliance policies and procedures. While the findings are useful reminders of what should be in that documentation, the documentation is not that useful if operations do not reflect the company's regulatory compliance aspirations. It is nice to have Supervisory Highlights from the CFPB that do not reveal a new line of thinking from the Bureau on debt collection and servicing issues.

On July 10, the Consumer Financial Protection Bureau requested comment on a proposed rule that would amend regulations originally issued in 2013 governing mortgage servicing. Generally, the proposed rules are intended to provide more flexibility for servicers, encourage servicers to use loss mitigation options as opposed to foreclosure, streamline paperwork requirements for loss mitigation, and improve servicers' communication with borrowers. None of the proposed new requirements would apply to small servicers.

According to the proposed rule's summary of key changes, "[t]he CFPB is proposing to streamline and simplify Regulation X's loss mitigation procedures by removing most of the existing requirements regarding incomplete and complete loss mitigation applications and replacing them with a new framework based on foreclosure procedural safeguards. Currently, a servicer generally must collect a complete loss mitigation application for all available options before making a determination about what loss mitigation options, if any, it will offer a borrower, and a borrower's foreclosure protections against initiation and sale are largely based on whether and when the borrower has submitted a complete loss mitigation application. Under the proposed framework, a servicer would not be required to collect a complete application prior to making a loss mitigation determination and would have flexibility to review a borrower for loss mitigation options sequentially rather than simultaneously, although a simultaneous review would be permitted. Under the proposed framework, once a borrower makes a request for loss mitigation assistance, the loss mitigation review cycle begins. It continues until either the borrower's loan is brought current or one of the following foreclosure procedural safeguards is met: (1) the servicer reviews the borrower for all available loss mitigation options and no available options remain, or (2) the borrower remains unresponsive for a specified period of time despite the servicer regularly taking steps to reach the borrower. During a loss mitigation review cycle, the servicer may not begin or advance the foreclosure process and borrowers would also be protected against the accrual of certain fees. The CFPB is also proposing to remove currently required loss mitigation notices that would no longer be necessary under the new proposed framework, such as those notifying a borrower about whether a loss mitigation application is complete or incomplete."

Next, the proposed rule would "require servicers to provide certain additional information in written early intervention notices, including, among other things, the name of the owner or assignee of the borrower's mortgage loan, a brief description of each type of loss mitigation option that is generally available from that owner or assignee, as well as a website to access a list of all loss mitigation options that may be available from that owner or assignee. The CFPB is also proposing a partial exemption for servicers from early intervention requirements while a borrower is performing under a forbearance, new live contact and written notice requirements when a borrower's forbearance is nearing its scheduled end, and timing for resuming compliance with early intervention when a borrower's forbearance ends."

The CFPB is proposing to require that servicers provide loss mitigation determination notices and appeal rights to borrowers regarding all types of loss mitigation options, instead of just loan modifications, and for offers as well as denials. The CFPB also is proposing to require servicers to include certain additional information in determination notices, including the key borrower-provided inputs, if any, that served as the basis for the determination; a list of other loss mitigation options that are still available to the borrower, if any, including a clear statement describing the next steps the borrower must take to be reviewed for those options or, if applicable, a statement that the servicer has reviewed the borrower for all available loss mitigation options and none remain; and, if applicable, a list of any loss mitigation options that the servicer previously offered to the borrower that remain available but that the borrower did not accept."

The CFPB is not proposing any new rule changes regarding credit reporting at this time but is "requesting comment about possible approaches it could take to ensure mortgage servicers are furnishing accurate and consistent credit reporting information for borrowers undergoing loss mitigation review."

Finally, "the proposed rule would require mortgage servicers to provide Spanish-language translations of certain written communications to all borrowers. The proposed rule also would require servicers to make certain written and oral communications available in multiple languages and to provide those translated or interpreted communications upon borrower request. The proposed rule would require servicers to include brief translated statements in certain written communications notifying borrowers of the availability of the translations and interpretations, and how they can be requested. It also would require that borrowers who received marketing for a loan in a language other than English receive specific early intervention and loss mitigation communications in that same language upon the borrower's request."

Comments on the proposed rule are due by September 9, 2024.

Amicus brief(ly): The CFPB's proposal is a fairly significant shift in the loss mitigation rules established after the foreclosure crisis in the late 2000s. The CFPB appears to be proposing to codify some of the standards loosened during the more recent pandemic and making more accommodations for borrowers, which should be effective (if finalized as proposed) in easing the path to a formal mortgage loan modification. That will be important in the coming months or years, as banks have recently been reporting a surge in consumer debt charge-offs. The CFPB previewed this proposal to a degree in its Spring 2024 Mortgage Servicing Supervisory Highlights, so the proposal is not out of the blue. And servicers should note the language access provisions in the proposals that will require them to offer at least some services and documents in both Spanish and English, consistent with what some states have done over the past few years and with the Bureau's own stated priorities with respect to consumers for whom English is not their first language.

Pennsylvania recently enacted House Bill 109, the Prohibition of Early Contract Termination Fees Upon Death Act. The Act provides that a vehicle lessee is not liable for charges for the early termination of a lease agreement if the lessee dies before the end of the lease term and the executor or administrator of the decedent's estate gives written notice to the lessor of termination of the lease agreement. The executor or administrator must also submit a copy of the decedent's death certificate to the vehicle lessor within 180 days of providing the written notice of termination. The vehicle lessor must waive early termination charges as of the date the lessor receives the written termination notice.

A violation of the Act is considered a violation of the state's Unfair Trade Practices and Consumer Protection Law. Note that the Act also imposes similar requirements on persons that provide contract services for cable television, cellular or other telecommunications, direct broadcast satellite, electric generation to retail electric customers, heating oil, natural gas supply, and Voice over Internet Protocol.

The Act takes effect on August 27, 2024.

Amicus brief(ly): Speaking of state UDAP laws, it is common for states to enact specific consumer protection laws in reaction to observed trade practices the states want to curb and to make non-compliance with those new, specific laws violations of the broader UDAP prohibitions under state laws. This Pennsylvania statute does exactly that. The new statute is very narrow and brief and will relieve consumer estates of the burden of early lease termination fees in the various contexts described above, including vehicle leases, when the early termination is a result of the lessee's death, as long as the executor or administrator of the lessee's estate sends notice to the lessor. Keeping in mind the CFPB's recent pronouncement about the relative value of a "savings clause" in a consumer contract (i.e., it can be a UDAP for a creditor to contract for a right or remedy not available under state law when the creditor includes a condition in the contract indicating that the right or remedy only applies if allowed under state law, thereby requiring the consumer to figure out what rights apply), vehicle lessors should review the early termination provisions in their Pennsylvania leases to account for this change in the law.

Florida recently enacted House Bill 1347, which imposes a number of significant changes on lenders making consumer finance loans under Florida's Consumer Finance Act, Fla. Stat. Ann. §§ 516.001 et seq.

Perhaps most significantly, the new law increases the maximum interest rate for consumer finance loans. Under the revised provisions, the maximum interest rate is 36% per annum on the first $10,000 of the principal amount; 30% per annum on the part of the principal exceeding $10,000 and up to $20,000; and 24% per annum on the part of the principal exceeding $20,000 and up to $25,000.

The law also extends the grace period for imposing delinquency charges for payments in default to 12 days, instead of the previously permitted 10 days. Licensees must also offer borrowers at the time the loan is made a credit education program or seminar provided by the licensee or a third-party provider. The program must be offered at no cost to the borrower, and licensees are prohibited from requiring borrowers to participate in a credit education program or seminar as a condition of receiving a loan.

In addition, the law prohibits a person from operating a branch of a business making consumer finance loans before obtaining a license from the Office of Financial Regulation, imposes a $625 fee for branch license applications, and requires licensees to file annual reports by March 15, 2025, and each March 15 thereafter.

Licensees are also required to suspend certain penalties and remedial measures for 90 days after an initial federal disaster declaration, including imposing delinquency charges, repossessing collateral, and filing civil collection actions. The law also requires licensees that offer assistance programs in the event of a federal disaster to send specified information to the OFR within 10 days after establishing the program.

The law was effective July 1, 2024.

Amicus brief(ly): For consumer lenders licensed in Florida, this is a material expansion in the interest rate authority under the Consumer Finance Act. Florida's general usury limit of 18% is relatively low compared to what other states allow, and licensees were limited to that 18% for balances between $3,000 and $25,000 before this change. That lower interest rate authority limited the value of this license for non-bank lenders making consumer loans that were not restricted to the lower-balance loans of $3,000 or less. With the increased interest rate authority, more non-bank lenders will likely take a new look at the license as a means of expanding their loan offerings in Florida to include borrowers in need of credit but who present higher credit risk. The provisions related to penalties following natural disasters is something new - where typically regulators will encourage servicers to relax servicing standards in recognition of the impact of natural disasters (and most servicers already have accommodation procedures available even when the regulators do not require it), those borrower accommodations are now codified in this Florida statute. We'll watch to see if this remains a unique statutory provision or if other states like the idea and follow Florida's lead.

On July 10, the California Department of Financial Protection and Innovation issued an order revoking the California Financing Law license of Synapse Credit LLC, a subsidiary of Synapse Financial Technologies, Inc. Synapse Financial filed for Chapter 11 bankruptcy protection in April 2024.

Synapse Credit is a finance lending company that offers loans to individuals and businesses. After the bankruptcy filing of Synapse Financial, the DFPI commenced a regulatory examination of Synapse Credit, seeking the company's books and records, reports, and other data to assess whether it was operating in conformity with the California Financing Law. The DFPI claimed in its reporting that Synapse Credit's failure to provide the requested information in response to multiple requests prevented the DFPI from conducting its regulatory examination and ensuring that the company was complying with the California Financing Law. As a result of the revocation order, Synapse Credit is no longer permitted to engage in the business of finance lending in California.

Amicus brief(ly): California's DFPI is an active regulator and had a strong reaction after Synapse Financial's Chapter 11 bankruptcy when, according to the DFPI, Synapse Credit did not provide the documents the DFPI requested for its regulatory exam. The reported inability of consumers with funds on deposit with Synapse Credit to access those funds also clearly got the DFPI's attention. Synapse Credit was an early and innovative fintech provider, but it is no longer able to do business in the big California market, at least for now.

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¹ For the unfamiliar, an “Amicus Brief” is a legal brief submitted by an amicus curiae (friend of the court) in a case where the person or organization (the “friend”) submitting the brief is not a party to the case, but is allowed by the court to file the brief to share information or expertise that bears on the issues in the case.