Last Week, This Morning

August 12, 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 August 2, 2024, Illinois Governor J.B. Pritzker signed Senate Bill 86 into law. The new law, effective immediately, provides important protections for cosigners of private education loans and makes other changes to the Know Before You Owe Private Education Loan Act and the Student Loan Servicing Act.

Under the new law, lenders must now give cosigners a separate disclosure before extending a private education loan to a borrower that includes how the loan obligation will appear on the cosigner's credit report, how the cosigner will be notified if the loan becomes delinquent and will be able to cure the delinquency, and eligibility for release of the cosigner's obligation on the loan.

Cosigners are now entitled to receive loan statements currently provided by private education lenders to borrowers. Cosigners are also entitled to access all documents or records related to the cosigned loan that are available to the borrower. Cosigners are additionally entitled to receive a certification from the educational institution that the borrower exhausted the federal financial assistance available under the federal Higher Education Act of 1965 and disclosure of any additional federal student assistance for which the borrower may be eligible.

The new law also adds protections upon the death or disability of cosigners and/or borrowers of private student loans. If a cosigner dies, the servicer may not attempt to collect against the cosigner's estate other than for payment default. If the servicer is notified of the total and permanent disability of the borrower or cosigner, the servicer must release the cosigner from his or her obligation under the loan and may not require the borrower to obtain another cosigner.

In addition to these protections aimed at cosigners, S.B. 86 enacts changes that apply more broadly to private student loans. Before offering a person a private education loan that is being used to refinance an existing education loan, a lender must disclose that the benefits and protections applicable to the existing loan may be lost due to the refinancing.

A servicer may not include in a private education loan a provision that permits the servicer to accelerate payments, in whole or in part, except upon a payment default. A servicer may not place any loan or account into default or accelerate a loan for any reason other than payment default.

Finally, the new law requires a private student loan servicer to provide on its website a description of any modified or flexible repayment options offered by the private education lender, establish policies and procedures and implement modified or flexible repayment options consistently in order to facilitate the evaluation of such option requests, and consistently present and offer private education loan modification or flexible repayment options to all borrowers with similar financial circumstances if the servicer offers such modification or repayment options.

Amicus brief(ly): Illinois' update to its student loan servicing law is comprehensive and includes consumer protections that are pretty unique. Illinois is one of only a few states that already had a general servicing notice requirement designed specifically to advise cosigners when the primary obligor on an account has defaulted. Creditors cannot furnish negative information to a consumer reporting agency or otherwise commence a collection action against a cosigner until after providing that notice. With these updates, cosigners will have regular information on the primary obligor's payment performance with the monthly statement requirement - as well as pre-consummation disclosures and access to loan documents. The balance of the new changes gives student debtors greater rights, including a limitation on events of default that makes failure to pay the only enforceable event of default. The requirement to post flexible payment options on servicers' websites is consistent with federal consent orders and guidance for best practices for student loan servicers, ensuring that consumers are aware of the repayment options available.

On August 2, 2024, New Hampshire Governor Christopher Sununu signed House Bill 1243, which repeals and replaces the Retail Installment Sales of Motor Vehicles Chapter (Chapter 361-A or "RISMV"). The sections of the bill related to RISMV are retroactively effective as of July 1, 2024. On August 6, 2024, the New Hampshire Banking Department issued an announcement regarding H.B. 1243, which provides that "[b]usinesses facing compliance challenges due to the July 1, 2024 effective date should contact the Banking Department for further guidance" and states that the department intends to issue guidance about the bill in the near future.

The new version of RISMV makes substantive changes to the existing law that impact all aspects of motor vehicle finance, including, but not limited to, application of RISMV to motor vehicle leases and direct loans, licensing of servicers, disclosure requirements for loans and retail installment sales, and servicing and loss mitigation requirements.

Under the prior version of RISMV, some provisions applied to motor vehicle leases and to "direct loans to retail buyers for the purchase of motor vehicles from retail sellers." H.B. 1243 revises the definition of "retail installment contract" and "retail installment transaction" and creates new definitions for "lender," "direct loan," and "indirect loan." The impact of these changes is that RISMV no longer applies to motor vehicle leases, but it now applies comprehensively to all motor vehicle-secured loans made by any lender, including motor vehicle refinance loans.

The new version of RISMV changes the definition of "sales finance company" to expand the chapter's licensing requirement to a person who merely services a loan or retail installment contract on behalf of the holder of the loan or RIC. Motor vehicle lessors are no longer subject to the licensing requirement under RISMV, and banks and credit unions remain exempt from licensing.

H.B. 1243 makes changes to the disclosure requirements imposed on lenders and retail sellers under the prior statutory regime. In addition, RISMV now includes new disclosures, which will require lenders and retail sellers to revise consumer-facing forms to incorporate the new disclosure requirements.

The new version of RISMV includes three new sections addressing servicing and loss mitigation:

1. Section 361-A:21, which imposes a new notice and right to cure requirement on licensees;
2. Section 361-A:22, which concerns the notice of disposition that must be sent prior to the sale of a vehicle by a licensee; and
3. Section 361-A:23, which addresses the written explanation of the calculation of any surplus owed after disposition of the vehicle that must be provided by a licensee to the vehicle's former owner.

Finally, H.B. 1243 makes other significant changes to the defined terms under RISMV, compliance requirements imposed on retail sellers, lenders, and sales finance companies, and the regulatory authority of the Banking Department.

Amicus brief(ly): Big changes are afoot in New Hampshire. This new law is a major rewrite of New Hampshire's vehicle finance law that borrows elements of other New England states' laws. Besides expanding the scope of the statute to include loans and contracting the scope of the statute to exclude leases, the new law requires servicers of vehicle finance accounts to create New Hampshire-specific cure and sale notices for repossession, as well as a notice of assignment that the seller and buyer of credit agreements will have to send. And the new law requires a creditor to send an Explanation of Deficiency or Surplus in all cases, superseding the Uniform Commercial Code's more permissive requirement to send the notice in connection with an attempt to collect a deficiency or within 14 days after a consumer request. A multistate notice should work for the Explanation in New Hampshire, but creditors will have to create New Hampshire cure notices and pre-sale notices. Compliance professionals will be busy with the changes required by this law.

In July 2023, the Consumer Financial Protection Bureau filed a complaint in the U.S. District Court for the District of Utah against Snap Finance LLC and its affiliates for alleged violations of the Consumer Financial Protection Act, Electronic Fund Transfer Act, Truth in Lending Act, and Fair Credit Reporting Act, as well as applicable implementing regulations, relating to personal property lease-purchase (i.e., "rent-to-own" or "RTO") transactions. Among other claims, the CFPB asserted that the RTO transactions constituted "credit" under the CFPA and that Snap Finance violated several consumer credit protection laws, including TILA and the EFTA. For example, the CFPB's complaint asserted that Snap Finance's requirement that RTO customers preauthorize ACH debits to make payments violated the EFTA and Regulation E's compulsory use prohibition. On August 1, 2024, the court issued a memorandum decision and order on Snap Finance's motion to dismiss in which it rejected the CFPB's argument that the RTO transactions were "credit" and dismissed the related claims for violations of federal consumer credit protection laws.

The EFTA and Reg. E prohibit a person from conditioning an extension of credit to a consumer on the consumer's repayment by preauthorized EFT (i.e., recurring EFT payments). The EFTA defines "credit" to mean "the right granted ... to a consumer to defer payment of debt, incur debt and defer its payment, or purchase property or services and defer payment therefor." The CFPA, TILA, and other consumer credit laws use similar definitions. The question before the court was whether Snap Finance's RTO transactions constituted "credit."

The court first looked at judicial interpretations of the term "credit." In the first case that analyzed the issue, the Ninth Circuit held a lease to be "credit" under the ECOA, where the definition of "credit" is virtually identical to the EFTA definition. Other courts (including the Second, Third, and Seventh Circuits) subsequently rejected the Ninth Circuit's reasoning and reached the opposite conclusion, mainly relying on the distinction that lease arrangements are "payments for contemporaneous use" rather than deferred debts. In reaching its decision, the judge in the Snap Finance case followed these later cases and determined that Snap Finance's RTO transactions were not "credit."

The court refuted the CFPB's argument that Snap Finance's practice of declining to repossess the property subject to the RTO transactions effectively granted consumers the right to defer payment and rendered the transactions non-contemporaneous. The court compared the RTO transactions to purchase finance arrangements and noted that Congress clearly intended that those arrangements not be treated as credit transactions.

Ultimately, the court dismissed eight of the CFPB's claims, including the TILA and EFTA claims.

Amicus brief(ly): We doubt this one is over. In light of the recent U.S. Supreme Court's Loper Bright decision, the time of judicial deference to agency interpretations is behind us. And Snap Finance clearly had a case here, as evidenced by the dismissal. A lease or RTO transaction is very specifically and purposefully not a loan or a credit sale and is subject to disclosure and other requirements as a function of the peculiar nature of the transaction. The federal consumer protection law definitions appear to consistently define "credit" in a way that excludes RTO transactions and leases, where continued permission to use the property that is the subject of the transaction is contingent on payment. That is similar to loan or credit sale "credit," but it is not the same. The CFPB has something riding on this case - if it cannot read leases and RTOs into the "credit" definitions, it will need Congress to act in order to get it done (good luck). We will watch this with interest and with the expectation that the CFPB will appeal the dismissal.

On August 7, 2024, the U.S. Department of the Treasury, the Consumer Financial Protection Bureau, and the Federal Trade Commission announced actions to address unfair and deceptive consumer acts and practices in the residential solar power sector. According to the agencies' joint press release, over the past decade, regulators have seen an increase in consumer complaints about companies that pressure consumers into predatory contracts or purchases and/or fail to install or activate residential solar systems as promised.

The FTC created a Consumer Solar Awareness Website, issued a Consumer Advisory - Solar Energy Scams are Against the Law - and released four guides - Before You Purchase and Finance Solar Panels, Before You Sign a Solar Lease Agreement, Before You Sign a Power Purchase Agreement, and Before You Sign a Community Solar Subscription Contract. The FTC issued a Consumer Alert - How to avoid getting burned by solar or clean energy scams. The CFPB released a Consumer Advisory - Steer clear of costly and complex loans for solar energy installation - and an Issue Spotlight on solar financing. These resources describe different types of solar power options, warn about common unfair or deceptive practices, provide key questions for consumers to ask before making purchases or signing agreements, and provide instructions on how consumers can file complaints.

Amicus brief(ly): As the use of residential solar power continues to expand, solar power companies and related businesses will be subject to increased scrutiny. Evidently, the federal agencies were hearing about some activity they did not care for, and they reacted. Consumer complaints seem to always lead to agency action like we see here, where the agencies warn consumers to be careful about buying and financing expensive things. Investigations and consent orders are almost certain to follow. Time and again, the federal agencies have made clear that deceptive advertising and aggressive sales tactics that lead consumers to obtain loans that are difficult to repay are not OK. There are tomes of examples of deceptive trade practices in the sale and financing of consumer goods that you can find in federal and state law and published enforcement actions focused on consumer sales and credit in contexts other than solar energy. Those materials can assist providers in creating good, compliant sales pitches and written advertisements that avoid the troublesome techniques described in the agencies' advisories and guides.

On August 8, 2024, the Consumer Financial Protection Bureau filed a proposed order to resolve its lawsuit against Credit Repair Cloud and the company's owner and chief executive officer for providing substantial assistance or support to credit repair businesses that charge illegal advance fees to consumers, in violation of the Telemarketing Sales Rule and the Consumer Financial Protection Act. If entered by the U.S. District Court for the Central District of California, the proposed order would impose a $2 million civil penalty against the owner/CEO and a $1 million civil penalty against the company.

According to the CFPB, the defendants provided users with a system that, among other things, generated and tracked disputes and integrated a billing system and also provided training, marketing tools, and model websites. Under the proposed order, in addition to the payment of civil money penalties, the defendants would be prohibited from providing substantial assistance to any companies that use telemarketing to sell credit repair services and charge advance fees, required to delete from their tools and services any language related to telemarketing and charging monthly fees for credit repair services, and required to send a notice to all users providing specific examples of telemarketing and advance fees that are unlawful and then monitor whether users are telemarketing and charging advance fees.

Amicus brief(ly): Speaking of agency action in response to consumer complaints, this CFPB action should not surprise creditors and servicers that have worked with consumers and credit repair organizations and found the CROs to overpromise and underdeliver for consumers. Some consumers overwhelmed by their debts seek out the help of CROs. They sign agreements and pay fees and expect the company to start advocating on their behalf ... then nothing happens. That is one of the reasons why advance fees are largely prohibited in connection with credit repair services. Creditors and servicers prefer to work directly with their customers who are struggling to figure out sensible repayment options. It is good to see the CFPB pursue claims against a company that is supposed to be helping consumers but is not. We wonder how many consumers are worse off with those creditors and servicers they stopped working with because they relied on a CRO.

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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.