April 22, 2024
Happy Earth Day! (It beats Tax Day.) 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 April 16, the Consumer Financial Protection Bureau issued a rule to update its procedures for designating nonbank covered persons for supervision. Section 1024(a)(1)(C) of the Consumer Financial Protection Act authorizes the CFPB to supervise a nonbank covered person that it “has reasonable cause to determine ... is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.” In 2013, the CFPB issued a procedural rule to govern supervisory designation proceedings. After years of largely not using this authority, the CFPB issued an amended procedural rule in 2022 and established a process to publicize the director’s final decisions and orders. In February 2024, the CFPB published its first decision and order where the nonbank subject contested the CFPB’s supervision, and now the CFPB seeks to update its procedures through a new procedural rule.
The new procedural rule clarifies that an agreement consenting to the CFPB’s supervision does not constitute an admission by the respondent and is not subject to the public release process. Orders issued because a respondent failed to file a response or has defaulted in the process are subject to public release, however. If a respondent consented to supervision under the 2022 procedural rule, the term was limited to a two-year period of supervision. Under the new procedural rule, the notice of reasonable cause will continue to include a proposed consent agreement, but instead of a two-year supervision period, the duration of the supervision will be on a case-by-case basis. The CFPB noted that it still expects most of the consent agreements to create a two-year period of supervision.
According to supplementary information to the rule, in February 2024, the CFPB began a transition to a new organizational structure for its supervision and enforcement work. Specifically, the functions of the Associate Director of the Division of Supervision, Enforcement, and Fair Lending (“SEFL”) are being transferred to the Supervision Director as head of a Division of Supervision and the Enforcement Director as head of a Division of Enforcement. Although not yet on the CFPB’s website, it appears that the SEFL Division is being discontinued and that Enforcement and Supervision will now be their own divisions and report directly to the CFPB Director. In light of this restructuring, the procedural rule transfers certain functions to the Supervision Director. The CFPB is hopeful that this new structure will streamline the internal decision-making process.
The procedural rule allows the initiating official to withdraw a notice of reasonable cause and request supplemental briefing. It also imposes word limits for the notice, response, and certain key filings.
The procedural rule is effective upon its Federal Register publication and applies to all proceedings issued on or after that date. It also applies to proceedings that are pending, unless the director determines that it is not just or practicable. Although the procedural rule is exempt from the notice-and-comment requirements, the CFPB is accepting comments on the rule.
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Kansas Governor Laura Kelly recently signed Senate Bill 345, which establishes commercial financing disclosure requirements. The new law will take effect on July 1, 2024, and will apply to commercial financing transactions of $500,000 or less. The law defines "commercial financing transactions" to include sales-based financing, factoring, and commercial loan transactions.
The new law will require a provider of commercial financing to give the following disclosures with each commercial financing:
Notably, the required disclosures do not include an annual percentage rate.
The new law will also prohibit a broker from charging an advance fee or making any false or misleading statements in its brokering activities.
The new law does not apply to banks, credit unions, real property-secured or purchase-money (any collateral) transactions, or leases. The law also does not apply to a company that makes five or fewer commercial financing transactions in Kansas during a 12-month period.
A company that violates the new law is subject to a civil penalty of up to $500 per violation and $20,000 for all aggregated violations. The maximum penalties increase to $1,000 per violation and $50,000 for all aggregated violations if the violations occur after the Kansas attorney general has notified the company of a previous violation. The AG has exclusive authority to enforce the law. The new law creates no private right of action against any person for failure to comply.
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On April 16, the Massachusetts Office of the Attorney General issued an advisory to provide guidance to developers, suppliers, and users of artificial intelligence and algorithmic decision-making systems (collectively, “AI”) about their respective obligations under the Massachusetts Consumer Protection Act, G.L. c. 93A, § 2, and the regulations promulgated in 940 Code Mass. Regs. 3.00 et seq. and 940 Code Mass. Regs. 5.00 et seq, the Massachusetts Anti-Discrimination Law, G.L. c. 151B, § 4, and the Data Security Law, G.L. c. 93H, and implementing regulations, 201 Code Mass. Regs. 17.00 et seq.
The advisory states that the following acts or practices, among others, are unfair or deceptive under the MCPA:
The advisory also notes that the state’s anti-discrimination laws prohibit AI developers, suppliers, and users from using technology that discriminates against individuals based on a legally protected characteristic, such as technology that relies on discriminatory inputs and/or produces discriminatory results that would violate the state’s civil rights laws. The advisory also clarifies that AI developers, suppliers, and users must take appropriate steps to safeguard personal data and comply with the state’s data breach notification requirements.
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On April 18, the American Financial Services Association released its first Consumer Credit Conditions (C3) Index, a quarterly survey of senior executives of AFSA finance company members, including providers of mortgages, vehicle financing, personal installment loans, credit cards, and other products. Participants in the survey provide their views on several key business indicators, including how they see consumer lending evolving in the coming months. This first C3 Index survey was conducted between March 27 and April 8, 2024. The survey’s results show conditions facing consumer lenders deteriorated on balance in the first quarter of 2024 compared to the fourth quarter of 2023. However, nearly 34% of lenders expect improved consumer credit conditions in the next six months.
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On April 17, the Consumer Financial Protection Bureau entered into a consent order with a for-profit vocational school that offered coding programs using income-share agreements as tuition financing options. Unlike conventional student loans, ISAs are products under which students defer their tuition payments by agreeing to pay the provider a predetermined share of their future income. Under most of the ISAs, students who earn more than $50,000 post-graduation must pay the school 17 percent of their pre-tax income each month until they make 24 payments or hit a cap of $30,000 in total payments, which was often $10,000 more than the sticker price of tuition.
The CFPB found that the school and its founder engaged in deceptive practices, in violation of the Consumer Financial Protection Act, by misleading students into believing the ISAs were not loans, did not create debt, had no finance charge, and were risk-free. The school advertised on its website “No loans, no debt” and claimed students could “skip student debt” and “Graduate Risk-Free.” In fact, the CFPB found that the ISAs had an average finance charge of $4,000 and carried substantial risk in that a single missed payment triggered a default and the remainder of the $30,000 cap coming due immediately.
The CFPB also found that the school and its founder engaged in abusive practices, in violation of the CFPA, by representing to students that their interests were aligned in that respondents would only make money if students did. The CFPB claimed that the respondents knew that students were rarely placed into high-paying jobs, and the respondents pursued a business strategy of enrolling more students each month and placing less than half of them into qualifying jobs.
Finally, the CFPB found that the school and its founder violated the Truth in Lending Act and Regulation Z by failing to disclose the amount financed, finance charge, and annual percentage rate of the ISAs and violated the Holder Rule by failing to include a provision in its ISAs making any holder of the agreement subject to the legal claims that students could assert.
The school and its founder neither admitted nor denied the allegations. To resolve the matter, they agreed to rescind the ISAs of certain affected consumers, instruct their servicers to cap repayments at the upfront cost of tuition, and return finance charges made by those consumers after the order’s effective date. The respondents also agreed to offer currently enrolled students the option to withdraw from the program and rescind their ISAs. Further, the school will pay a civil penalty of $100,000 and the founder a civil penalty of $64,235. The order permanently bans the school from all consumer lending activities and bans the founder from such activities for 10 years.
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