Last Week, This Morning

April 1, 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.

A bill before the New York State Assembly would, if passed, have major implications for a variety of financing transactions in the Empire State. The End Loan Sharking Act, Assembly Bill 9585, would subject a variety of products to the state's usury limits and licensing requirements. Among other things, the bill would:

• apply the state's usury limits (both civil and criminal) to "financing arrangements." This term would be broadly defined to include not only the lending or advancing of money, but also a number of products that the bill deems to be equivalent to such transactions such as retail installment contracts, merchant cash advances, invoice financing, revenue-based financing, earned wage access and similar wage advance transactions, lease-to-own and rent-to-own transactions, rental-purchase transactions, buy-now pay-later transactions, litigation financing, and education income-sharing agreements. The bill would grant the attorney general rule-writing authority and the ability to issue guidance to interpret the term "financing arrangements." The bill would also strike provisions from the New York statutes governing rental-purchase agreements that currently prohibit the AG from characterizing such transactions as a form of consumer credit or requiring an annual percentage rate disclosure.
• expand the definition of "interest" for usury calculation purposes. As amended, interest would include all amounts charged, taken, or paid, either directly or indirectly and either voluntarily or otherwise, by any person to or for the account of the lender (including any discount applied to amounts advanced in connection with a financing arrangement). It would include fees, charges, tips, renewal charges, credit insurance premiums, debt suspension or similar products, and any other amount paid or payable. For consumer transactions only, interest would also include any ancillary product sold in connection with an extension of consumer credit.
• require calculation of the rate of interest on financing arrangements to be done in conformity with the annual percentage rate calculation in the New York commercial financing regulations. The charges identified as components of interest as discussed above would need to be included in this calculation.
• amend the licensing requirement of the New York Licensed Lender Act to include any party entering into financing arrangements with individuals in the amount of $25,000 or less (for consumer transactions) or $50,000 or less (for business or commercial purposes). The bill would also establish the criminal usury limit (25% per annum) as the maximum rate for such transactions. Because retail installment contracts are included within the definition of "financing arrangements," this licensing requirement would appear to apply to retail sellers of motor vehicles, goods, and services. Currently, such entities are largely exempt from licensure under New York's sales finance company licensing laws.

The bill as drafted would become effective immediately, which would represent a near insurmountable compliance challenge, particularly regarding licensing obligations that did not previously exist. Consumer and commercial financial services providers should monitor this bill closely.

Amicus brief(ly): It is very early in the life cycle of this bill, so it is not yet clear how viable the bill is. But if it passes as written, this bill introduces a sea change in New York not just for commercial finance transactions but for a variety of consumer products not presently regulated as credit products (e.g., BNPL, earned wage access) as well. We anticipate significant lobbying against the bill but recommend that any company doing business in New York track it to see where it lands. If it passes as written, this bill imposes significant regulatory burdens.

On March 22, U.S. Senators Richard Blumenthal (D-CT), Edward J. Markey (D-MA), and Elizabeth Warren (D-MA) introduced legislation that requires car dealers to repair any open safety recalls for used cars prior to selling, leasing, or loaning them to consumers. According to the senators’ press release, “[t]o ensure that open recalls are repaired, the Used Car Safety Recall Repair Act incentivizes auto dealers to swiftly repair recalls by allowing them to sell recalled vehicles to other dealers who have the ability to fix the defects instead of sitting in their lots. The legislation also requires manufacturers to provide dealers with parts to repair safety defects within 60 days or reimburse dealers if the manufacturers cannot provide the necessary parts.”

Amicus brief(ly): If it passes, this bill is likely to slow down the sale process for some new and especially used cars, but in a way that most consumers will welcome. Specifically, you can drive a car off a dealer’s lot today with an open recall that you have to come back to have repaired – causing inconvenience shortly after your purchase or lease. Expect significant support for this effort from consumers and their advocates.

Wisconsin's governor recently signed into law Assembly Bill 574, which regulates earned wage access services in the state. The law imposes various substantive requirements on providers of earned wage access services, including a licensing requirement.

Pursuant to the new law, a provider must obtain a license issued by the Wisconsin Division of Banking if it offers earned wage access services to an individual residing in Wisconsin, regardless of whether the provider is physically located in the state. The licensee must also register with and maintain a valid unique identifier issued by the Nationwide Multistate Licensing System and Registry. Lastly, the law requires a licensee to post a surety bond of $25,000. The law provides that the licensing requirements do not apply to banks, savings banks, savings and loan associations, trust companies, credit unions, or any of their affiliates. Note also that providers who are subject to the new licensing requirements are exempt from Wisconsin's consumer loan and payday loan licensing laws.

The law comprehensively regulates the offering of earned wage access services in Wisconsin. Among other things, the law requires the licensed provider to:

• develop and implement policies and procedures to respond to questions raised by consumers and address complaints from consumers in an expedient manner;
• offer to the consumer at least one reasonable option to obtain proceeds at no cost to the consumer and clearly explain how to elect that no-cost option; and
• before entering into an agreement with a consumer, inform the consumer of his or her rights under the agreement and fully and clearly disclose all fees associated with the services.

The law also requires a provider to provide certain disclosures if it solicits, charges, or receives a tip, gratuity, or donation from a consumer for the services it provides.

Pursuant to the new law, a provider is prohibited from, among other things:

• sharing profits with the consumer's employer;
• requiring a consumer's credit report or credit score provided by a consumer reporting agency to determine a consumer's eligibility for earned wage access services;
• accepting certain payments from consumers by means of a credit card or a charge card;
• charging a late fee, deferral fee, interest, or any other penalty or charge for failure to pay outstanding proceeds, fees, voluntary tips, gratuities, or other donations;
• reporting to consumer reporting agencies or debt collectors any information about the consumer regarding the inability of the provider to be repaid; and
• compelling or attempting to compel payment by a consumer through a lawsuit, the use of third-party debt collectors on behalf of the provider, or the sale of outstanding amounts to third-party debt collectors or debt buyers.

A licensee is required to submit an annual report to the division, including information concerning gross revenue attributable to earned wage access services, the total number of transactions in which the provider provided proceeds, the total number of unique consumers to whom the provider provided proceeds, the total dollar amount of proceeds the provider provided, and the total dollar amount of fees, voluntary tips, gratuities, or other donations the provider received from consumers. The law also imposes a requirement that the licensee retain records related to the proceeds for at least two years following the date on which proceeds are provided.

Under the new law, the division has the power to suspend or revoke a provider's license for violation of the provisions. In addition, the division may engage in rulemaking, impose penalties, and seek a temporary restraining order against the adverse party without notice, among other disciplinary actions.

The new law takes effect on the first day of the sixth month beginning after publication (the law was published on March 22, 2024). By such a date, the division will make available the application form. The new law authorizes a person who, as of January 1, 2023, was engaged in the business of providing earned wage access services in the state to continue to do so without a registration until the first day of the seventh month after the law's effective date, if that person has submitted an application for a license and otherwise complies with the law.

Amicus brief(ly): There is a lot to unpack in this new Wisconsin law, but will anyone bother? Earned wage access products differ from consumer loan products in a number of ways, including relative expense and underwriting. And they are less likely to end up in collections, given the requirement that consumers have earned the wages they want to draw early. But the fact that providers cannot furnish data on these accounts, charge servicing fees, or attempt to collect them after default through the traditional use of debt collectors and law firms – not to mention the inability to sell defaulted accounts – means that providers have to think very hard about whether it’s worth offering an earned wage access product in Wisconsin. History tells us that, with limited enforcement mechanisms, this product will necessarily get more expensive in Wisconsin (if providers continue to offer it) to help providers offset some of the risk. We’ll see whether the increased pricing will be tolerable to Wisconsin consumers, but it’s more likely that we’ll see an exodus of providers from this business in Wisconsin before the law goes into effect in six months. If that happens, Wisconsin consumers in need of quick, low-dollar cash will have to seek help in the form of more expensive payday or other small-dollar loans, which is not likely the intended result of this legislation.

On March 26, West Virginia enacted Senate Bill 613 to update the law related to mortgage lender, broker, and servicer regulation. The bill amends the state’s Residential Mortgage Lender, Broker and Servicer Act to, among other things, require any individual in control, as newly defined, of a licensee or applicant, any individual who seeks to acquire control of a licensee, and each key individual, as newly defined, to furnish certain information to the Commissioner of Financial Institutions. The bill also requires, with certain exceptions, a person or group of persons acting in concert to acquire control of a licensee to obtain the written approval of the commissioner and explains the process for obtaining approval. The bill additionally amends the state’s SAFE Mortgage Licensing Act by adding a section to allow employees of a mortgage lender, broker, or servicer licensee to work, subject to certain restrictions, from alternate locations. The new law is effective June 3, 2024.

Amicus brief(ly): This update catches West Virginia up with a number of states that require regulator management and approval of transactions involving ownership of licensees. The state is asking for more information about owners generally, but then imposes a prior approval requirement for certain changes in the ownership of licensed non-bank mortgage lenders, brokers, and servicers. The new statute gives the regulator 90 days to act on a change-of-control application, after which the application is approved if the regulator does not take action. Investors and licensees considering an acquisition should note these new requirements because the pre-close approval required by this new law has a long lead time.

On March 25, Florida’s governor signed into law House Bill 3, which requires social media platforms to prohibit minors under 14 from obtaining a social media account, even if the minor has parental consent, and to cancel any existing social media account held by a minor under 14. Minors who are 14 or 15 are prohibited from obtaining a social media account unless the minor’s parent or guardian provides consent. Any knowing or reckless violation of these provisions is deemed an unfair and deceptive trade practice actionable by the Department of Legal Affairs against the social media platform. The department may obtain civil penalties of up to $50,000 per violation and reasonable attorney’s fees and court costs, and, in cases where a social media platform’s failure to comply is a consistent pattern of knowing or reckless conduct, punitive damages may be assessed. A social media platform that violates these provisions is also liable to the minor account holder, including reasonable attorney’s fees and court costs, and such plaintiffs may be awarded up to $10,000 in damages. The department may adopt rules to implement the new law.

In addition, the new law creates a provision requiring age verification for online access to materials harmful to minors. Specifically, a commercial entity that knowingly and intentionally publishes or distributes material harmful to minors on a website or application, if the website or application contains a substantial portion of material harmful to minors, must use either anonymous age verification or standard age verification to verify that the age of a person attempting to access the material is 18 years of age or older and prevent access to the material by a person younger than 18 years of age. The commercial entity must offer anonymous age verification and standard age verification, and a person attempting to access the material may select which method will be used to verify his or her age. Violation of this provision is also deemed an unfair and deceptive trade practice actionable by the department against the commercial entity and exposes the entity to a civil action brought by the minor. The same penalties and damages noted above apply to violations of this provision. The new law is effective January 1, 2025.

Amicus brief(ly): As we have followed the development of this bill in Florida in PrivacyLaw®, it was clear that Florida was going to pass something to restrict social media accounts for young Floridians one way or another. When Florida’s Governor DeSantis vetoed a more restrictive HB1, the state House of Representatives adjusted HB3 to overcome his concerns. This privacy-related development will not go over well with kids and young teenagers, as it restricts them from having social media accounts (but does not restrict their access to viewing social media). Proponents of the bill say it is designed to protect children from predators and empower parents to better protect their children. But critics say this bill clearly infringes on protected First Amendment free speech rights – an argument we’ll likely hear about in a court case to be filed between now and the January 1 effective date.

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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.