May 28, 2024
Hope everyone had a wonderful Memorial Day weekend! 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 May 22, the Consumer Financial Protection Bureau issued an interpretive rule confirming that “lenders that issue digital user accounts that consumers use from time to time to access credit products to purchase goods and services are ‘card issuers’ under Regulation Z, including when those products are marketed as Buy Now, Pay Later. Such lenders are ‘card issuers’ because such digital user accounts are ‘credit cards’ under [Reg.] Z.” Therefore, BNPL loans are now subject to certain provisions of Reg. Z applicable to credit cards. In particular, according to the interpretive rule, BNPL lenders are subject to Reg. Z provisions governing credit card billing disputes, refund rights, and periodic statements. BNPL lenders must now investigate disputes initiated by consumers and pause payment requirements during the investigation, provide refunds to consumers who return products or cancel services, and provide billing statements.
For purposes of the interpretive rule, BNPL refers to a “consumer loan for a retail transaction that is repaid in four (or fewer) interest-free installments and does not otherwise impose a finance charge. The loan generally requires an initial down payment of 25 percent, followed by three additional installments due every two weeks.”
Even though it is not required under the Administrative Procedure Act, the CFPB is seeking public comment on the interpretive rule and may make revisions as appropriate after reviewing any feedback. Comments must be received by August 1, 2024.
The interpretive rule is effective 60 days after its publication in the Federal Register.
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The Consumer Financial Protection Bureau recently filed a lawsuit in the U.S. District Court for the Central District of California against Solo Funds, Inc., a financial technology company that facilitates small-dollar, short-term loans, alleging violations of the Consumer Financial Protection Act and the Fair Credit Reporting Act. Specifically, the CFPB alleged that the company all but requires consumers to pay fees styled as “tips” or “donations,” which result in a high cost of borrowing that is not properly disclosed or avoidable. The CFPB alleged that the company engaged in deceptive practices when it misrepresented certain terms about the total cost of credit in its loan disclosure documents. Additionally, the CFPB alleged that the company engaged in unfair and deceptive practices when it serviced and collected on loans that were void or uncollectible because the loans were made without required state licenses or in excess of state usury caps. Finally, the CFPB alleged that the company coerced payments by threatening to provide negative credit information to credit reporting agencies, even though the company did not actually engage in credit reporting.
The complaint seeks damages in the form of a permanent injunction against the company, monetary relief including restitution, disgorgement, and a civil penalty.
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On May 20, the Consumer Financial Protection Bureau announced a settlement with Western Benefits Group, LLC, a telemarketing company that offers student loan debt relief services, to resolve allegations that it violated the Telemarketing Sales Rule and the Consumer Financial Protection Act. The CFPB alleged that the company violated the TSR and the CFPA by engaging in deceptive acts and practices in the marketing, sale, and administration of debt relief services and by engaging in deceptive telemarketing practices. Specifically, the CFPB alleged that the company misrepresented that it was affiliated with the U.S. Department of Education; that fees paid to the company would go towards the customer’s student loan balance; and that the company would help customers consolidate their loans, reduce their monthly payments, or achieve loan forgiveness. The CFPB alleged that customers who enrolled in the company’s debt relief services were charged fees from $99.95 to $159.95, as well as monthly fees, regardless of whether the company was able to receive results on the customer’s behalf. The CFPB alleged that these were advance fees in violation of the TSR.
The consent order requires the company to permanently cease operations, void all consumer agreements, and pay a $400,000 penalty to the CFPB’s victims relief fund.
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On May 17, Colorado enacted Senate Bill 205 – the Colorado Artificial Intelligence Act – to address the potential risk of “algorithmic discrimination” by developers and deployers of high-risk artificial intelligence systems (“high-risk AI system”).
Under the new law, a “developer” is a person doing business in Colorado that develops or intentionally and substantially modifies an AI system, and a “deployer” is a person doing business in Colorado that deploys a high-risk AI system. A high-risk AI system includes a system that makes, or is a substantial factor in making, a “consequential decision,” which is defined as a decision in specified areas involving consumers – including employment, education, financial services, healthcare, housing, insurance, government services, or legal services – that has a material or significant effect on the provision, costs, or terms of a service or opportunity. “Algorithmic discrimination” means “any condition in which the use of an artificial intelligence system results in an unlawful differential treatment or impact that disfavors an individual or group of individuals [that belong(s) to a protected class under Colorado or federal law].”
SB 205 requires a developer of a high-risk AI system to use reasonable care to avoid algorithmic discrimination. There is a rebuttable presumption that a developer used reasonable care if the developer complied with specified provisions in the new law, including:
SB 205 also requires a deployer of a high-risk AI system to use reasonable care to avoid algorithmic discrimination. There is a rebuttable presumption that a deployer used reasonable care if the deployer complied with specified provisions in the new law, including:
Developers and deployers of AI systems that interact with consumers must ensure that each consumer is aware that he or she is interacting with an AI system.
The new law provides an affirmative defense to developers or deployers involved in a potential violation of the law’s provisions if they are in compliance with specified nationally or internationally recognized risk management frameworks for AI systems and they take specified measures to discover and cure violations. The new law grants the AG rulemaking authority to implement and enforce its requirements.
SB 205 is effective on February 1, 2026.
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On May 17, Colorado enacted House Bill 1011, which requires a mortgage servicer to disclose certain information to a borrower concerning the disbursement of insurance proceeds to the borrower. Under the new law, upon the request of a borrower, a mortgage servicer must promptly disclose to the borrower the specific conditions under which the servicer will disburse insurance proceeds to the borrower in the event that a residential property that is the subject of a mortgage is damaged or destroyed and an insurance company pays insurance proceeds to satisfy a claim associated with such damage or destruction. In the event that the property is damaged or destroyed, a borrower, after consulting with the borrower’s contractor, must create a written repair plan or a written rebuild plan and submit the plan to the mortgage servicer for approval. The servicer must indicate approval or disapproval within 30 days after receiving the plan. The plan must include specific milestones that require the servicer to disburse insurance proceeds in certain amounts upon reaching those milestones. The new law also requires a servicer to disburse insurance proceeds to a borrower in specified amounts depending on the amount of the insurance proceeds and whether the borrower is delinquent in making payments on the mortgage.
In addition, HB 1011 requires a mortgage servicer to hold in an interest-bearing account any insurance proceeds that the mortgage servicer does not immediately disburse to a borrower. A mortgage servicer must ensure that any interest that is credited to the account is credited and disbursed to the borrower.
Finally, HB 1011 imposes some more general requirements on mortgage servicers, including a requirement to, immediately upon commencing the servicing of a mortgage and at any time thereafter at the request of the borrower: (1) disclose to the borrower the interest rate associated with the mortgage, and (2) provide the borrower with a primary point of contact for the servicer. Mortgage servicers must also retain for at least four years all written and electronic communications between the servicer and the borrower.
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On May 20, the Minnesota governor enacted House Bill 3438, which makes it a deceptive trade practice to advertise, display, or offer a price for goods or services that does not include all mandatory fees or surcharges. “Mandatory fee,” under the new law, “includes but is not limited to a fee or surcharge that: (1) must be paid in order to purchase the goods or services being advertised; (2) is not reasonably avoidable by the consumer; or (3) a reasonable person would expect to be included in the purchase of the goods or services being advertised.” “Mandatory fee” does not include taxes on the sale, use, purchase, receipt, or delivery of the goods or services, and a person may charge a reasonable postage or shipping fee that is actually incurred by the consumer. The new law does not prevent a person from offering goods or services at a discounted price from the advertised, displayed, or offered price.
Among other exemptions, the new law exempts fees authorized by law that are related to the purchase or lease of a motor vehicle and charged by a dealer, as defined, and any fees, surcharges, or other costs associated with settlement services, as defined in the Real Estate Settlement Procedures Act.
The new law is generally effective on January 1, 2025.
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