Last Week, This Morning

August 26, 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.

In a divided opinion, the U.S. Court of Appeals for the Fourth Circuit determined that the Truth in Lending Act's provision preventing creditors from using money from a consumer's deposit account to offset payments owed on a credit card plan applies to home equity lines of credit.

In 2005, William Lyons obtained a HELOC from National City Bank. National City issued Lyons a credit card that he could use to obtain cash advances or make purchases from his HELOC account during the draw period. In May 2010, Lyons opened three deposit accounts at PNC Bank, N.A., which had merged with National City in 2009 and taken over Lyons's HELOC. In opening one of those deposit accounts, Lyons signed an account agreement that included a provision authorizing PNC to set off funds from the account to pay any loans or other indebtedness that he owed to PNC. In September 2019, PNC applied approximately $1,400 from Lyons's deposit account to an outstanding HELOC payment without notifying him. Lyons objected, but PNC made another withdrawal the following month to offset another outstanding HELOC payment. Lyons sued, claiming that PNC violated Section 1666h(a) of TILA, which, with certain exceptions, prohibits a card issuer from taking any action to offset a cardholder's indebtedness in connection with a consumer credit transaction under a credit card plan against funds of the cardholder held on deposit with the card issuer. A federal trial court determined that the TILA provision's reference to "credit card plan," which is not defined, did not extend to a HELOC and granted PNC's motion for judgment on the pleadings. On August 14, 2024, the federal appellate court issued an opinion disagreeing with the trial court and allowing the lawsuit to proceed. Writing for the majority, Judge Roger L. Gregory found that the trial court erred by failing to note the relationship between a "credit card" and a "credit card plan" and concluded that the term "credit card plan" includes HELOCs where credit is accessed via a credit card.

In an amicus brief, the American Bankers Association sided with PNC, arguing that extending TILA's prohibition on offsets to HELOCs could harm consumers by increasing the risk of foreclosure. In its own amicus brief, the Consumer Financial Protection Bureau sided with Lyons, arguing that TILA's offset prohibition should apply to credit card plans involving HELOCs based on the text and history of TILA and Regulation Z.

Amicus brief(ly): The setoff right is an important recovery tool for banks with customer funds on deposit, but not all HELOCs offer credit card access as a means for the borrower to draw funds on the line of credit. Back in 2005, when the consumer in this case obtained his HELOC, it was fairly common. In those days, some states did not allow credit card access to HELOCs on the theory that if a consumer was using that card for everyday purchases like groceries and gas, the possibility of a foreclosure upon default was a disproportionate remedy. This case is not quite on the same theoretical footing, but the result is not incongruent with TILA's prohibition on setoff in connection with credit card accounts (even if we agree that the court is reading "credit card plan" expansively in this case). HELOC lenders still have foreclosure available as a remedy for non-payment, which will typically mitigate losses better than setoff can.

On August 21, the Consumer Financial Protection Bureau announced a consent order with Fay Servicing, LLC, to resolve allegations that the nonbank mortgage servicer violated a 2017 order with the Bureau and violated the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Homeowners Protection Act, and the Consumer Financial Protection Act in connection with its mortgage servicing activities.

Specifically, the consent order alleges that the servicer violated certain provisions of a 2017 CFPB order - which required the servicer to correct certain loss mitigation and foreclosure activities - by continuing to initiate prohibited foreclosure actions against borrowers who applied for loss mitigation and continuing to hinder borrowers from taking advantage of certain loss mitigation options available to them. The CFPB additionally alleges that the servicer did not fully inform borrowers about their loss mitigation options and the effect of choosing a particular loss mitigation option, overcharged for private mortgage insurance, and charged late fees that were not allowed by borrowers' mortgage contracts.

The consent order requires the servicer to pay $3 million in consumer redress, pay a $2 million penalty, limit compensation to Edward Fay - the founder and CEO of the company - if he does not take the actions necessary to ensure compliance with the current order, and invest at least $2 million to update its servicing technology and compliance management systems.

Amicus brief(ly): The CFPB has made it clear that it will be tough on recidivists that do not comply with terms of consent orders. The fines here are significant, as is the provision requiring a $2 million investment in the servicer's technology and compliance management systems. Where the financial penalty may not have made much difference in the past, the investment requirement should help Fay Servicing avoid ending up on the consent order list again for the same alleged infractions. Loss mitigation requirements go back to the aftermath of the recession in the late 2000s, and they are not going anywhere. Servicers have to comply with those requirements among all of the others; this consent order underscores that point.

On August 16, the New Hampshire Banking Department released frequently asked questions regarding the recently enacted House Bill 1243, which repeals and replaces the Retail Installment Sales of Motor Vehicles Chapter (Chapter 361-A or "RISMV"). We highlighted this New Hampshire law in the August 12th issue of Last Week, This Morning. The new version of Chapter 361-A 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. The sections of the law related to RISMV are retroactively effective as of July 1, 2024. On August 6, 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 Banking Department's FAQs address questions it has frequently been asked about specific provisions in the new Chapter 361-A. The Banking Department notes that the FAQs are provided as informal guidance only and that businesses should consult with an attorney for legal guidance.

Amicus brief(ly): New Hampshire provides some useful guidance in these FAQs for industry adjusting to its new retail installment sales law. For example, the state clarifies that securitization trusts are not "holders" subject to licensing and that even the initial transfer of a contract from the originating dealer to a finance source (bank, credit union, finance company) requires notice of assignment. When we reported on this development two weeks ago, we commended compliance professionals to the new law and its extensive changes - that recommendation remains. Things are busy in vehicle finance in New Hampshire.

On August 19, California Governor Gavin Newsom signed Senate Bill 1198, which amends provisions of the California Financial Code regulating pawnbrokers.

The existing law authorizes a pawnbroker to collect a handling and storage charge for pawned articles at the time property is redeemed or a replacement loan is issued. The new law authorizes a pawnbroker to collect a security charge, in addition to a handling and storage charge, for pawned articles. The new law also increases the permitted handling, storage, and security charges depending on the size of the pawned articles.

In addition, the new law authorizes a pawnbroker to collect a remote transaction fee in addition to other allowed charges. A pawnbroker may collect a remote transaction fee, if the pledgor elects to request a replacement loan or to redeem a loan through electronic means, of up to 3 percent of the transaction amount to cover the recurring costs associated with software applications.

The existing law permits a pawnbroker to charge a fee of up to $5 for services and costs pertaining to preparation of a 10-day notice when a pledged item is not redeemed during the loan period. This new law expands the services and costs for which the above-described fee may be charged to include the mailing or electronic transmission of the notice and increases the maximum amount of the fee to $7.

Amicus brief(ly): California, of all places, gives pawnbrokers a rare legislative win related to permissible fees. In this new law, pawnbrokers gain the right to impose charges they could not charge before. Instead of restricting the transaction-related charges, in a rare twist based on recent state (and federal) legislation related to the imposition of fees, California is increasing permissible charges in pawn transactions. The fact that the fees are rational may have been useful in passing the bill, and we're certain industry will view this development as a rare win in pawnbrokers' quest to be able to recover fees and expenses.

On August 16, the Federal Trade Commission issued an administrative complaint against one of the largest automotive retailers in the nation, three of its dealerships, and their general manager, individually. The complaint alleges that the respondents violated the Equal Credit Opportunity Act by discriminating against Black and Latino customers. It also alleges that the respondents charged customers for unwanted voluntary protection products without their express, informed consent.

The allegations raise the question of whether differences in the prices paid by some groups for non-credit products will support a discrimination claim under the ECOA. Although the complaint released by the FTC was heavily redacted, it does not appear that the agency is claiming that Black and Latino customers paid more than non-Latino white customers in the terms of credit, such as the interest rate. Instead, the alleged discrimination occurred in charging Black and Latino customers more, on average, for the same products. The complaint alleges discrimination under theories of both intentional discrimination (disparate treatment) and unintentional discrimination (disparate impact).

The complaint also claims that consumers were charged for voluntary protection products they did not agree to buy and that the respondents misled some consumers into believing that these voluntary products were required. The FTC alleges that the respondents sometimes engaged in "packing" - a practice of adding additional products to the purchase contract when the approved credit amount would accommodate additional charges. The complaint alleges that some consumers were required to sign on an electronic pad without being able to view the documents before signing. Based on telephone interviews with a sample of customers at the three named dealerships, the FTC alleges that charging for unwanted products was widespread.

Hearings before an administrative law judge are set to start in April 2025. After reviewing the ALJ's recommended decision and considering the arguments of the FTC staff and the respondents, the FTC will issue a final order. Under an administrative order, the FTC can only order the respondents to cease the practices it found to be unlawful. But the FTC has indicated that it may try to get consumer redress by using a dormant power under Section 19 of the FTC Act. That provision allows the FTC to seek consumer redress in federal district court if it can prove that "a reasonable man would have known under the circumstances that [the conduct] was dishonest or fraudulent."

Amicus brief(ly): The fact that the reportable event here is the filing of a complaint, and not a consent order, indicates that the retailer was not willing to settle these fair lending claims with the FTC. Its resistance could lie in a fundamental disagreement over whether its practices are actually discriminatory, or (just as likely) it may not have been willing to settle because discrimination on a disparate impact theory is going to be a challenge for the government to prove. In fact, the retailer may have tested its sales and pricing data to look for a disparate impact on protected consumers and may feel comfortable that it can show that, despite the appearance of a disparate impact from its pricing and sales techniques, when it controlled for common factors in a statistical test, the apparent discrimination went away (that is, the similarly situated consumers were not so similarly situated after all). In addition to the interesting fair lending claims, there are your more typical but equally concerning claims about product packing, deceptive product sales tactics, and failure to deliver required documents. We will report on the outcome of the case, watching with keen interest the FTC's ability to make its discrimination case.

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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.