On July 16, the New York DFS re-proposed a rule to regulate third-party debt collection. The revised proposal: (i) describes disclosures debt collectors must provide to consumers when the debt collector initially communicates with a consumer, and additional disclosures that must be provided when the debt collector is communicating with a consumer regarding a charged-off debt; (ii) requires debt collectors to disclose to consumers when the statute of limitations on a debt has expired; (iii) outlines a process for consumers to request additional documentation proving the validity of the charged-off debt and the debt collector’s right to collect the charged-off debt; (iv) requires debt collectors to provide consumers written confirmation of debt settlement agreements and regular accounting of the debt while the consumer is paying off a debt pursuant to a settlement agreement; (v) requires debt collectors to provide consumers with disclosures of certain rights when settling a debt; and (vi) allows debt collectors to correspond with consumers by electronic mail in certain circumstances. The DFS states that although comments on its initial proposal were “generally supportive,” the revised proposal responds to comments on how the rules could better correspond to the structure of the collection industry, and seeks to clarify the meaning of certain provisions. Comments on the revised proposal are due by August 15, 2014.
On July 17, the New York DFS announced a proposal to establish a licensing regime for virtual currency businesses, the first by any state. In January, the DFS held a two-day hearing on developing a regulatory framework for virtual currency firms, and subsequently sought applications for virtual currency exchanges pending completion of the regulations. The proposed regulations define virtual currency as “any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology.” This would include digital units of exchange that: (i) have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort. It would exclude digital units that are used solely within online gaming platforms or that are used exclusively as part of a customer affinity or rewards program.
Under the proposal, the state would require companies engaged in the following activities to obtain a so-called BitLicense: (i) receiving or transmitting virtual currency on behalf of consumers; (ii) securing, storing, or maintaining custody or control of such virtual currency on the behalf of customers; (iii) performing retail conversion services; (iv) buying and selling virtual currency as a customer business (as distinct from personal use); or (v) controlling, administering, or issuing a virtual currency. To obtain a license, a business would be required to, among other things: (i) hold virtual currency of the same type and amount as any virtual currency owed or obligated to a third party; (ii) provide transaction receipts with certain required information; (iii) comply with AML rules; (iv) maintain a cyber security program; and (v) establish business continuity and disaster recovery policies. Licensed entities would be subject to DFS supervision, with examinations taking place no less than once every two calendar years. The proposal will be published in the New York State Register’s July 23, 2014 edition, which begins a 45-day public comment period.
On July 9, the New York DFS announced that it finalized a rule that allows for shared appreciation mortgage modifications, which permit banks and mortgage servicers to reduce the amount of principal outstanding on a borrower’s mortgage in exchange for a share of the future increase in the value of the home. The option is limited to borrowers who are 60 or more days past due on their loan or whose loan is the subject of an active foreclosure action and who are not eligible for existing federal and private foreclosure prevention programs. The regulations detail the method for calculating a holder’s share of the appreciation, and limit the share to the lesser of: (i) the amount of the reduction in principal, plus interest; or (ii) 50% of the amount of appreciation in market value. In addition, banks and servicers would be required to provide specific disclosures to borrowers about the terms and nature of the shared appreciation mortgage modification. The regulations also: (i) specify allowable fees, charges, and interest rates; (ii) detail the calculation of unpaid principal balance and debt-to-income ratio; and (iii) list certain prohibitions, including, among others, that the holder cannot require the borrower to waive any legal claims or defenses as a condition to obtaining shared appreciation modification. The new regulations took effect immediately.
On July 9, Pennsylvania Governor Tom Corbett signed SB 622, which directs the Department of Banking and Securities to establish licensing requirements, including fees, for providers of debt settlement services. Such a license will be a “covered license” under state law, and, as such, will require employees of entities seeking a license to submit to criminal history checks. In addition, licensed debt settlement firms would be required to provide written disclosures regarding, among other things: (i) the amount of time necessary to achieve the represented results; (ii) the extent to which debt settlement services may include settlement offers to creditors and debt collectors, including the time by which bona fide offers will be made; (iii) the cost to the individual for providing debt settlement services and the method by which any fee will be calculated; (iv) that the use of a debt settlement service will likely adversely impact the credit worthiness of the individual; and (v) the total estimated program costs if the individual completes the program. The bill does not apply to (i) judicial officers; (ii) depository licensees; (iii) title insurers, escrow companies, or other persons that provide bill paying services and offer debt settlement incidental to those services; or (iv) attorneys who act as intermediaries. The bill defines certain prohibited activities, and grants the regulator authority to supervise licensed firms, enforce the requirements, and impose civil penalties of up to $10,000 for each violation. Most provisions of the bill take effect November 1, 2014.
Recently, the Massachusetts Division of Banks published final amendments to its regulation concerning documentation and determination of borrower’s interest to establish an additional safe harbor for any home loan that meets the definition of a “Qualified Mortgage” under the CFPB’s ability-to-repay/qualified mortgage rule. A Qualified Mortgage now will be deemed to be in the borrower’s interest under the regulation. The amendments also clarify that the exemption under the borrower’s interest regulation applies to all Qualified Mortgages which are eligible for safe harbor consideration under TILA, including the small creditor exemption, provided that the Qualified Mortgage is not higher cost. The amendments became effective July 18, 2014.
On July 14, Illinois Attorney General (AG) Lisa Madigan announced that her office filed separate civil lawsuits (here and here) in state court against two student debt relief firms and their principals. The lawsuits allege that the defendants violated several state consumer protection statutes relating to their deceptive student debt relief practices and collection of improper fees. The AG claims that the unlicensed companies and their sole principals improperly accepted upfront fees from student borrowers while claiming to have enrolled them in sham loan forgiveness programs or other legitimate loan relief programs that were available to borrowers free of charge. The lawsuits also allege that the defendants engaged in extensive false and misleading advertisements that misrepresented their expertise, affiliation with the U.S. Department of Education, and the debt relief programs available to borrowers.
The AG maintains that these practices violate several state consumer protection statues, including:
- The Illinois Consumer Fraud and Deceptive Business Practices Act, prohibiting unfair and deceptive business practices, including making false representations and failing to disclose material facts to consumers;
- The Credit Services Organizations Act, prohibiting unlicensed parties from acting as “debt settlement providers” or accepting illegal fees; and
- The Debt Settlement Consumer Protection Act, prohibiting parties from accepting upfront payment for debt relief services.
The lawsuits seek injunctive and non-monetary relief in the form of permanent injunctions against each defendant and a rescission of all contracts with Illinois residents. The AG is also pursuing a variety of monetary damages and penalties, including restitution, costs of prosecution and investigation, and civil penalties of $50,000 for each statutory violation with additional penalties for those conducted with the intent to defraud or perpetrated against elderly victims.
On July 2, the Massachusetts Division of Banks published an industry letter regarding mortgage lenders’ obligation to timely fund and disburse mortgage proceeds and oversee internal and third-party compliance with that requirement. The letter advises lenders that numerous recent examinations have revealed issues with timely funding of loans by lenders and disbursement of funds by settlement agents. The letter reminds lenders that the state’s “Good Funds Law” requires a mortgage lender to disburse—in the form of a certified check, bank treasurer’s check, cashier’s check, or wire transfer—the full amount of the loan proceeds prior to recording the mortgage, and that failure to do so may be considered an unfair and deceptive practice. In addition, the letter advises lenders that (i) they must establish and implement policies and procedures to ensure that vendors distribute loan proceeds in the required timeframe, and (ii) internal compliance audits should include testing of the lender’s and any settlement agents’ settlement processes and procedures.
On June 28, California Governor Jerry Brown signed AB 129, which repeals a state ban on the issuance or circulation of anything but lawful money of the United States. As described in a legislative staff analysis of the bill, the repeal is designed to ensure that forms of alternative currency such as digital currency, points, coupons, or other objects of monetary value do not violate the law when those methods are used for the purchase of goods and services or the transmission of payments in California.
New York AG Civil Suit Targets International Bank’s “Dark Pool”, Relationships With High-Frequency Traders
On June 25, New York Attorney General (AG) Eric Schneiderman announced the filing of a civil suit against a large international bank alleging that, from 2011 to the present, the bank violated the Martin Act by making false statements to clients and the investing public about how, and for whose benefit, the bank operates its private securities trading venue, i.e. its dark pool. The AG claims that the bank actively sought to attract high frequency traders to its dark pool, and provided such traders advantages over others trading in the pool, while telling clients and investors that it implemented special safeguards to protect them from such high-frequency traders. Specifically, the AG alleges that the bank: (i) falsified marketing materials purporting to show the extent and type of high frequency trading in its dark pool; (ii) falsely marketed the percentage of high frequency trading activity in its dark pool; (iii) made a series of false representations to clients about its “Liquidity Profiling” service; (iv) falsely represented that it routed client orders for securities to trading venues in a manner that did not favor its own dark pool; and (v) secretly provided high frequency trading firms informational and other advantages over other clients trading in the dark pool. The suit seeks an order requiring the bank to pay damages, disgorge amounts obtained in connection with the alleged activities, and make restitution of all funds obtained from investors in connection with the alleged acts.
On June 20, Florida Governor Rick Scott signed SB 1524, which significantly revises and strengthens the state’s data breach notice law, making it among the toughest in the country. The bill shortens the timeline for providing notice of a data breach to require notice to consumers within 30 days of the “determination of a breach.” The bill also adds a parallel requirement to notify the state attorney general’s office for an incident affecting more than 500 state residents. The bill also provides that consumer notice by email will no longer require an E-SIGN consent. The new law clarifies the application of data breach requirements by amending the definition of “covered entity” to mean “a sole proprietorship, partnership, corporation, trust, estate, cooperative, association, or other commercial entity that acquires, maintains, stores, or uses personal information.” The bill also expands the definition of “personal information” to add, as was done in California last year, user name or e-mail address, in combination with a password or security question and answer that would permit access to an online account. The bill requires covered entities to take reasonable measures to (i) protect and secure data in electronic form containing personal information and (ii) dispose, or arrange for the disposal, of customer records containing personal information within its custody or control when the records are no longer to be retained. Finally, the bill revised the risk of harm provision in two noteworthy ways: (i) like Connecticut and Alaska, law enforcement must be consulted to employ the exemption to noticeand (ii) the exemption appears to cover only consumer notice, not AG notice. The changes take effect July 1, 2014.
Recently, Connecticut Governor Dannel Malloy signed SB 209, which makes a number of changes to the restrictions on unsolicited telemarketing contacts with consumers. Under current law, telemarketers are prohibited from making an unsolicited sales call to consumers on the state “Do Not Call” registry unless they receive a consumer’s prior written or verbal consent. The bill removes the verbal consent option, requiring telemarketers to obtain prior express written consent before making such calls. In addition to unsolicited calls, the bill also prohibits without prior express written consent unsolicited text or media messages, as well as unsolicited, automatically dialed, recorded telephonic sales calls—i.e. robocalls. Under the bill, a text or media message is a message that contains written, audio, video, or photographic content and is sent electronically to a mobile telephone or electronic device telephone number, but does not include electronic mail. The bill also increases the maximum fine for each violation from $11,000 to $20,000.
On June 16, New York Attorney General (AG) Eric Schneiderman announced that a national bank agreed to adopt new policies governing its use of a credit bureau that screens individuals seeking to open checking or savings accounts. The agreement is the first to come out of the AG’s ongoing investigation of the use of credit bureaus by major American banks. As the basis for its investigation, the AG’s office asserts that individuals who are deemed by one of these credit bureaus to present a credit or fraud risk are typically denied the opportunity to open an account, and that these credit bureau databases “disproportionately affect lower-income Americans, often punishing them for relatively small financial errors and forcing them to resort to fringe banking services that are more costly than mainstream checking and savings accounts.” According to the AG’s press release, under the terms of the agreement, the bank will continue screening customers for past fraud but will no longer seek to predict whether customers present credit risks. The bank also committed to expand its support for the Office of Financial Empowerment (OFE)—a New York City agency that provides financial education and counseling to low-income New Yorkers—by donating $50,000 to help OFE provide counseling for applicants who are rejected by the bank on the basis of a credit bureau report. The bank plans to implement the changes nationwide.
On June 16, Massachusetts Attorney General (AG) Martha Coakley announced that a large mortgage servicer agreed to provide $3 million in borrower relief and pay $700,000 to the Commonwealth to resolve allegations that the servicer failed to provide certain notices to homeowners, as required by state law, and that it unlawfully foreclosed on certain properties. Specifically, the AG alleged that the servicer failed to send state-mandated notices to homeowners in default, and failed to execute proper mortgage assignments, filed in the Massachusetts Registry of Deeds, as required by Massachusetts law. The agreement also resolves claims that a servicer acquired by the settling servicer allegedly initiated foreclosures when it did not hold the actual mortgages, a violation of Massachusetts law, as established by a 2011 state supreme court decision. As described in the AG’s announcement, the agreement requires the servicer to properly execute documents filed in connection with foreclosure proceedings, and to mail to residents notices that are in compliance with applicable statutes and regulations.
On June 16, the New York DFS launched a new database of online lenders that have been subject to actions by DFS based on evidence of illegal payday lending, and announced that one national bank had agreed to start using the tool. The DFS believes the database will help financial institutions meet “know your customer” obligations with regard to online lenders and will help ensure that electronic payment and debit networks are not used to transmit or collect on allegedly illegal, online payday loans made to New York residents. According to the DFS, the national bank plans to use the information about companies that may be engaged in illegal lending to (i) help confirm that its merchant customers are not using their accounts to make or collect on illegal payday loans to New York consumers; and (ii) identify payday lenders that engage in potentially illegal payday loan transactions with its New York consumer account holders, and, when appropriate, contact the lenders’ banks to notify them that the transactions may be illegal. The bank also agreed to provide DFS with information about payday lending activities by lenders listed in the database, including identifying lenders that continue to engage in potentially illegal lending activities despite the DFS’s previous actions. The database announcement is just the latest step taken by the DFS with regarding to online payday lending. Over the past year, the DFS has opened numerous investigations of online lenders and has scrutinized or sought to pressure debt collectors, payment system operators, and lead generators in an attempt to halt lending practices that the DFS claims violate state licensing requirements and usury restrictions.
On June 12, Louisiana Governor Bobby Jindal signed HB 766, which requires all creditors seeking to conduct any consumer credit transaction or deferred presentment transaction to obtain a license in the state, regardless of whether they maintain an office in the state. Under current law only creditors with an office in the state are required to register. Any credit or deferred presentment transaction conducted by an unlicesened creditor will be deemed null and void. The bill retains an existing requirement that a creditor be licensed in the state before taking assignments of and undertaking direct collection of payments from or enforcing rights against consumers arising from consumer loans, but removes the requirement that such creditors maintain an office in the state. The bill makes corresponding changes to licensee recordkeeping requirements to allow licensed creditors to maintain records outside of the state. In addition, the bill (i) authorizes certain finance charges and fees in conjunction with a deferred presentment transaction or small loan; (ii) removes existing authority that allows a licensee to charge a one-time delinquency charge; (iii) allows a borrower who is unable to repay either a deferred presentment transaction or small loan when due to elect once in any 12-month period to repay the licensee the amount due by means of installments, referred to as an extended payment plan; and (iv) provides procedures, terms, and requirements for such extended payment plans. The changes take effect January 15, 2015.