Consumer Finance Observer – Fall 2019

CFOJenner & Block has published its second issue of Consumer Finance Observer or CFO, a newsletter providing analysis of key consumer finance issues and updates on important developments to watch.  As thought leaders, our lawyers write about the consumer finance sector on topics ranging from artificial intelligence, compliance, data security, FinTech, lending and securities litigation.

In the Fall 2019 issue of the CFO, our consumer finance lawyers discuss the use of alternative data; best practices to avoid TCPA wrong-number claims; the OCC’s FinTech Charter; the FTC monitoring of class action settlements; an Eleventh Circuit ruling in a TCPA case; a quick look at HUD’s FHA Lender Annual Certification Statements; FinCen's report on business email scams; and a brief history of the CFPB payday lending rule.  Contributors are Amy M. GallegosJoseph L. NogaMichael W. RossDavid P. Saunders and Damon Y. Smith; Associates Gabriel K. GillettWilliam S.C. GoldsteinOlivia Hoffman and Katherine Rosoff; and Staff Attorney Alexander N. Ghantous.

To read the full issue, please click here.


FTC Releases Guidance for Social Media Influencers

 

By: David D. Heckman and Kristen M. Iglesias

Social-media-influencerOn November 5, 2019 the Federal Trade Commission (FTC) released Disclosures 101 for Social Media Influencers, to provide guidance to social media users that recommend or endorse products in their posts, videos or other content (often called ‘influencers’).  Influencers have become big business, with millions of followers and payments of tens or even hundreds of thousands of dollars per post.  The FTC took action in 2017, sending educational warning letters to influencers and settling charges with two influencers popular in the online gaming community for failing to disclose that they jointly owned a gambling service they endorsed.  While the new guidance does not carry the force of law, it provides helpful insight into how the FTC views the issue and will approach enforcement. 

The FTC cites the need for disclosure of any “material connections” between the influencer and the brand or product being endorsed.  A material connection includes any financial, employment, personal, or family relationship with a brand or product.  The guidance specifies that a material connection should be disclosed by an influencer if they are being provided with any free or discounted products or other perks, even if the influencer is reviewing or endorsing a different product made by the same brand.  Additionally, the FTC guidance clarifies that influencers should disclose a material connection even if they believe their review of the product is unbiased.  Endorsement is similarly broadly defined, to include “tags, likes, pins, and similar ways of showing [the influencer likes] a brand or product.”

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NY Action Against UnitedHealth Algorithm

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By: Isabel F. Farhi

HealthcareOn  October 25, 2019, the New York State Department of Financial Services (DFS) and Department of Health (DOH) jointly sent a letter to UnitedHealth Group, Inc. (UnitedHealth) calling for the company to address its use of an algorithm it uses to make health care decisions, which a recent study had shown may have a racially discriminatory impact.

Specifically, researchers Ziad Obermeyer, Brian Powers, Christine Vogeli and Sendhil Mullainathan published an article in the periodical Science concerning “Impact Pro,” an algorithm UnitedHealth has used to identify patients who should receive the benefit of “high risk care management,” a service for patients with complex health care needs.[1]  According to one source, UnitedHealth licenses this algorithm to hospitals.[2]  The Science article describes how one metric the algorithm uses to determine eligibility for the program is the cost of patients’ previous health care.  Yet, as the article explains, black patients typically spend less money on health care, in part because of historic barriers to access due to poverty and in part because of historic distrust of doctors.  The article concludes that because of these systemic problems with the reliance on historic cost expenditures as an eligibility metric, two patients, one white and one black, with the same illness and complexity of care, could be treated differently when being considered for enrollment in the high risk care management program.[3]

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Texas Jury Awards $200 Million In Mobile Banking Patent Dispute

By: Benjamin J. Bradford IStock-1155413889

On November 6, a jury in the Eastern District of Texas awarded the United Services Automobile Association (USAA) a $200 million verdict finding that Wells Fargo willfully infringed two of USAA’s patents directed to the “auto-capture” process, which is used by banking customers to deposit checks using photographs taken from a mobile phone or other device.  (Civ. No. 2:18-cv-00245 (E.D. Tex.))  Based on the finding of willfulness, USAA may be entitled to enhanced damages beyond the $200 million verdict.

Despite the verdict, the fight between Wells Fargo and USAA is still ongoing.  Wells Fargo filed patent office challenges to the validity of USAA’s patents, which are still pending before the Patent Trial and Appeals Board, but may not be decided for another 15 months.  In addition, Wells Fargo will likely appeal the decision, including a recent denial of summary judgment that found the patents were not invalid under 35 U.S.C. 101.  Nevertheless, the verdict against Wells Fargo will likely embolden USAA to assert its patents against other banks and financial institutions that use an “auto-capture” process. 


The Intersection of the California Consumer Privacy Act and California’s Preexisting Consumer Protection Statutes

By Kate T. Spelman

CaliforniaWith the close of the California state legislative session on Sept. 14, 2019, the final shape of the California Consumer Privacy Act (CCPA)—which is set to take effect on Jan. 1, 2020—came into focus. The most recent amendments included carve-outs for business-to-business contracts and employee records, though both sunset after a year. While the statutory language is settled for now, many questions remain about how it will be enforced. The Attorney General has issued proposed regulations clarifying some of this uncertainty. However, one issue that may be left for future judicial interpretation is the interplay between the CCPA and California’s preexisting consumer protection statutes such as the Unfair Competition Law (UCL) and the Consumer Legal Remedies Act (CLRA). As discussed below, the CCPA contains an explicit prohibition, along with implicit safe harbors, likely to limit certain UCL and/or CLRA claims related to the use or disclosure of information subject to the CCPA.

The CCPA Likely Bars Derivative UCL Claims

The CCPA provides for enforcement by the Attorney General, but §1798.150(a) creates a private right of action for consumers whose personal information “is subject to an unauthorized access and exfiltration, theft, or disclosure as a result of the business’s violation of the duty to implement and maintain reasonable security procedures and practices.” Despite several legislative attempts to broaden the private right of action—which were supported by California’s Attorney general—it is currently limited to “violations as defined in subdivision (a),” precluding CCPA claims related to violations of other statutory provisions. (Notably, the CCPA contains no express provision permitting attorney fees for prosecution of claims under §1798.150, though plaintiffs’ attorneys may argue that such fees should be awarded as “other relief the court deems proper” (§1798.150(a)(1)(C)), or pursuant to the private attorney general attorney fee statute, CCP §1021.5.)

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California Attorney General Issues Proposed CCPA Guidelines

By: David P. Saunders

New-Update-IconOn October 10, 2019, the California Attorney General surprised many by issuing 24 pages of proposed regulations implementing the California Consumer Privacy Act of 2018 (CCPA).  After reviewing the proposed regulations, they have left many in the industry shaking their heads.  Absent from the proposed regulations is much of the clarity that industry participants were hoping for.  In its place are additional obligations that not only risk confusing consumers, but that likely will pose administrative and logistical challenges.

Public comment on the proposed regulations is open through 5:00 pm PST on December 6, 2019.  Interested parties can submit comments by e-mail to PrivacyRegulations@doj.ca.gov or by mailing comments to the Privacy Regulations Coordinator, California Office of the Attorney General, 300 South Spring Street, First Floor, Los Angeles, CA 90013.  Additionally, the Attorney General will be holding four public hearings on the new proposed regulations, the schedule of which is available here. 

In the meantime, let us examine the proposed regulations...

To read the full client alert, please click here


FinCEN Has Eye on Sports Betting, Crypto Money Laundering Risks

Casino1In an article published by Bloomberg, Partners Reid J. Schar and Wade A. Thomson and Associate E.K. McWilliams highlight a recent speech by the director of the Financial Crimes Enforcement Network (FinCEN), an arm of the Treasury Department.  Speaking at an anti-money laundering conference in Las Vegas, FinCEN Director Kenneth A. Blanco affirmed the Department’s commitment to enforcing the Bank Secrecy Act on casinos and other businesses that deal in cryptocurrency.  The authors give context to the speech and discuss its implications for brick-and-mortar and online gaming establishments.

To read the full article, please click here.


California Enacts AB 5, Gig Worker Bill

By: Amy Egerton-Wiley

New-Development-IconOn September 18, 2019, Governor Gavin Newsom signed Assembly Bill 5 (AB 5) into law, which is intended to reclassify many of the state’s independent contractors as employees.  Proponents of the bill claim that the bill rectifies misclassification of employees as independent contractors.  Opponents, which include both workers and companies, note the importance of the flexibility of independent contractors and worry about the increased costs to consumers.

This bill largely codifies the “ABC” test established by the California Supreme Court in Dynamex v. Superior Court, 4. Cal. 5th 903 (2018).  Under the ABC test, a worker must be classified as an employee (versus an independent contractor) unless the hiring entity can establish:

(A) that the worker is “free from the control and direction of the hiring entity in connection with the performance of the work,”

(B) that the worker “performs work that is outside the usual course of the hiring entity's business,” and

(C) that the worker is “customarily engaged in an independently established trade, occupation, or business.”

Dynamex, 4 Cal. 5th at 964.

AB 5 expands the ABC test to certain areas not explicitly subject to Dynamex, such as reimbursements for expenses incurred in the course of employment.  Of course, companies that rely on independent contractors will be impacted by this legislation.

While AB 5 will not take effect until January 1, 2020, it may impact ongoing litigation, such as the San Diego City Attorney’s recent lawsuit against the grocery delivery service Instacart, which alleges that the company misclassified workers as independent contractors.  And it remains to be seen whether the law will be subject to a challenge via referendum or in the courts.


A Brief History of the Consumer Financial Protection Bureau Payday Lending Rule

By: Alexander N. Ghantous

LendingBetween 2013 and 2016, the Consumer Financial Protection Bureau (CFPB) issued no fewer than six white papers or reports relating to payday loan protections.[1]  On the date of the last report, June 2, 2016, the CFPB issued a proposed rule[2], and on October 5, 2017, a final rule issued that addresses payday loans, auto title loans, and other loans that require the entire loan balance, or the majority of a loan balance, be repaid at once.[3]  The rule’s stated objective was to eliminate “payday debt traps” by, among other things, addressing underwriting through establishing “ability-to-repay” protections that vary by loan type.[4] 

Under the final rule, for payday loans, auto title loans, and other loans comprised of lengthier terms and balloon payments, the CFPB would require a “‘full-payment test” to establish that borrowers can afford to pay back the loan and also limits the quantity of loans taken “in quick succession” to only three.[5]  The rule also lays out two instances when the “full-payment test” is not required:  (1) borrowing up to $500 when the loan balance can be repaid at a more gradual pace; and (2) taking loans that are less risky, such as personal loans taken in smaller amounts.[6]  The rule would also establish a “debit attempt cutoff,” which requires lenders to obtain renewed authorization from a borrower after two consecutive unsuccessful debits on a borrower’s account.[7]  The rule was scheduled to become effective one year and 9 months after being published by the Federal Register, which was last month[8] (the rule was published on November 17, 2017[9]).     

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HUD’s FHA Lender Annual Certification Statements May Significantly Reduce FHA Lender Risk of False Claims Act Liability

By: Damon Y. Smith

New-Update-IconSeptember 13, 2019 is the deadline for comments on HUD’s proposed changes to FHA Lender Annual Certification Statements.  The most significant changes include elimination of, inter alia:

  • Broad certification language stating that the operations of the lender conformed to all HUD regulations and requirements;
  • Acknowledgements that lenders are responsible for the actions of their employees, including loan underwriters and originators;
  • General certifications that the lender is not under indictment for or convicted of offenses that reflect adversely on its integrity, competence or fitness;
  • Certifications involving criminal misconduct on the part of lender staff, including mortgage underwriters and originators; and
  • Certifications regarding compliance with the SAFE Act.

These changes represent a dramatic departure from the prior administration, which brought False Claims Act claims against lenders for submitting the certifications to be eligible for FHA programs while underwriting loans that they allegedly knew were not in compliance with FHA’s regulatory requirements.   See, e.g., https://www.housingwire.com/articles/49337-quicken-loans-agrees-to-pay-325-million-to-resolve-fha-loan-allegations-with-doj.  Because the False Claims Act liability allows for treble damages, some considered the risk of substantial liability to be too high for further participation in FHA’s single family programs.  See https://www.wsj.com/articles/banks-fled-the-fha-loan-program-the-government-wants-them-back-11557417600.

If adopted, the new certification may lead to additional interest in FHA programs from lenders who curtailed or ended their participation because of the potential risks associated with the prior certification. 

The Federal Register Notice can be found here.