Colorado Consumers Receive Additional Protections after Attorney General Settles Lawsuits

By: Alexander N. Ghantous

loanIn August of 2020, the Colorado Attorney General’s Office settled two lawsuits concerning Colorado’s right to enforce its consumer loan interest rate limits.[1] The lawsuits involved Avant of Colorado, LLC (“Avant”) and Marlette Funding, LLC (“Marlette”), both of which are not banks.[2] However, partnerships with banks located outside of Colorado were established by the companies: Avant with WebBank, and Marlette with Cross River Bank.[3]

According to the Colorado Attorney General’s website, federal law permits “certain out-of-state banks” to offer loans at higher interest rates in Colorado than what is generally permitted in the state.[4] The Colorado Attorney General alleged that the partnerships in these matters were established to illegally offer loans at higher interest rates than what was allowed in Colorado.[5] While the lawsuits did result in a settlement, there was no admission of fault, liability, or wrongdoing.[6]  

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California Legislature Passes New Consumer Financial Protection Law

By: Madeline Skitzki

New-Update-IconOn August 31, 2020, the California Legislature passed Assembly Bill 1864. In general, this bill (1) renamed the Department of Business Oversight as the Department of Financial Protection and Innovation and renamed the commissioner of the Department as the Commissioner of Financial Protection and Innovation, and (2) enacted the California Consumer Financial Protection Law (CCFPL) to, among other purposes, strengthen consumer protections by expanding the ability of the Department of Financial Protection and Innovation to improve accountability and transparency in the California financial system and promote nondiscriminatory access to responsible, affordable credit.

Under the bill, the Department of Financial Protection and Innovation is required to regulate the provision of various consumer financial products and services and exercise nonexclusive oversight and enforcement authority under California and federal (to the extent permissible) consumer financial laws. The Department is granted the power to bring administrative and civil actions, issue subpoenas, promulgate regulations, hold hearings, issue publications, conduct investigations, and implement outreach and education programs, and is required to promulgate certain rules and regulations regarding registration requirements. The bill also makes it unlawful for covered persons or service providers to engage in unlawful, unfair, deceptive, or abusive acts or practices with respect to consumer financial products or services or to provide consumers financial products or services that are not in conformity with any consumer financial law.  It further requires covered persons and service providers to file certain documents under oath and imposes specific civil and monetary penalties, as well as injunctive relief, for violations of the CCFPL.  With respect to funding, the bill requires the Commissioner to deposit all money collected or received under the CCFPL with the State Treasurer for the Financial Protection Fund, which is created under the bill for the administration of the CCFPL.


Consumer Finance Observer – Summer 2020 Edition

Summer 2020Jenner & Block has published its fifth 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 Summer 2020 issue of the CFO, our consumer finance lawyers discuss: litigation and enforcement consideration for FinTech PPP Lenders; an update on New York State’s Department of Financial Services; the US Supreme Court’s decision in Selia Law LLC v. CFPB; Office of the Comptroller of the Currency's adoption of the rule in Madden v. Midland Funding; COVID-19's disparate impact; and proposed amendments to California's Proposition 65. Contributors are Partners Kali N. BraceyJeremy M. CreelanMichael W. Ross, and Kate T. Spelman; Associates Jacob D. Alderdice and Julian J. Ginos.

To read the full newsletter, please click here


RIP “White” Chocolate Litigation (2012-2020)

By: Alexander M. Smith 

White chocolateWhile some varieties of food labeling lawsuits (such as lawsuits challenging the labeling of “natural” products) show no sign of dying off, other trends in food labeling litigation have come and gone. Last year, for example, appeared to mark the end of lawsuits challenging the labeling of zero-calorie beverages as “diet” sodas. And this year may witness the end — or, at least, the beginning of the end — of lawsuits challenging the labeling of “white” candy that is not technically “white chocolate,” at least as the FDA defines that term.

Although it is difficult to pinpoint the beginning of “white” chocolate litigation, the leading case for many years was Miller v. Ghirardelli Chocolate Co., 912 F. Supp. 2d 861, 864 (N.D. Cal. 2012). There, the court declined to dismiss a lawsuit challenging the labeling of Ghirardelli’s “Classic White” baking chips. The court concluded that the plaintiff had plausibly alleged that a variety of statements on the packaging — including “Classic White,” “Premium,” “Luxuriously Smooth and Creamy,” “Melt-in-Your-Mouth-Bliss,” and “Finest Grind for Smoothest Texture and Easiest Melting” — collectively misled the plaintiff into believing that the product was made with “real” white chocolate, even though it was not. Id. at 873-74. Emboldened by this decision, plaintiffs in California, New York, and elsewhere began filing a wave of similar class actions challenging the labeling of “white” chocolate, baking chips, and other candy. Since the beginning of this year, however, courts have begun dismissing “white” chocolate lawsuits with increasing frequency.

In Cheslow v. Ghirardelli Chocolate Co., for example, the plaintiffs — like the plaintiffs in Miller — challenged the labeling of Ghirardelli Classic White Premium Baking Chips as misleading. --- F. Supp. 3d ---, 19-7467, 2020 WL 1701840, at *1 (N.D. Cal. Apr. 8, 2020). Although the plaintiffs alleged that the product’s labeling misled them into believing that the product contained white chocolate, the court found this theory of deception implausible and dismissed the complaint. In reaching that conclusion, the court noted that the labeling did not include the terms “chocolate” or “cocoa” and that the term “white” referred to the color of the chips, rather than the presence of white chocolate or the quality of the chips. Id. at *4-5. Much as the term “white wine . . . does not inform the consumer whether the wine is a zinfandel or gewürztraminer,” the court reasoned that the adjective “white” was not probative of whether the chips contained white chocolate. Id. at *5. Likewise, even if some consumers might misunderstand the term “white” to refer to white chocolate, the court concluded that this would not salvage the plaintiffs’ claims; according to the court, the fact that “some consumers unreasonably assumed that ‘white’ in the term ‘white chips’ meant white chocolate chips does not make it so.”  The court also rejected the plaintiffs’ remaining theories of deception: it concluded that the term “premium” was non-actionable puffery (id. at *5-6); it held that the image of white chocolate chip macadamia cookies on the package did not “convey a specific message about the quality of those chips” (id. at *7); and it held that consumers could not ignore the ingredients list, which made clear that the product did not include white chocolate and resolved any ambiguity about its ingredients (id. at *7-8). And while the plaintiffs attempted to amend their complaint to bolster their theory of deception, the court concluded that their new allegations — including a summary of a survey regarding consumer perceptions of the labeling — did not render their theory any more plausible and dismissed their lawsuit with prejudice. See Cheslow v. Ghirardelli Chocolate Co., --- F. Supp. 3d ----, 2020 WL 4039365, at *5-7 (N.D. Cal. July 17, 2020).

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SEC and CFTC Actions Against Cryptocurrency App Developer for Unregistered Security-Based Swaps Highlight Risks for Fintech Companies

By: Charles D. Riely and Michael F. Linden

FintechA recent enforcement action by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) in the Fintech space serves as a cautionary tale for innovators who fail to heed traditional regulations. On July 13, 2020, the SEC and CFTC each filed settled enforcement actions against California-based cryptocurrency app developer Abra and its related company, Plutus Technologies Philippines Corporation. Abra’s bold idea was to provide its global users with a way to invest in blue-chip American securities, all funded via Bitcoin. In executing this idea, Abra took pains to focus its products outside of the United States and hoped to avoid the ambit of US securities laws. As further detailed below, however, the SEC and CFTC both found that Abra’s new product violated US laws. This post details Abra’s product, why the regulators came to the view that the new idea ran afoul of long-established provisions under federal securities and commodities laws, and the key takeaways from the regulators’ actions.

  1. Abra’s Product

In 2018, Abra began offering users synthetic exposure, via Bitcoin, to dozens of different fiat currencies and a variety of digital currencies, like Ethereum and Litecoin. Users could fund their accounts with a credit card or bank account, and Abra would convert those funds into Bitcoin. When a user wanted exposure to a new currency, the user would choose the amount of Bitcoin he or she wanted to invest, Abra would create a “smart contract” on the blockchain memorializing the terms of the contract, and the value of the contract would move up or down in direct relation to the price of the reference currency.

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OCC Adopts Final Rule Rejecting Madden

By: Michael W. Ross, Williams S.C. Goldstein, Amy Egerton-Wiley and Maria E. LaBella

LoanLast month, the Office of the Comptroller of the Currency (OCC) adopted a final rule clarifying that the terms of a national bank’s loans remain valid even after such loans are sold or transferred.  The rule was intended to reject the Second Circuit’s decision in Madden v. Midland Funding 786 F.3d 246 (2015).  The Federal Deposit Insurance Corporation (“FDIC”) followed suit later in the month, adopting a rule to clarify that interest rates on state bank-originated loans are not affected when the bank assigns the loan to a nonbank.  These steps do not resolve all of the uncertainty surrounding the decision, as discussed further below.

  1. The Madden v. Midland Funding

In Madden v. Midland Funding, Saliha Madden, a New York resident, contracted with Bank of America for a credit card with a 27% interest rate.  That rate exceeded the 25% usury cap under New York law.  But, as a national bank, Bank of America believed that it was entitled to “export” the interest rate of Delaware, its place of incorporation, under the National Bank Act and attendant principles of federal preemption.  By the time Madden defaulted, the balance had been acquired by Midland Funding, a debt collector headquartered in California.  When Midland Funding tried to collect the debt at the 27% interest rate, Madden sued under New York usury laws.  She argued that Midland could not take advantage of Bank of America’s interest-rate exportation.

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Update on the PPP Litigation Landscape

By: Michael W. Ross and Jacob D. Alderdice

COVID19The implementation of the Paycheck Protection Program (PPP) under Title I of the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) amidst the COVID-19 economic downturn has spawned a growing cottage industry of litigation, including several waves of cases against different defendants—primarily bank and non-bank lenders, and the United States Small Business Administration (SBA).  The nature of the cases has varied.  In the first cases filed, borrowers excluded from PPP sued banks for imposing additional restrictions on their applications, and for prioritizing bigger, institutional clients.  The second wave of lawsuits saw different categories of borrowers, such as companies owned by borrowers with criminal records, companies in bankruptcy, and others, suing the SBA for excluding them from the program entirely.  Finally, the latest round of cases involve financial services firms, accountants, and other borrowers’ agents initiating class actions against lenders for the failure to pay agent fees to those parties.  These three “waves” encompass the bulk of PPP litigation to date, but there have been some lawsuits of other varieties as well, including at least one civil enforcement action by the Federal Trade Commission alleging unfair and deceptive practices.[1]

In a prior update, we described one of the first court rulings in the PPP cases, in which on April 13, a federal district court in Maryland denied relief to a borrower who had sued Bank of America for imposing its own eligibility requirements on PPP borrowers.  See Profiles, Inc. v. Bank of Am. Corp., No. CV SAG-20-0894, 2020 WL 1849710, at *1 (D. Md. Apr. 13, 2020).  The court held that the CARES Act did not authorize a private right of action for borrowers to sue private lenders, and that the Act permitted banks to impose their own lending restrictions.  Soon after, a California federal court denied relief in a similar suit, denying a temporary restraining order for borrowers alleging that JPMorgan Chase and other large banks improperly accepted PPP applications from only existing customers.  Legendary Transp., LLC v. JPMorgan Chase & Co., No. 220CV03636ODWGJSX, 2020 WL 1975366, at *2 (C.D. Cal. Apr. 24, 2020).  Although no court has yet ruled in favor of borrowers in this type of lawsuit, similar lawsuits have continued to be filed and remain pending, alleging violations of state laws.[2]

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Ready for Launch (Redux)? An Updated Analysis of the Federal Reserve’s Rapidly Changing Main Street Lending Facilities

   

By: Neil M. Barofsky, Michael W. Ross and Ali M. Arain

COVID19On June 8, 2020—shortly after announcing the program was set to launch—the Board of Governors of the Federal Reserve (Federal Reserve) announced material changes to some of the key terms for the “Main Street” lending program.[1]  As of June 15, 2020, months after it was first announced, the program is finally operational.

As described in our prior alert, the Main Street lending program will provide up to $600 billion in loans to small- and medium-sized businesses in order to ease the economic dislocation caused by the COVID-19 pandemic.  Federal Reserve Chair Jerome H. Powell has underscored in several recent remarks that one key goal of the program is to ensure companies can continue to support the country’s workforce.  

Since the initial roll out of the program, the Federal Reserve has continued to announce changes, new details, and clarifying FAQs, that provide important guidance to potential participants.  These include significant changes made to the program on May 27, 2020, and then again on June 8, 2020, on the eve of the program’s launch.  Understanding the changes and clarifications to the program since its launch will be crucial for companies considering submitting an application for funds.

This client alert builds on our prior alert and provides a summary of the key features of the Main Street program, highlighting changes since its initial announcement and how those changes may affect the businesses that are considering seeking relief through this program.  We encourage you to follow up with any questions or concerns.  Jenner & Block offers a wide array of resources and lawyers with experience necessary to help our clients navigate the implications of these important new programs, led by our COVID-19 Response Team.  The firm is well positioned to help our clients manage the challenging issues related to the current crisis, from applications for funds, to managing workforce concerns, to the Congressional oversight and government investigations that may accompany any such financial assistance.

To read the full alert, please click here.

Additional Contributors: Marc B. Hankin, Anna Meresidis, Edward L. Prokop, Jacob D. Alderdice and William R. Erlain


Mitigating COVID-19’s Additional Disparate Impacts - Fair Housing and Lending Obligations Under the CARES Act

By: Kali N. Bracey and Damon Y. Smith

COVID19As data began pouring in from cities and states hit hard by COVID-19 it became clear that, even though the virus is color blind, certain racial and ethnic communities were suffering a disproportionate impact from the disease.  See, e.g.https://www.npr.org/2020/04/09/831174878/racial-disparities-in-covid-19-impact-emerge-as-data-is-slowly-released, last visited on May 5, 2020.  In particular, African Americans who contract COVID-19 have higher death rates, caused by underlying conditions and lack of access to health care.  Id.  Similarly, women- and minority-owned businesses may be disproportionately impacted by this crisis due to preexisting economic conditions such as lack of access to credit.  See, e.g., https://www.mbda.gov/page/executive-summary-disparities-capital-access-between-minority-and-non-minority-businesses, last visited on May 5, 2020.

When Congress passed the CARES Act to provide desperately needed funds to impacted industries, they waived statutory and regulatory requirements that could delay the delivery of that aid.  However, in recognition of the disparate conditions described above, Congress did not provide waivers of the Fair Housing Act, 42 U.S.C. § 3602 et. seq. and the Equal Credit Opportunity Act, 15 U.S.C. § 1691 et. seq.

The Fair Housing Act (FHA) prohibits discrimination in the sale or rental of housing because of race, color, national origin, religion, sex, familial status and disability.  With very few exceptions, homebuyers, homeowners, renters and prospective renters are protected from discrimination based on these classifications in all aspects of the financing and provision of housing.  The FHA prohibits both intentional discrimination and policies and decisions that are not intentionally discriminatory, but have a disproportionate and adverse impact against a protected class.  If a plaintiff is able to show that the disproportionate adverse impact exists, the burden shifts to the defendant to prove that there is a legitimate, non-discriminatory business need for the policy or decision.

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Proposed Amendments to Prop 65 Regulations May Force Changes to E-Commerce Warnings

By:  Kate T. Spelman and Amy Egerton-Wiley

Proposition 65 warnings are familiar to any business that manufactures, distributes, or supplies consumer products for sale in California. Enacted through a ballot initiative in 1986 as “the Safe Drinking Water and Toxic Enforcement Act,” Proposition 65 requires businesses to provide “clear and reasonable” warnings to consumers regarding exposure to certain carcinogenic and/or toxic chemicals identified by the California EPA’s Office of Environmental Health Hazard Assessment (OEHHA). image from environblog.jenner.com

Recent amendments—and proposed amendments—to the Proposition 65 warning regulations purportedly seek to clarify ambiguities related to the who, what, where, and when of providing safe harbor warnings under the law. With respect to internet purchases, however, the proposed amendments arguably go farther than simply clarifying the existing law, requiring e-commerce businesses to provide multiple warnings not required of brick-and-mortar retailers.

I. Recent Amendments Addressing Responsibility for Proposition 65 Warnings

OEHHA’s most recent amendments to the Proposition 65 warning regulations became effective on April 1, 2020. These amendments clarify the roles of upstream sellers and retail sellers in providing Proposition 65 warnings to consumers.

The warning regulations previously provided that upstream sellers (including manufacturers, distributors, and importers) could satisfy the Proposition 65 warning requirement with either an on-label warning, “or by providing a written notice directly to the authorized agent for a retail seller.” This “written notice” provision created confusion for upstream businesses involved in complicated supply chains or otherwise without knowledge of the final retail seller of the product at issue. The April 2020 amendments helpfully clarify that upstream sellers are only required to provide Proposition 65 notices to their direct customers, which in some cases may be other manufacturers or distributors as opposed to retailers. The April 2020 amendments also clarify that an upstream seller may deliver such notice to its customer’s “legal agent” if that customer has not selected an “authorized agent” for purposes of Proposition 65.

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