FYI: CFPB Enters into $3.2MM UDAAP Consent Order With Online Lender

An online lender that extends payday and unsecured installment loans reached a settlement with the Consumer Financial Protection Bureau (CFPB) regarding "unfair, deceptive, or abusive acts or practices" allegations that the lender unlawfully debited consumers' bank accounts without authorization and failed to honor loan extensions to its customers.

 

Under the terms of the settlement and consent order, the lender is barred from making or initiating electronic fund transfers without valid authorization, and must pay a $3.2 million civil money penalty.

 

A copy of the consent order is available at:  Link to Consent Order

 

The respondent, an online lender ("Lender"), extends and services unsecured payday and installment loans and lines of credit to individual customers in the U.S., U.K. and Brazil. 

 

Lender purchased consumer loan applications with the consumer's bank account information from lead generators; in some instances from consumers who already had loans with Lender, but with different bank account information.  Because Lender maintained a policy to extend only one loan at a time to any consumer, if it found that the consumer already had an outstanding loan with Lender, it would deny the application.

 

Beginning in 2010, Lender allegedly used consumer bank account information obtained from loan applications purchased from lead generators to overwrite and replace the banking information it had on file with its existing customers.  Supposedly without authorization, Lender was alleged to have electronically debited payments on 5,520 consumers' outstanding loans from the new bank accounts.  Although it stopped overwriting consumers' bank account information from its lead-generator applications in June 2014, it allegedly continued to debit or attempt to debit 265 customers' accounts that had already been overwritten at least 6,425 through December 2018—in most instances supposedly without its customers' authorization.

 

As a result of the debits or attempted debits, Lender allegedly extracted millions of dollars in unauthorized debits from customers' accounts supposedly without their consent, resulting in unexpectedly low or negative balances and impositions of insufficient funds fees and other bank fees to its customers.

 

During the same relevant period, Lender also allegedly offered certain consumers who had previously repaid two or more loans, and had a debit card on file with Lender, a same-day expedited funding ("Flash Cash").  In instances where funding to the debit card on file failed, the Flash Cash funding was allegedly denied, but the loans were funded to the consumer's bank account the following day. 

 

Between May 2013 and May 2014, Lender supposedly created two records associated with these customers; one incorrectly reflecting the Flash Cash as returned with a $0 balance, and the second accurately reflecting the loan funded the following day.  When some of these consumers later requested and received loan extensions, Lender allegedly incorrectly applied the extensions to the loan files with the $0 balance, rather than the funded loan.  This allegedly resulted in 308 consumers not receiving the approved extensions, and having their accounts debited for full loan payments instead of the extension fee, resulting in unexpectedly low or negative balances and impositions of insufficient funds fees and other bank fees to its customers.

 

After consumers notified Lender of this issue in September 2013, Lender identified the source as a coding error, and implemented a coding fix in January 2014. However, when the fix failed ten days later, Lender manually disabled it, and did re-enable the fix until May 2014.  Affected customers allegedly were not informed that Lender had deducted the full loan payment amounts from their bank accounts, instead of the promised extension fee, until almost a full year later, in April 2015.

 

As you may recall, sections 1031 of the Consumer Financial Protection Act of 2010 provides the CFPB with authority to declare an act or practice to be unlawful if it "has a  has a reasonable basis to conclude that — (A) the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition."  12 U.S.C. §§ 5531(c)(1).

 

Moreover, section 1036 prohibits any "covered person" or "service provider" "to engage in any unfair, deceptive, or abusive act or practice."  12 U.S.C. § 5536(a)(1)(B).

 

Lender (and its subsidiary entities) is subject to the CFPB's authority because it (i) extends credit and services loans offered or provided for use by consumers primarily for personal, family, or household purposes. (12 U.S.C. § 5481(15)(A)(i)) and; (ii) collects debt related to the loans it extends. 12 U.S.C. § 5481(15)(A)(x).

 

First, as to the Lender's practice of unauthorized debiting its customers' accounts, the CFPB asserted that the injury to consumers from the unauthorized debiting was not outweighed by any countervailing benefit to consumers or to competition, and the consumers supposedly could not have reasonably avoided the injury.  Moreover, the cost to Lender from refraining from the practice allegedly would not have been significant.  Accordingly, the CFPB concluded that Lender's practice of unauthorized debiting constituted an unfair act and practice in violation of section 1031(c) and 1036(a) of the CFPA, 12 U.S.C. §§ 5531(c), 5536(a)(1)(B).

 

As to Lender's failure to honor loan extensions to its consumers who applied for Flash Cash funding, the CFPB similarly concluded that injury to consumers from Lender's failure to honor loan extensions was not outweighed by any countervailing benefit to consumers or to competition.  Moreover, the CFPB again asserted that the cost of correcting Lender's software errors would not have been significant and the erroneous practice did not confer any benefit to consumers or competition. 

 

Accordingly, Lender's failure to honor loan extensions also was deemed an unfair act and practice in violation of section 1031(c) and 1036(a) of the CFPA, 12 U.S.C. §§ 5531(c), 5536(a)(1)(B).

 

Pursuant to the CFPB's Consent Order, Lender is permanently restrained and enjoined from:

debiting or attempting to debit any consumer's bank account without having obtained the consumer's express informed consent;

making or initiating electronic fund transfers from a consumer's bank account on a recurring basis without obtaining a valid authorization signed or similarly authenticated from the consumer for preauthorized electronic fund transfers from that particular bank account and providing the consumer a copy of the authorization signed or similarly authenticated by the consumer for preauthorized electronic fund transfers from the consumer's account;

failing to honor loan extensions granted to consumers, and;

debiting the full payment instead of a loan extension fee to consumers granted a loan extension.

 

As a result of the above-described violations, Lender was ordered to pay the CFPB a $3.2 million fine.  

 

Under the Consent Order, additional requirements concerning reporting, distribution of the consent order, recordkeeping, and compliance monitoring were imposed against Lender.  Although the provisions of the Consent Order do not bar, estop or prevent the CFPB or any other government agency from taking action against Lender, Lender was forever released and discharged from all potential liability for law violations concerning its unauthorized debiting and failure to honor loan extensions.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

 

FYI: Fla Sup Ct Rules Borrower Entitled to Attorney's Fees After Voluntary Dismissal of Foreclosure Appeal

Reversing a ruling by the Fourth District Court of Appeal, the Supreme Court of Florida recently held that a mortgagee's voluntary dismissal of an appeal made the borrower the prevailing party entitled to recover appellate attorney's fees because the mortgagee maintained its right to enforce the mortgage contract that contained a prevailing party attorney's fees provision until it dismissed the appeal.

 

A copy of the opinion is available at:  Link to Opinion

 

A mortgagee filed an in rem foreclosure action on a reverse mortgage on real property.  The borrower moved to dismiss the complaint for a variety of reasons, including that the holder lacked standing.  The trial court ultimately dismissed the complaint with prejudice, but the dismissal order did not state the reason for dismissal.

 

The mortgagee appealed to the Fourth District Court of Appeal.  After the parties submitted briefs, the mortgagee voluntarily dismissed the appeal before the Fourth District issued its ruling. 

 

The borrower then moved for appellate attorney's fees pursuant to section 57.105(7), Florida Statutes.  The Fourth District denied the borrower's motion for attorney's fees holding that the borrower could not recover fees after seeking to dismiss the complaint for lack of standing.

 

The Florida Supreme Court accepted the borrower's request for review.

 

Initially, the Florida Supreme Court noted generally that, "when a plaintiff voluntarily dismisses an action, the defendant is the prevailing party."  As such, the Court held, the Fourth District wrongly denied the borrower's appellate attorney's fees based on the mortgagee's voluntary dismissal of the appeal. 

 

The Florida Supreme Court also took issue with the Fourth District's conclusion that the trial court dismissed the complaint because the borrower argued that the mortgagee lacked standing to foreclose because it misstated the trial court's ruling and failed to address that the borrower's motion for appellate attorney's fees arose from the mortgagee's voluntary dismissal.

 

Specifically, the Florida Supreme Court found that the "trial court granted the dismissal but did not provide any reasoning for its decision."  In addition, during the appeal the borrower advanced three arguments to affirm the dismissal order, only one of which was that the holder lacked standing to foreclose.

 

The Florida Supreme Court also distinguished the Fourth District's reliance on Bank of New York Mellon Trust Co. v. Fitzgerald, 215 So. 3d 116 (Fla. 3d DCA 2017), which held that when no contract existed between a borrower and a lender, the borrower "could not invoke the reciprocity provisions of section 57.105(7)."  Here, the Court noted, unlike Fitzgerald, the trial court never made a finding of fact that a mortgage contract never existed.

 

Additionally, although the law in Florida "is clear that a party is precluded from claiming attorney's fees under a contract that has been found to have never existed," the Court noted it is also true "that when parties enter into a contract and litigation later ensues over that contract, attorney's fees may be recovered under a prevailing-party attorney's fee provision contained therein even though the contract is rescinded or held to be unenforceable."

 

Thus, the Florida Supreme Court reversed the Fourth District's ruling, and held that the borrower was the prevailing party entitled to recover appellate attorney's fees.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

 

 

FYI: 8th Cir Vacates FCRA Class Settlement on Spokeo Grounds

The U.S. Court of Appeals for the Eighth Circuit recently vacated a trial court's order approving a class action settlement agreement because the trial court did not first determine whether the FCRA class representative had standing.

 

In so ruling, the Eighth Circuit held that a court's approval of a settlement was a judgment, which is invalid unless the court has Article III standing and subject matter jurisdiction.

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiff filed a putative class action in Missouri state court alleging the defendant violated the federal Fair Credit Reporting Act ("FCRA"). Defendant removed the case to federal court.

 

Shortly thereafter, the parties reached a settlement agreement during mediation. Days later, the Supreme Court rendered its decision in Spokeo v. Robins, "holding that the Ninth Circuit failed to properly analyze Article III standing in assessing a claim brought under the FCRA."

 

The defendant then moved to dismiss for lack of standing, which the trial court denied, reasoning that "[plaintiff's] standing to bring the FCRA claims underlying this settlement is irrelevant to whether she has standing to enforce the parties' settlement agreement."

 

The trial court then directed the parties to "submit their settlement for approval under Fed. R. Civ. P. 23(e)" and approved the settlement. Defendant appealed.

 

On appeal, the Eighth Circuit held that "the trial court erred by not assessing standing before enforcing the settlement agreement."

 

The Court reasoned that "Article III standing must be decided first by the court and presents a question of justiciability; if it is lacking, a federal court has no subject-matter jurisdiction over the claim." In addition, the trial court has a continuing obligation to make sure that standing exists throughout the case, not just when the complaint is filed, and this applies to class actions because an order approving a settlement agreement is a judgment, which is invalid unless the court has subject matter jurisdiction to enter it.

 

The Eighth Circuit rejected the class representative's argument that the trial court did not need to address standing after Spokeo because the defendant was bound by settlement agreement even if the law changed, reasoning that Spokeo "was not a change in the substantive law bearing on [plaintiff's] claim that would have 'altered the settlement calculus.'"

 

In other words, the class representative argued that only changes in the law that directly affect Article III standing or subject matter jurisdiction matter would invalidate a settlement. However, the Eighth Circuit rejected this argument, holding that "Spokeo did not change the law of standing and thus was not a post-agreement change in the law. It merely reiterated that an Article III injury must be both particular and concrete."

 

The Eighth Circuit concluded that because there was no finding in the record reflecting whether the plaintiff had standing, the trial court's approval of the settlement would be vacated and the case remanded for a determination of whether plaintiff had standing to sue, expressing no opinion "on whether the Seventh Circuit's opinion on FCRA standing or one of the competing approaches in other circuits is best applied to the facts of this case." 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments