Consumer Financial Protection

While many today returned to work after the Holiday season, things remained quieter than usual here in the nation’s capital – with many federal workers furloughed until further notice as the federal government continues to be in a partial shutdown.  President Trump is reportedly meeting with congressional leaders today ahead of Thursday’s start to a new congressional session but, at least for now, there’s no immediate end to the shutdown in sight.

Here’s how the shutdown is affecting federal agencies responsible for overseeing and enforcing advertising and privacy laws:

  • The FTC closed as of midnight December 28, 2018.  All events are postponed and website information and social media will not be updated until further notice.  While some FTC online services are available, others are not.  More information here.
  • The CPSC is also closed, although a December 18, 2018 CPSC memorandum summarizing shutdown procedures indicates that certain employees “necessary to protect against imminent threats to human safety” will be excepted employees and continue work during the shutdown.  The CPSC consumer hotline also continues to operate. Companies should remember that obligations to report potential safety hazards are not furloughed, so the mantra of “when in doubt, report” still applies, even if public announcement of a recall may be delayed.
  • Roughly 40% of FDA is furloughed according to numbers released by its parent agency, the Department of Health and Human Services.  In a post on its website, the agency explained that it will be continuing vital activities, to the extent permitted by law, including monitoring for and responding to public health issues related to the food and medical product supply.  The agency is also continuing work on activities funded by carryover user fee balances, although it is unable to accept any regulatory submissions for FY 2019 that require a fee payment.
  • Because the CFPB is funded through the Federal Reserve and not Congress, it remains in operation.

Earlier today, an en banc panel of the U.S. Court of Appeals for the D.C. Circuit ruled that the CFPB was constitutionally structured, reversing an earlier decision by a divided three-judge panel and holding that the Dodd-Frank Act permissibly shields the CFPB Director from removal without cause.  The Court’s 7-3 majority opinion only addressed the constitutionality of the Director’s for-cause removal protection; it did not substantively address a related issue concerning the interpretation of the Real Estate Settlement Procedures Act (RESPA) and instead reinstated the three-judge panel’s decision as to substantive RESPA issues.

The Court found that Congress’s choice to include a for-cause removal provision did not impede the President’s Article II executive authority and duty to “take care that the laws be faithfully executed.”  Specifically, the majority held that:

  • Because the President can still remove the Director for “inefficiency, neglect of duty, or malfeasance in office,” the President retains ample tools under Article II to ensure the faithful execution of the laws.  The majority noted that this same removal standard was upheld when the Supreme Court considered the FTC’s for-cause removal provision in its 1935 Humphrey’s Executor decision.
  • The majority rejected the proposed distinction based on the FTC as a multi-member independent agency and the CFPB as a single-director independent agency as “untenable,” asserting that the “distinction finds no footing in precedent, historical practice, constitutional principle, or the logic of presidential removal power.”
  • Finally, the majority held that the functions of the CFPB and its Director, unlike, for example, the Secretary of State or another Cabinet officer, are not core executive functions, and financial and consumer protection regulators have long been afforded a degree of independence, citing the FTC, the Federal Reserve, the FDIC, and others as examples.  The majority asserted that holding otherwise would result in a “wholesale attack on independent agencies—whether collectively or individually led—that, if accepted, would broadly transform modern government.”

The procedural uniqueness of the case makes it uncertain whether it will be appealed to the Supreme Court.  Under the Trump administration, the Justice Department supported the earlier decision finding the CFPB structure unconstitutional and expressed disappointment with today’s decision.  In that PHH could benefit from the reinstatement of the three-judge panel’s decision on RESPA issues, its appetite for appeal may also be limited.  We’ll continue to watch this interesting case closely and post updates here.

Earlier this month, the Securities and Exchange Commission (SEC) issued a warning to celebrities and social influencers who use social media to encourage consumers to invest and/or purchase stocks. Recent celebrity endorsements for investment in Initial Coin Offerings (ICOs) were highlighted as examples in the SEC’s warning. In the future, if celebrities and social influencers do not disclose the nature, source, and amount of compensation paid, directly or indirectly, by the company in exchange for the endorsement, they may face action for violations of the anti-touting and anti-fraud provisions of the federal securities laws, participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.

This warning follows a wave of enforcement brought by the SEC earlier this year. In April 2017, the SEC filed civil fraud actions against 27 companies for the fraudulent promotion of stocks. These included three public companies, seven stock promotions/communications firms, two company CEOs, six individuals at the firms and nine writers. The actions were filed under Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, as well as Rule 10b-5, which prohibit fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of securities. In an effort by public companies to generate publicity for their stocks, defendants allegedly hired communications firms that paid writers to publish articles endorsing the company’s stocks. In one case, a firm allegedly had its writers sign non-disclosure agreements preventing them from disclosing that they were compensated.

More than 250 articles were published allegedly without proper disclosures regarding compensation received by the companies they were promoting. Seventeen parties have agreed to settlements with penalties ranging from $2,200 to $3 million based on the frequency and severity of the actions. One example of the kind of advertising that was targeted is shown here: It is a post on Seeking Alpha, an online forum dedicated to financial discussion, in which the post encourages investment in a particular Alzheimer’s therapy. The author’s name and picture allegedly were false as was a statement in the article that indicated that it was not sponsored content.

Here’s the lesson: The FTC is very much interested in ensuring that advertisers and their agents disclose when they disseminate sponsored content (as we’ve repeatedly written about here), but the FTC isn’t alone. The SEC clearly shares this concern, as does FINRA, which issued this notice in April 2017 addressing disclosure obligations relating to native advertising. For more information about how advertising standards apply to influencers and native advertising, check out our recent webinar here.

Associate Lauren Myers contributed to this post. She is practicing under the supervision of principals of the firm who are members of the D.C. Bar.

Last week, the Senate voted 51 to 50 (with Vice President Pence casting the tiebreaking vote) to override the Consumer Financial Protection Bureau’s Arbitration Rule, which was finalized earlier this year in July.  As previously discussed here and here, the Arbitration Rule would have prohibited providers of covered consumer financial products and services from using pre-dispute arbitration agreements to compel consumers to participate in arbitration to resolve disputes about those products and services.  Shortly after the vote, the White House released a statement applauding the override vote and indicating that President Trump intended to enact it, effectively confirming that the Arbitration Rule will not come into effect.

The override occurred pursuant to the Congressional Review Act (CRA), which was enacted in 1996 to provide an easier mechanism for Congress to undo agency regulations without enacting wholly new legislation.  Under the CRA, both the House and Senate can use streamlined procedures that limit debate and the amendment process and allow Congress to overturn agency regulations with a simple majority in each chamber.  The CRA also prohibits agencies from issuing regulations that are “substantially the same” as the overturned regulation unless authorized by a subsequent law, meaning that the CFPB will be unable to simply pass a substantially similar rule in the next session of Congress.  The meaning of “substantially the same” under the CRA has yet to be litigated, so it’s at least possible that the CFPB could try to reissue another arbitration rule down the road even without subsequent legislation.

While the battle over the Arbitration Rule appears to be over for now, proponents of the rule vowed to continue to push related reforms and encouraged the CFPB to use existing authority to review and take action against unfair, deceptive, or abusive arbitration provisions.  The CFPB remains authorized to use its supervisory and enforcement authorities under the Dodd-Frank Act to regulate arbitration provisions.  While the repeal of the Rule means the CFPB can’t prohibit arbitration clauses in the aggregate via rule, it could still allege that particular arbitration provisions are unfair, deceptive or abusive on a case-by-case basis.  Providers of financial products and services, therefore, should remain cognizant of the CFPB’s regulatory and enforcement authority and evaluate consumer arbitration provisions in light of relevant court precedent and guidance to minimize the likelihood that such provisions are invalidated and/or garner CFPB interest.

After months of speculation among the consumer protection and antitrust bars, Trump announced today his intention to nominate former Director of the Bureau of Competition and current Paul Weiss partner Joseph Simons as Chairman of the Federal Trade Commission.  Trump also announced his plan to nominate Rohit Chopra, currently a senior fellow at the Consumer Federation of America and previously Assistant Director at the Consumer Financial Protection Bureau (CFPB), to one of two vacant commissioner seats.  News outlets also are reporting that Trump will soon nominate Noah Phillips, chief counsel for Senator John Cornyn (R.-Tex.), to an additional commissioner seat.

Assuming Simons is confirmed and appointed as Chair, Acting Chairman Maureen Ohlhausen would return to her position as Commissioner.  Her term is set to expire in September 2018.  Commissioner Terrell McSweeny also continues to serve on the Commission, although her term expired in September, and as reported by MLex.com, Simons’ confirmation would place him in the slot she currently occupies.  More information on each of the three nominations follows.

Joseph Simons.  Currently a partner and co-chair of the Antitrust Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP, Simons has worked in private practice for the majority of his career and is likely to be welcomed by industry as a reasoned and qualified choice.  He also has experience in public service, having served at the FTC as Director of the Bureau of Competition from June 2001 to August 2003.  He also served as the Associate Director for Mergers and the Assistant Director for Evaluation at the FTC in the late 1980s.  Simons has worked on a number of high profile antitrust cases, including representing MasterCard Inc. in antitrust class actions over merchant fees, and representing a consortium including Microsoft, Ericsson, RIM and Sony in its $4.5 billion acquisition of the patent portfolio of Nortel Networks.

As a long-time antitrust practitioner with experience in private and public practice, Simons is likely to bring a thorough and deliberative approach to the Commission.  While Simons is unlikely to support enforcement that is not justified by a rigorous economic analysis of costs and benefits, he’s also unlikely to shy away from challenging deals and conduct that fail the economic test.  In short, economic effects and rule of reason will guide policy.  Simons notably has significant high tech and intellectual property experience, as well as merger experience, where economics predominates decision making.

On the consumer protection side, Simons’ experience will likely reinforce the policies announced by Acting Chairman Ohlhausen to put economic injury at the center of case selection.  The emphasis on fraud will likely continue, while actions and remedies that would regulate ordinary business practices will face the test of economic analysis.  If he’s confirmed as expected, Simons would serve a seven-year term that began on September 26, 2017.

Rohit Chopra.  While Simons’ experience comes primarily from the competition side, Chopra has concentrated on consumer protection issues.  Chopra is currently a senior fellow at the Consumer Federation of America where he focuses on consumer finance issues, particularly with regard to their impact on younger Americans.  Chopra was previously the Assistant Director of the CFPB where he led enforcement actions against student loan borrowers and helped establish a new student loan complaint system at the agency.  Chopra’s background and experience with consumer finance give him an expertise rare among commissioners and could translate into significant influence on hot topics such as credit reporting, debt collection, and big data.  He also may engage in advertising and privacy initiatives affecting children and younger Americans, given his prior interest in this area.

Chopra’s approach to competition could be influenced by longtime ally, Senator Elizabeth Warren (D.-Mass.), who has distinguished herself as a proponent of aggressive enforcement and new legislation.  Unlike most prior FTC commissioners, Chopra is not an attorney.  His background is in business and includes an MBA from the Wharton School at the University of Pennsylvania.  Trump indicated that Chopra would be appointed to the remainder of a seven-year term that would expire on September 25, 2019.

Noah Phillips.  While yet to be announced by the Trump Administration, media outlets are reporting that Phillips will be named to fill another vacancy at the Commission.  Phillips is presently Chief Counsel to Senator Cornyn.  Phillips previously worked as an associate at Cravath, Swaine & Moore LLP and Steptoe & Johnson LLP, before leaving the private sector to serve as counsel to Cornyn.

Phillips would come to the Commission with significant law firm experience, as well as an understanding of the Hill.   Among others, Cornyn serves on the Senate Committee on Finance, which includes subcommittees on international trade and energy.  We would expect, therefore, to see Phillips take an active interest in international issues, as well as competition in the energy sector.

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We will continue to monitor the appointment and confirmation process and post updates here.

A California jury in federal court ruled on Tuesday, June 20, that TransUnion violated the Fair Credit Reporting Act (FCRA) by erroneously linking certain consumers with similarly named terrorists and criminals in the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC’s) database.  The jury awarded statutory and punitive damages in excess of $60 million, which could set a record for the largest FCRA verdict to date.

Initially filed in 2012, plaintiffs alleged that TransUnion willfully violated FCRA by failing to maintain reasonable procedures to assure maximum possible accuracy of the consumer reports it sold, and by failing to provide required disclosures to consumers.  TransUnion offers an add-on service to its standard consumer reports whereby it would check consumers against OFAC’s “Specially Designated Nationals and Blocked Persons List” (SDN), which lists terrorists, drug traffickers, and other criminals.  Companies that do business with individuals on the SDN face strict liability penalties approaching $290,000 per transaction, so companies have a strong incentive to cross-reference the SDN before undertaking certain transactions – depending on the type of transaction and other factors.

The case arose out of so-called “false positives,” whereby TransUnion would find and report a potential match to the SDN but that match would subsequently be found to be erroneous.  For example, lead plaintiff Sergio L. Ramirez was prevented from buying a car in 2011 because TransUnion told lenders that he potentially matched two individuals on the OFAC list.  Ramirez and other class members alleged that TransUnion failed to take reasonable steps, such as also cross-referencing date of birth or other information available on the SDN, before reporting the match on the consumer report.  TransUnion countered that it did all that was feasible for the time period in question to achieve maximum accuracy, as required by FCRA, while still helping its clients comply with OFAC regulations and avoid criminal penalties.

The case provides an interesting example of the competing legal obligations that a company can face under different statutes, and of the need to stay abreast of constantly evolving technology that informs the relevant legal standard.  Determining how to screen potential customers for OFAC compliance and use consumer reports consistent with FCRA depends on a number of factors, including the technology available at the time and the type and scope of transaction at issue.

Kelley Drye’s Export Controls and Sanctions Compliance Group regularly assists clients with obligations in connection with OFAC screening, and Kelley Drye’s Consumer Financial Protection Regulation regularly advises clients on FCRA compliance.    

 

Last week the FTC announced that it had reached a settlement with NetSpend over allegations that NetSpend deceived consumers by promising “immediate access” with “guaranteed approval” to money loaded on its general purpose reloadable cards.  Approved 2-1 with a vote by then-Commissioner Ramirez before her resignation, the order prohibits NetSpend from making misrepresentations about the length of time or conditions necessary before its prepaid products will be ready for use, the comparative benefits of its prepaid products to debit cards and other payment methods, and the protections consumers have in the event of account errors.  The order also requires NetSpend to pay $53 million in monetary relief and to provide notices to third-party advertisers directing them to discontinue any claims stating that NetSpend’s cards “provide immediate or instant access to funds, are ready to use today, or provide guaranteed approval.”

Initially filed in November 2016, the complaint alleged that NetSpend targets the “unbanked” or “underbanked,” as well as low-income and Spanish-speaking consumers, and deceptively represents that NetSpend cards will be ready for use immediately without any approval process.  The complaint suggests that because, “in all cases consumers must contact NetSpend and provide personal identification information to activate the card” (e.g., name, address, birthday and SSN), the claims of “immediate access” are misleading and create false expectations for consumers.  The complaint further alleges that NetSpend did not always activate consumer accounts even though consumers sent the requested information and that NetSpend placed blocks on card accounts and made it difficult for consumers to resolve the blocks through poor customer service.

In a dissenting statement, Acting Chair Ohlhausen raised two primary objections.  First, Ohlhausen argues that the majority fails to consider the phrase “immediate access” in context, which describes the benefits of NetSpend cards as a direct deposit vehicle that could provide access to funds quicker than other forms of deposits.  Ohlhausen reasons that, when considered in context, consumers would understand the claim “immediate access” to mean access to funds on the date when the payer made funds available for transfer to the account, not necessarily the day the consumer opens the account.  Second, Ohlhausen asserts that, even assuming the claims were deceptive, the $53 million monetary relief “is not sufficiently related to that claim” because there was insufficient evidence to conclude that consumers abandoned funds because of NetSpend’s allegedly deceptive advertising.

Commissioner McSweeny also issued a statement that responded to the Acting Chair’s arguments, noting that “[t]hese claims were not limited to situations involving direct deposit” and that “[m]any NetSpend card users load funds onto their cards at the time of purchase or otherwise have funds deposited before activation.”   McSweeny also noted that some consumers allegedly never received their funds even after they provided the information requested by NetSpend to verify their identity.

The case is notable both substantively – as one of few cases addressing representations for prepaid access cards, and procedurally – since it could not be entered if the vote took place today given the conflicting views of the two current Commissioners.  (The settlement announcement was delayed because Commissioner McSweeny did not vote to support the settlement until March 8, about a month after then-Commissioner Ramirez had voted in favor of the settlement.)

Please join Kelley Drye in 2017 for the Advertising and Privacy Law Webinar Series. Like our annual in-person event, this series will provide engaging speakers with extensive experience and knowledge in the fields of advertising, privacy, and consumer protection. These webinars will give key updates and provide practical tips to address issues faced by counsel.

This webinar series will commence January 25 and continue the last Wednesday of each month, as outlined below.

January 25, 2017 | February 22, 2017 | March 29, 2017 | April 26, 2017 | June 28, 2017
July 26, 2017 | September 27, 2017 | October 25, 2017 | November 29, 2017

Kicking off the series will be a one-hour webinar on “Marketing in a Multi-Device World: Update on Cross Device Tracking” on January 25, 2017 at 12 PM ET. For more information and to register, please click here. CLE credit will be offered for this program.

The FTC recently examined peer-to-peer (P2P) payment systems and crowdfunding in the second forum of its FinTech series.  P2P payment systems are online services that allow consumers to share money electronically.  These platforms enable the immediate transfer of money between consumers, typically for free or for a small fee.  In the panel discussion of P2P payments, the following themes emerged:  P2P payments have been transformational to the online payment industry and have changed consumer expectations about how money is being moved; these platforms likely will be disproportionately targeted by sophisticated hackers; and there are high barriers to entry into this market, in terms of cost and regulatory risk.

Crowdfunding is the process by which companies and individuals raise money from the public to fund new products, projects, or individual needs.  Panelists discussed the responsibility platforms bear to shape consumer understanding of crowdfunding campaigns through adequate disclosure and communication.

The following expands on these themes and provides key takeaways from the forum:

P2P Payments as Transformational

Panelists (see list here) described the consumer benefits of P2P payments as enormous. The benefits go beyond splitting the dinner check or paying the babysitter with a few taps on a smart phone.  P2P payments have expanded financial access to underserved communities, in particular, to underbanked and non-banked consumers.  For example, P2P platforms enable instantaneous remittance payments or the wiring of funds, and remove obstacles in conventional banking such as delayed payment transfers and overdrafts.

And P2P platforms are not just a thing for millennials. Studies report that while millennials are conducting approximately 11 transactions a year, 45-54 year olds are conducting about 4 transactions and the over 65 crowd about 3.1

Fraud Risk

P2P payment systems collect more consumer data beyond the traditional credit card services. Therefore, panelists believe these platforms may be disproportionately targeted by sophisticated hackers.  As one panelist aptly noted: “The mode is new, but the scams are old.”  One positive attribute about Fintech companies is their typical approach to data security: they are extremely good at authentication and many view themselves first as security companies.  Indeed, the weakest security points in P2P payments may not be in the platform, but the consumers using the services and security vulnerabilities in their devices (for more on IoT security, see here). In response, panelists noted the importance of appropriate and reasonable data security protocols to protect consumer data in this space.

Regulatory Risk

Panelists noted the high barriers to entry into this market. This is due to the various state licensing requirements for money transmission, and to the consumer protection issues raised by this type of mobile platform.  Depending on the platform type, different sets of regulation may apply, including the following:

  • Banking regulations and money transfer regulations;
  • Electronic Funds Transfer (EFT) Act, Reg E, requiring that financial institutions and any third party involved in EFT services disclose specific information to consumers before engaging in any transactions;
  • Truth in Lending Act and Reg Z, requiring that creditors disclose clearly and conspicuously in writing the terms of the legal obligation between the parties;
  • Section 5, Federal Trade Commission Act, prohibition against unfair or deceptive acts and practices; and
  • Dodd-Frank’s prohibition against unfair, deceptive, and abusive acts and practices.

In addition, panelists noted the applicability of the new prepaid rulemaking issued by the CFPB. The new rule applies specific federal consumer protections to broad swaths of the prepaid market for the first time. It covers traditional prepaid cards, including general purpose reloadable cards, and extends to newer platforms such as mobile wallets and P2P platforms.  The regulations require adequate disclosure, liability protection, among other things.  See here for more information on this rulemaking.

There was discussion among the panelists on how to communicate effectively to consumers the information collected and stored by these platform. As a cautionary tale, panelists noted the Texas Attorney General action in May 2016 against PayPal involving its Venmo mobile app.  The app allegedly failed to clearly disclose how consumers’ transactions and interactions with other users would be shared, and misrepresented that communications from Venmo were actually from particular Venmo users.  As a result, consumers may have publically exposed private information regarding their payments.

Crowdfunding

Crowdfunding is an evolving method of raising capital that has been used to raise funds through the Internet for a variety of projects.2

There are four basic types of crowdfunding: donation-based (e.g., GoFundMe, etc.); rewards-based (e.g., Kickstarter); equity-based (e.g., Crowdfunder.com); and debt-based (e.g., LendingClub).  Equity and debt-based crowdfunding offerings are considered securities and subject to regulation by the SEC.Donation and rewards-based crowdfunding generally are not regulated.  Hence the FTC’s heightened interest in ensuring these sites are not engaging in unfair or deceptive acts or practices in violation of Section 5 of the FTC Act.

Indeed, the FTC settled its first case in June 2015 against a creator of a crowdfunding project, Erik Chevalier (The Forking Path).  Chevalier allegedly raised money from consumers to produce a board game through a Kickstarter campaign, but instead used most of the funds on himself and refused to provide refunds to his backers.  Chevalier was fined approximately $112,000 and is prohibited from making misrepresentations about any future crowdfunding campaign.

Panelists discussed the import of the FTC’s settlement, in particular, the responsibility that crowdfunding platforms bear to shape consumer understanding and to monitor creators for fraud. Panelists agreed there was a role for both regulators to pursue fraud and for industry self-regulation to adopt best practices.

FinTech companies face high barriers to entry, an uncertain regulatory environment, and increased privacy and data security concerns. But the benefits to consumers of these types of novel platforms are enormous.  P2P payments expand financial services to underserved communities; creators of successful crowdfunding projects may have access to venture capital previously unavailable to them.  Regulators therefore seek to balance technological innovation with consumer protection directives, in particular, to ensure all players keep their promises, tell consumers the truth, and provide adequate disclosures.

  1. Javelin LLC, P2P Payments in 2015: Market Sizing and Evaluation of P2P (Dec. 2015).
  2. U.S. Securities & Exc. Comm’n, SEC Adopts Rules to Permit Crowdfunding (Oct. 30, 2015).
  3. The SEC adopted Regulation Crowdfunding in October 2015 to enable individuals to purchase securities in crowdfunding offerings subject to certain limits, require companies to disclose certain information about their business and securities offering, and create a regulatory framework for the intermediaries facilitating crowdfunding transactions.

CFPBEarlier today, the U.S. Court of Appeals for the D.C. Circuit issued a landmark decision against the CFPB, finding that the agency was unconstitutionally structured because it concentrates “enormous executive power in a single, unaccountable, unchecked Director.”  However, the court stopped short of ordering a shutdown of the Bureau and instead held that the President “now will have power to remove the Director at will, and to supervise and direct the Director,” severing a provision of the Dodd-Frank Act that provided that the CFPB Director could only be removed for cause.

Particularly given that the decision is likely to be appealed, its most immediate impact may relate to the CFPB’s interpretation of its authority to initiate administrative enforcement actions under the Dodd-Frank Act.  While the CFPB had argued that there is no statute of limitations for any CFPB administrative actions to enforce any consumer protection law, the D.C. Circuit flatly rejected this argument and held that the Dodd-Frank Act incorporates the statutes of limitations in the underlying statutes enforced by the CFPB.

Continue Reading D.C. Circuit Rules that CFPB is Unconstitutionally Structured