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On July 31, 2018, the Office of the Comptroller of the Currency (“OCC”) announced its intent to accept applications for special purpose national bank charters from eligible non-depository financial technology (“Fintech”) companies.[1] This announcement coincides with the release of a Treasury Department report supporting financial innovation and the regulation of nonbank financial entities.[2]  These announcements signal a significant shift in the current banking marketplace. On the one hand, the announcements are good news for Fintech disrupters, as it opens an avenue to reaching a nationwide market despite sometimes hostile state laws. On the other, for traditional banks, the announcements are a further harbinger, if any is needed, of the emerging new competition from Fintech.

The OCC’s Response to Technological Innovation in Banking

Over the past several years, Fintech has caused meaningful disruption in the financial services industry. Working with banks and non-bank businesses, Fintech companies have introduced new approaches to traditional banking products and services, and entirely new products and services, by leveraging technology, data, and connectivity. Typically, Fintech avoids the expense of extensive brick-and-mortar physical presence, while reaching broad markets, by using the internet to provide products and services.

The OCC has expanded special-purpose national bank charters (“SPNBCs”) to eligible Fintech companies to bring these companies within the U.S. bank regulatory system, which in turn will increase consumer protection, foster healthy competition, and encourage technological innovation in the banking industry. Also, by granting SPNBCs to Fintech companies, the OCC will expand its oversight of technology-based products and services that are reshaping the banking industry. In exchange, OCC-chartered Fintech companies will be able to conduct business throughout the U.S. under a uniform set of regulations and supervisory standards without the need to seek multi-state licensing or partner with insured depository institutions, while enjoying the significant benefits of federal preemption of many state laws under the National Bank Act.

Only Certain Fintech Companies May Qualify for the OCC’s Special Purpose National Bank Charter

Historically, a special-purpose national bank has been an entity “that engages in a limited range of banking or fiduciary activities, targets a limited customer base, incorporates nontraditional elements, or has a narrowly targeted business plan.”[3] The OCC has for many years issued SPNBCs for trust institutions and credit card banks with little to no fanfare. In the current context, the OCC will make SPNBCs available to those Fintech companies engaged in one of the two core banking functions of paying checks or lending money (including activities interpreted by the OCC as the equivalent thereto[4]), subject to the OCC’s approval of a charter application (discussed below). However, the OCC will not consider applications from Fintech companies involving proposals to engage in deposit-taking activities.[5]  Those Fintech companies must apply to the Federal Deposit Insurance Corporation (“FDIC”) for deposit insurance and seek a full-service bank charter.

The Benefits of the SPNBC

As with a national bank, a Fintech company that obtains a SPNBC will be subject to the corporate licensing, organization and structure provisions of the National Bank Act. In addition, the same statutes, regulations, examination and reporting metrics, and ongoing supervisory requirements applicable to national banks, such as legal lending limits, will apply to SPNBC Fintech companies.[6] Fintech companies that operate as special purpose national banks will also be subject to other federal statutory schemes such as the Bank Secrecy Act and federal anti-money laundering regulations, as well as prohibitions against unfair, deceptive or abusive acts or practices.[7] A Fintech company that obtains a SPNBC that engages in consumer lending will also continue to be subject to federal consumer lending laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, and the Fair Credit Reporting Act.

For a Fintech company that obtains a SPNBC, burdensome state-by-state licensing, regulatory and supervisory requirements – including state usury laws – will be preempted by the National Bank Act.[8] These companies will not need to be licensed under state law to engage in any activity permissible pursuant to the National Bank Act. However, a Fintech company that obtains a SPNBC should expect that some consumer protection and other state laws will continue to apply. Examples of state laws generally applicable to national banks include laws on anti-discrimination, fair lending, debt collection, and foreclosure.

The SPNBC Application Process

To obtain a SPNBC, a Fintech company must submit to the same de novo application review process as national banks, including an assessment of whether the Fintech company has a reasonable chance of success and will (i) be operated in a safe and sound manner, (ii) provide fair access to financial services, (iii) promote the fair treatment of customers, (iv) ensure compliance with applicable laws and regulations, and (v) foster healthy competition in the marketplace. [9]

The OCC’s approval of a Fintech company’s application to obtain a SPNBC will depend on the applicant:

    • presenting a comprehensive business plan that articulates why a SPNBC is being sought with significant detail about proposed activities; [10]
    • demonstrating the ability to meet minimum and ongoing capital and liquidity levels proportionate to the risk and complexity of the activities proposed in the business plan;[11]
    • committing to provide fair access to financial services and fair treatment of customers commensurate with the high standards imposed on traditional banks by the Community Reinvestment Act;[12] and
    • developing and committing to adhere to a contingency plan that includes various scenarios that could threaten the viability of the Fintech company.[13]

If approved for a SPNBC, the OCC will subject the recently chartered Fintech company to a scheduled supervisory cycle, including on-site examination and periodic off-site monitoring (as it would any de novo bank).[14] This means rigorous ongoing supervisory oversight to ensure that management and the board of directors are properly executing their business strategy and the Fintech company is meeting its performance and compliance goals.

Cost-Benefit Approach to the SPNBC

Whether a Fintech company should pursue a SPNBC from the OCC requires a tailored cost-benefit analysis. If the OCC processes Fintech applications for SPNBCs as rigorously as traditional de novo national bank charter applications, the SPNBC process could take several months from prefiling to approval. The OCC has stated that proposals from Fintech companies without an established business record will be subject to more scrutiny to evaluate the likelihood of long-term success.

Challenges from State Banking Regulators

In response to the OCC’s preliminary proposal regarding SPNBCs and Fintech issued in 2016, the New York Department of Financial Services and the Conference of State Bank Supervisors filed separate lawsuits challenging the OCC’s authority to issue SPNBCs to Fintech companies. Those suits were both dismissed on the basis that OCC had yet to issue any special purpose national bank charters. The OCC’s announcement of its intent to accept Fintech SPNBC applications paves the way for those parties to renew their opposition as soon as the first SPNBC is issued to a Fintech company, if not before.

Conclusion

The OCC’s decision to accept SPNBC applications from Fintech companies presents an opportunity for Fintech participants and the financial industry. Whether you are an established Fintech company or contemplating a new business, Troutman Sanders is ready to help you navigate the SPNBC process.


[1] OCC Press Release NR 2018-74 (July 31, 2018).

[2] U.S. Department of the Treasury, Press Release:  “Treasury Releases Report on Nonbank Financials, Fintech, and Innovation” (July 31, 2018).

[3] OCC Licensing Manual Suppl., Considering Charter Applications from Financial Technology Companies, p. 2 (July 2018).

[4] The OCC has indicated that it views “facilitating payments electronically” as the “modern equivalent of paying checks” and that the scope of qualifying activities would be determined on a case-by-case basis. See OCC White Paper, Exploring Special Purpose National Bank Charters, p. 4 (Dec. 2016).

[5] Id.

[6] Id. at 2 n.4 (internal citations omitted).

[7] Such prohibitions will continue to apply as required either by Section 5 of the Federal Trade Commission Act or Section 1036 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

[8] See generally Barnett Bank of Marion County v. Fla. Ins. Comm’r, et al., 517 U.S. 25 (1996) (federal law preempts state financial laws that prevent or significantly interfere with exercise of powers by national bank).

[9] OCC Licensing Manual Suppl. at 5.

[10] Id. at 6-8. See also 12 C.F.R. § 5.20(h) (detailing specific items to be addressed in business plans).

[11] Id. at 8-10. This may include an OCC-specified minimum capital level – and, if applicable, a commitment from the applicant’s parent company.

[12] Id. at 10. See also OCC Policy Statement on Financial Technology Companies’ Eligibility to Apply for National Bank Charters, p. 3 (July 31, 2018).

[13] The contingency plan must outline strategies for restoring the Fintech company’s financial strength and options for selling, merging, or liquidating the entity if the recovery strategies are ineffective. See OCC Licensing Manual Suppl. at 10.

[14] Id. at 13.

Two Troutman Sanders LLP attorneys discuss the Concepcion ruling, examining the historical landscape of arbitration, the law prior to the ruling, and what courts have done since.

When the Supreme Court (Court) handed down its opinions in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the majority’s holding engendered breathless (at least in legal terms) headlines. Clearly, as arbitration’s opponents and proponents concurred, five jurists, led by Justice Antonin Scalia, had consigned bans on class-action arbitration waivers into oblivion in the hallowed name of the Federal Arbitration Act (FAA), 9 U.S.C. §§1–16.

Possibly due to the legal establishment’s quick recognition of its utility and peril, however, feverish debate over this holding’s validity and advisability beclouded the lead opinion’s subtle affirmation of older filaments of legal thought and endorsement of a new analytical approach to the FAA’s so-called “Savings Clause.”

Time’s passage has changed little, this initial ignorance ossifying instead. As a result, in opinion after opinion issued over the past eight years, these gravid assertions have rarely featured, and defects traceable to their inexplicable omission and damaging to their precedential value now plague much of arbitration law’s post-Concepcion jurisprudence. To discern these latent possibilities and buried flaws, one must return to, and pull back the curtain on, this most controversial matter.

View full article published on Bloomberg Law

Last night, California legislators passed Assembly Bill 375 (commonly known as the “California Consumer Privacy Act”) that would grant Californians “increased control” over their data. The new Act will have substantial effects on any business that has appreciable interactions with California, in how they store, share, disclose, and engage with consumer data.  The Act will be effective as of January 1, 2020.

To comply with the new Act, businesses will need to create internal processes to properly and timely respond to consumer requests for information, requests for deletion, and requests to opt out of having their information sold. Businesses will also need to update their privacy policies and websites to provide the more stringent disclosures and methods for consumers to exercise their newly acquired rights. Vendor management and controls will also need to be updated to ensure compliance with the limitations provided for in the Act. Businesses heavily reliant upon analyzing data will need to heighten technological capabilities to ensure that personal information is de-identified

For technology companies, this Act may create additional obstacles to innovation that leverage economies of scale across different organizations either through shared platforms or technologies.  Consider companies that have created tools to permit other companies to release consumer-facing mobile applications through various APIs and SDKs. While stakeholders often start with a common set of technologies, each partner may ultimately use the tools in their own unique way.  Consumers may argue that the web of privacy policies may ultimately need to be reconciled amongst the stakeholders because the ecosystem is presented to all consumers as one comprehensive application.

Practically, all parties involved in an ecosystem will likely be affected by the conduct of the others, which is a shift from the traditional American digital paradigms. However, the basic tenets are familiar to those of us who have worked with the Fair Credit Reporting Act and other statutory schemes that build off of the Fair Information Privacy Principles.  Partners and vendors will need to be carefully vetted prior to engagement by business teams and legal counsel. Each involved party will need to understand the data that the others are collecting, sharing, and selling, and obtain representations and warranties in their agreements to protect itself from a consumer class action or regulatory enforcement. Additionally, many contractual provisions such as licensing of data and indemnity will become greater points of contention in business-to-business deals and should be carefully discussed and reviewed with legal counsel.

Below is our summary and analysis of the Act:

What is “Personal Information”? Effectively adds the following categories of information:

  • Records of personal property, products, or services, and “consuming histories or tendencies”;
  • Biometric data;
  • Clickstream and “other electronic network activity information”;
  • Geolocation data;
  • Consumer sensory information;
  • Professional or employment-related information;
  • Educational information not publicly available;
  • “Inferences drawn” from personal information.

Does not include “public information” and “de-identified information.” But public information does NOT include: (1) information that is used in a way not compatible with its original purpose, or (2) de-identified or aggregate information.

When Is Personal Information “De-Identified”? Personal information is not considered “de-identified” unless the business (1) undertakes technical and business processes to prevent re-identification, (2) has processes to prevent inadvertent release of de-identified information, and (3) makes no attempt to re-identify the information
Consent and Proportionality Adds the concept of proportionality (i.e., “reasonably necessary”) to the definition of “business purpose,” which must have been permitted.
What Is “Selling” of Personal Information? “Selling” personal information includes “releasing, disclosing, disseminating, making available” for “valuable consideration.” Does not include third party processors who receive that information for only processing.
Consumers’ Right to Request

Collectors – (1) Consumers have right to request categories of information collected, (2) from whom it was collected, (3) the specific business purposes for which it was collected, and (4) with whom it is shared.

Sellers – (1) Consumers have right to request categories of information sold, and (2) to whom it was sold. “Sellers” appear to be also “collectors.”

Both may require a verifiable request. Certain exceptions to the above apply for truly “one time” uses.

Consumers’ Right to Delete Records Businesses that receive verifiable requests from consumers to delete their personal information, must delete, and direct any service providers to delete, such information. Compliance is not required if it is necessary for the business or service provider to maintain the personal information (such as for legal, security, or transactional needs).
Response In a “Readily [Machine] Useable Format” Disclose and deliver required information to consumer within 45 days in writing and delivered through consumer’s account, or by mail or electronically at consumer’s option if consumer does not maintain account, “in a readily useable format that allows consumer to transmit this information from one entity to another entity without hindrance.”
Forms of Disclosure Contains express form requirements for disclosures, including for opt-out notices and online webforms and links.
Consumers’ “Right to Say No,” And Opt-Outs & Opt-Ins

Consumers have a right to say no to the sale of their information at any time. Collectors have to provide an opt-out notice first before consumer information may be shared. Sellers have to obtain an “explicit notice” before they can sell information.

Minors under 16-years of age must “opt-in.”

Seller must provide clear and conspicuous link on homepage to allow consumer to opt out of sale of personal information.

Clearer exceptions for: (1) completion of the business purpose with the consumer, (2) security and debugging purposes, and (3) comply with a legal purpose.

Requirement of Privacy Statement

A privacy statement that describes:

(1) a description of consumers’ rights and the methods of submitting requests;
(2) a list of categories of information collected;
(3) a list of categories of information disclosed;
(4) a list of categories of information sold.

Discriminatory Use of Personal Information Prohibited

Requirement that business not discriminate against consumers for exercising their rights under the title, including by:

(1) Denying goods or services;
(2) Charging different prices or imposing penalties;
(3) Providing a different quality of service;
(4) Suggesting the above;

…unless the above is related to differences resulting from “the value provided to the consumer by the consumer’s data.”

Business may offer financial incentives to consumers, however, to obtain their personal information. But the practices for this entire subsection may not be “unjust, unreasonable, coercive, or usurious.”

Exceptions Exceptions:
(1) to comply with federal, state, or local laws;
(2) cooperate with law enforcement;
(3) all activities take place outside of California;
(4) HIPAA exception;
(5) FCRA exception, for generation of a consumer report;
(6) GLBA exception, for activities carried out for that purpose, “if it is in conflict with that law”;
(7) DPPA exception, for activities carried out for that purpose, “if it is in conflict with that law”;
(8) Small businesses not covered by the definition of “business.”
Enforcement

Enforcement:

(1) Private right of action by consumers for between $100-$750 per violation in statutory or actual damages, after 30-notice to cure, if it can be cured.   Consumer will then notify state AG, if any, whose action will terminate consumer action.
(2) State AG enforcement available for stiffer penalties (up to $7,500 per violation).   Also gives prescriptive authority to AG.

 

On Monday, May 14, 2018, the Federal Communications Commission (“FCC”) issued a public notice seeking comment on interpretation of the Telephone Consumer Protection Act (“TCPA”) in light of the D.C. Circuit’s decision in ACA International v. FCC. The notice reflects an intent by the FCC to take up the proper interpretation of the TCPA promptly. Specifically, the FCC seeks comment on key areas of the TCPA, including:

  • How to interpret “capacity” in light of the D.C. Circuit’s decision in ACA, including the amount of user effort required to enable a device to function as an automatic telephone dialing system (“ATDS”);
  • The functions a device must be able to perform to qualify as an ATDS, including whether the word “automatic” envisions only non-manual dialing of telephone numbers;
  • How to treat reassigned wireless numbers and how to interpret the term “called party” for reassigned numbers, including whether the term refers to the person the caller expected to reach, the party the caller reasonably expected to reach, or the person actually reached;
  • Revocation of prior consent, including particular opt-out methods that would suffice to revoke consent;
  • The scope of the term “person” under the statute, and whether it includes federal government contractors; and
  • The appropriate limit for calls made to a reassigned number.

The initial comment period closes on June 13, 2018 and the reply comment period closes on June 28, 2018, meaning that the issues would be ripe for decision by the FCC in short order.

The ACA decision was immediately hailed by current FCC Chairman Ajit Pai, who said in a statement that the “unanimous D.C. Circuit decision addresses yet another example of the prior FCC’s disregard for the law and regulatory overreach. As the court explains, the agency’s 2015 ruling placed every American consumer with a smartphone at substantial risk of violating federal law. That’s why I dissented from the FCC’s misguided decision and am pleased that the D.C. Circuit too has rejected it.” Commissioners O’Rielly and Carr similarly praised the decision, giving Chairman Pai the necessary majority to effect major change in the TCPA landscape.

The call for comments also follows on the heels of a petition filed with the FCC by the U.S. Chamber of Commerce and 17 trade groups. The petition focused solely on the definition of an ATDS. Like the FCC’s request for comment, the petition tracks the language of the D.C. Circuit’s decision in ACA, where it struck down major portions of the FCC’s previous expansive interpretations of the TCPA, including its definition of an ATDS. While the FCC has taken the position for 15 years that a predictive dialer is an ATDS, the D.C. Circuit found that the 2015 Order and its predecessors do not give a clear answer as to whether a device qualifies as an ATDS only if it can generate random or sequential numbers for dialing. The U.S. Chamber petition urges the FCC to confirm that equipment must use a random or sequential number generator to store or produce numbers and dial those numbers without human intervention to qualify as an ATDS and to find that only calls made using actual ATDS capabilities are subject to the TCPA. Calling the ACA decision “an opportunity to restore rationality to . . . the TCPA,” the groups ask the Commission to issue a declaratory ruling as soon as possible to clarify the ATDS definition.

In sum, the groundwork is being laid at the FCC for a major change in interpretation of the TCPA, and the changes under consideration would substantially reduce the legal risks for companies using telephony to contact consumers.

Troutman Sanders LLP has unique industry-leading expertise with the TCPA, with experience gained trying TCPA cases to verdict and advising Fortune 500 companies regarding their compliance strategy. We will continue to monitor legislative developments and regulatory implementation of the TCPA in order to identify and advise on potential risks.

The District of Nevada recently applied the D.C. Circuit’s decision in ACA International v. FCC and granted summary judgment in favor of the defendant on plaintiff’s Telephone Consumer Protection Act claim.  Specifically, the Court held in Marshall v. The CBE Group, Inc. that CBE’s phone system does not qualify as an automatic telephone dialing system, commonly referred to as an “ATDS.”

Plaintiff Gretta Marshall filed suit against CBE, a third-party debt collector, alleging that it violated the TCPA and the Fair Debt Collection Practices Act through its collection efforts related to her outstanding bill.  Marshall alleged that CBE’s agents used an ATDS to contact her in violation of the TCPA.  CBE places calls using a Manual Clicker Application (“MCA”), requiring the call agent to click a bullseye on a computer screen to place a call.  When a CBE agent clicks the bullseye, a call is sent through a cloud-based connectivity pass-through, LiveVox, and then the CBE agent is connected with the person to whom the call is placed.

In analyzing CBE’s “communication infrastructure,” the Court stated that in light of the ACA v. FCC decision, it would apply the statutory language defining an ATDS, resulting in a focus on whether CBE’s phone equipment has the capacity to produce or store phone numbers to be called using a random or sequential number generator.  The Court noted that the overwhelming authority held that “point and click” dialing systems, used in unison with cloud-based pass-through services, did not qualify as ATDSs due to the human intervention required to place the call.  Applying this rationale, the Court found that CBE agents who were required to click the bullseye were “integral to initiating outbound calls.”  This finding weighed in favor of finding that the MCA, used with LiveVox, was not an ATDS.

Further, the Court dismissed Marshall’s allegations that LiveVox, the cloud-based pass-through, placed the calls and qualified as an ATDS.  Marshall argued that because LiveVox could perform call progress analysis (such as maintaining call logs), it actually initiated the call, not CBE.  Ultimately, the Court found that Marshall had not presented any evidence or legal authority sufficient to create a genuine dispute of material fact as to LiveVox’s alleged qualification as an ATDS.  Specifically, Marshall did not show that LiveVox’s ability to track calling information meant that LiveVox has the capacity to produce or store telephone numbers to be called, using a random or sequential number generator, and to dial the numbers.

Given the human intervention necessary to place calls using MCA and Marshall’s failure to create a genuine dispute of material fact regarding LiveVox’s role, the Court held that CBE did not use an ATDS to place calls to Marshall.

The District of Nevada is one of the first courts to apply the decision from ACA International v. FCC when interpreting the definition of an ATDS.  The decision in Marshall v. CBE indicates that courts will be able to simplify their analysis of whether a telephone system qualifies as an ATDS under the TCPA by eliminating the need to determine “potential functionalities” of a calling system and instead focusing on the calling systems’ “capacity to store or produce telephone numbers to be called, using a random or sequential number generator.”

Within days of realizing a data breach incident had occurred, Under Armour, Inc.—the owner of the popular calorie counting application, MyFitnessPal—began notifying its users of the breach that impacted approximately 150 million user accounts.  According to the data breach notice, the MyFitnessPal team learned on March 25 that an unauthorized party acquired data associated with MyFitnessPal user accounts.  The affected information included user names, email addresses, and passwords, but users’ payment card data remained secure since that information is collected and processed separately by MyFitnessPal.

In response to the data breach, MyFitnessPal immediately began taking steps to protect the MyFitnessPal community, including:

  1. Providing users with information on how they can protect their data;
  2. Requiring users to change their passwords and urging them to do so immediately;
  3. Monitoring accounts for suspicious activity and coordinating the company’s efforts with law enforcement authorities; and
  4. Continuing to make enhancements to their systems to detect and prevent unauthorized access to user information.

MyFitnessPal also instructed users to change their passwords for other accounts that use the same or similar information as their MyFitnessPal accounts and to monitor all accounts for suspicious activity. It is currently unknown who is responsible for the data breach. However, Under Armour has made it clear that the investigation into the matter remains ongoing.

Under Armour has already earned high marks for its quick response to the data breach, which in large part can likely be attributed to a well-oiled Incident Response Plan that had been tested through tabletop exercises.  This should serve as a reminder that companies are no longer being judged on whether a data incident occurs but rather on how they respond to such incidents—with timeliness being a key component.

On March 29, 2018, the United States Court of Appeals for the Second Circuit rendered a long-awaited opinion in what is commonly called a “reverse-Avila” or “current account balance” case, holding that it is not a violation of the Fair Debt Collection Practices Act (“FDCPA”) for a debt collector to state a consumer’s balance without mentioning interest or fees, when no such interest or fees are accruing.

The case is Christine Taylor, et al. v. Financial Recovery Services, Inc. No. 17-cv-1650 (2d Cir. Mar. 29, 2018), and the opinion is available here.

Underlying Facts

In Taylor, both Plaintiffs incurred debts with a bank, which after default were placed with Financial Recovery Services (“FRS”) for collection. At the time of placement, the bank instructed FRS not to accrue any interest or fees on the accounts. FRS thereafter sent a series of collection notices to both Plaintiffs, each notice containing the identical balance due as the previous notice. None of the notices contained a disclosure that interest and fees may accrue on the balance of the account. Neither Plaintiff made any payments on their accounts and each ultimately filed for Chapter 7 bankruptcy protection.

Due to the lack of a specific disclosure regarding whether interest and fees were accruing, the Plaintiffs argued the letters could be interpreted to have more than one meaning, and they filed suit claiming violations of Section 1692e and 1692g of the FDCPA. Plaintiffs relied heavily on the Second Circuit’s holding in Avila v. Riexinger & Associates, LLC, 817 F.3d 72 (2d Cir. 2016), where the court held a debt collection letter violates the FDCPA if it states a “current balance” of a consumer’s debt without disclosing that interest and fees are accruing on that balance, when they are in fact accruing such that paying the balance listed on a letter would not pay a debt in full.

The District Court’s Decision Granting Summary Judgment in Favor of the Debt Collector

In May 2017, the District Court granted summary judgment to FRS, holding its letters did not violate the FDCPA and noting the collection notices were not false, misleading, or deceptive as a matter of law. The Court further found that the Plaintiffs failed to present evidence that the balances on the face of the notices were inaccurate. Since the balances were accurate, the Court found it “irrelevant” whether or not the balances, in fact, accrued interest or fees after being referred to FRS. Furthermore, the Court pointed out that the statements were not misleading because the balances owed were stated numerous times within each letter and the balances remained the same in successive letters.

In analyzing the “least sophisticated consumer” standard, the Court stated that “[t]he letters are not misleading to the least sophisticated consumer, who (i) might not understand or even consider the concept of interest and when it accrues; (ii) could reasonably take the language at face value as the amount owed; or (iii) might infer from the unchanging amount in each of the coupons and successive letters that interest was not accruing.” Importantly, the Court noted that “[o]nly a consumer in search of an ambiguity and not the least sophisticated consumer relevant here, would interpret the letters to mean that interest was accruing .” (emphasis added).

In distinguishing this case from the holding in Avila, the District Court recognized that the Plaintiffs provided no evidence that paying the balance on their respective letters would not satisfy their debts.

The Second Circuit’s Decision Rejecting the Plaintiffs’ Interpretations of the FDCPA

On appeal to the Second Circuit, Plaintiffs argued that FRS’s collection notices were misleading within the meaning of Section 1692e “because the least sophisticated consumer could have interpreted them to mean either that interest and fees on the debts in question were accruing or that they were not accruing.” Relying heavily on Avila, Plaintiffs argued a debt collector commits a per se violation of Section 1692e whenever it fails to disclose whether interest or fees are accruing on a debt. The Second Circuit made clear the Plaintiffs were mistaken, noting the violation in Avila arose because “[a] reasonable consumer could read the notice and be misled into believing that she could pay her debt in full by paying the amount listed on the notice” where such payment would not have settled the debt in that case.

In Taylor, however, the Court noted no interest or fees were accruing, so the balances included in the collection notices sent to Plaintiffs correctly stated the payment needed to satisfy the debt in full, and that no language regarding interest and fees was required. Unlike Avila where the Court found the message prejudicially misleading, in Taylor prompt payment of the stated balance would have satisfied Plaintiffs’ debts. In the words of the Court:

Thus, the only harm that Taylor and Klein suggest a consumer might suffer by mistakenly believing that interest or fees are accruing on a debt is being led to think that there is a financial benefit to making repayment sooner rather than later. This supposed harm falls short of the obvious danger facing consumers in Avila.

It is hard to see how or where the FDCPA imposes a duty on debt collectors to encourage consumers to delay repayment of their debts. And requiring debt collectors to draw attention to the fact that a previously dynamic debt is now static might even create a perverse incentive for them to continue accruing interest or fees on debts when they might not otherwise do so. Construing the FDCPA in light of its consumer protection purpose, we hold that a collection notice that fails to disclose that interest and fees are not currently accruing on a debt is not misleading within the meaning of Section 1692e.

Opinion at 6 – 7.

In holding Plaintiffs’ letters were not misleading under the FDCPA, the Court mirrored its decision with the Seventh Circuit’s holding in Chuway v. National Action Financial Services, Inc., which stated the following:

[I]f a debt collector is trying to collect only the amount due on the debt the letter is sent, then he complies with the [FDCPA] by stating that the creditor has “assigned your delinquent account to our agency for collection,” and asking the recipient to remit the balance listed and stopping there, without talks of the “current” balance.

362 F.3d 944, 949 (7th Cir. 2004) (Emphasis added).

The Second Circuit further read sections 1692e and 1692g of the FDCPA in harmony, meaning that if there is no interest and fees accruing on the balance, then collection notices are not misleading under section 1692e and the balance is accurately stated under section 1692g. Conversely, if interest and fees are accruing and no disclosure is given in the notice, then it would run afoul of both sections 1692e and 1692g.

Plaintiffs also unsuccessfully raised two additional arguments before the court. First, Plaintiffs argued the bank continued to accrue interest on Plaintiffs’ accounts even after they were placed with FRS for collection. The Court refused to consider this argument because Plaintiffs failed to raise this issue before the district court, so it could not be raised on appeal.

Second, Plaintiffs argued that even though the bank may not have accrued interest, it nonetheless retained the right to do so and could start adding interest onto the accounts at any point in the future. The Court rejected this argument because it would be so far in the future it would have no effect on the notice sent by FRS. Further, since nothing was being added to the account balances, Plaintiffs’ debts were static so they could satisfy them by prompt payment.

Take-Aways

The Taylor opinion is a response to the flood of “current account balance” lawsuits filed in the wake of the Avila decision. Its common-sense approach gives debt collectors a clear answer to what should be a straightforward question of statutory interpretation. It can also be interpreted as a statement by the Second Circuit regarding the confusing tangle of opinions that have come out of the Eastern District of New York on the issue. Debt buyers and collectors should be refreshed by any opinion that recognizes when an idiosyncratic interpretation of the FDCPA affects their business by encouraging consumers to delay repayment of their debts.

As newspaper articles, academic studies, and politicians’ speeches have repeated, statistics suggest that a student loan crisis may be building. The share of students graduating with more than $50,000 in student loan debt has more than tripled since 2000, increasing from 5% in 2000 to 17% in 2014. As a result, this group of “large-balance borrowers” now holds the majority (58%) of the outstanding student debt owed to the federal government, approximately $790 billion of the $1.4 trillion accumulated by December 31, 2017. 

In recent days, the idea of “risk-sharing plans,commonly referred to as “RSPs,” has gathered momentum. In general, these arrangements compel educational institutions to repay taxpayers for some of the loans taken out by their defaulting graduates. One iteration, created by Tiffany Chou from the Office of Economic Policy at the Department of Treasury, Adam Looney from the Brookings Institution, and Tara Watson of Williams College and endorsed by Brookings itself, uses a purportedly hard-to-manipulate repayment rate—the amount each institution’s students have repaid after five years—to set minimum thresholds below which institutions would have to contribute. These scholars currently propose a rate of 20%. Thus, if the repayment rate falls below 20%, the college would be required to pay part of the difference to the federal government, with differing obligations as the rate decreases. According to its defenders, such an RSP would correct for the distortion in the student loan market created by federal guarantees of student loans. 

Significantly, this idea received a boost from favorable mention in a white paper released on February 1 by the staff of the Senate’s Committee on Health, Education, Labor and Pensions (or “HELP Committee), the very committee presently considering various reforms of the federal government’s student loan system. It even earned a reference on page 41 of the President’s Fiscal Year 2019 budget proposal. As of March 26, whether the HELP Committee will include such a program in a future bill and what form it would take remain unknown.

 

On March 12, Judge Eldon E. Fallon of the U.S. District Court for the Eastern District of Louisiana tossed a plaintiff’s putative class action lawsuit against the American Heart Association (“AHA”), Anthem Foundation, Inc., and Anthem, Inc. under the Telephone Consumer Protection Act relating to text messages sent to a consumer following her attendance at a CPR training course. This decision provides some additional clarity for health care companies in distinguishing between informational and telemarketing outreach under the TCPA.

The underlying facts are straightforward. The plaintiff attended a CPR training event and provided her cellular telephone number to the AHA to receive content including “monthly CPR reminders” and “healthy messaging information.” She subsequently received “more than 20 text messages” from AHA, such as “AHA/Anthem Foundation: Memorize your work address. You may need to recite it to a dispatcher should you have to call 9-1-1 from the office.” Each of the roughly two dozen text message included “AHA/Anthem Foundation” at the beginning of the message. Although the text messages generally provided health-related informational content, one text message provided a link to the AHA’s website to find available CPR courses in a specific geographic area—some of which were free, and others available for a fee.

The plaintiff’s theories of liability were that (1) the messages were telemarketing, and thus the prior express consent she provided to AHA was not sufficient for the at-issue text messages; (2) nonprofit Anthem Foundation was vicariously liable for text messages sent by AHA because “Anthem Foundation” was included in the body of the message; and (3) Anthem, Inc. was vicariously liable because the inclusion of Anthem Foundation in the text messages was a “purely commercial plug” of its corporate parent. The defendants jointly moved to dismiss the complaint, claiming that the consent provided to AHA was sufficient for the whole of the communications with the plaintiff, and submitted the entire text-message log between the plaintiff and AHA.

The lawsuit attempted to broaden the TCPA in two key ways: (1) expanding vicarious liability to brands allegedly affiliated with the communications, and (2) applying the TCPA’s prior express written consent standard for telemarketing to text messages providing information about local CPR classes—neither of which Judge Fallon was willing to indulge. On the vicarious liability point, the Court found that “although the text messages reference Anthem Foundation, this is irrelevant because the sender was, in fact, AHA.” The Court further noted the lack of any authority suggesting that “a nonprofit’s association with a donor or another charitable entity—i.e., Anthem Foundation—gives rise to a TCPA claim when she voluntarily sought to receive certain communications and information.”

As to the content of the messages, Judge Fallon examined the text message relating to CPR courses, which contained a link to a search function allowing users to find nearby classes. The Court visited the link and provided screenshots of the website in its ruling. It observed that “[t]o sign up for a CPR class—whether for-pay or free—a visitor must click on one of the providers, in which the [visitor] is taken to the provider’s Website.” The Court wrote, “[I]n this case, common sense tells the Court that the information in which Plaintiff labels as ‘commercial’ is undoubtedly informational. Defendants AHA and Anthem Foundation provide individuals with a public resource to seek CPR training. This resource is the type of communications Plaintiff wanted and signed up to receive: information about CPR and healthy living. Her complaint is thus unwarranted.”

With this dismissal and others like it, health care companies can be heartened that multiple courts have taken a “common sense” approach interpreting the TCPA to permit beneficial, health-related outreach to their members and consumers. However, this area of law remains murky, and thus companies are reminded of the importance of maintaining accurate records to minimize litigation risks.

The defendants were jointly represented by Covert J. Geary of Jones Walker LLP in New Orleans, Louisiana. Anthem Foundation, Inc. and Anthem, Inc. were also represented by Chad R. Fuller, Virginia Bell Flynn, and Justin M. Brandt of Troutman Sanders LLP.

 

Like a bevy of other jurisdictions, the District of Columbia has established a “borrower’s bill of rights” which creates minimum standards for timely processing, correction of errors, and communication for servicers of federal student loans. 

In response to this state-level action, the U.S. Department of Education recently argued that all such regulations are wholly preempted by its own regulatory efforts and the Higher Education Act of 1965 (HEA).  

On March 20, the Student Loan Servicing Alliance (SLSA), a trade group representing companies who collect education debt payments, invoked federal preemption in a lawsuit seeking invalidation of D.C.’s borrower’s bill of rights. In particular, the complaint by SLSA argues that the bill violates a provision of the HEA that says loans authorized by the federal government are not subject to any disclosure requirements under state law. 

“This lawsuit is about preserving uniform federal guidelines to ensure borrowers know what to expect from their servicer regardless of where they live,” the SLSA’s spokesman contended. 

In general, the SLSA and individual servicers argue that state laws purporting to regulate student lending interject more complexity and confusion into an already complicated federal statutory and regulatory structure for student lending. “It makes perfect sense that the federal government — not individual states — should control who services these assets and how they do it,” asserted the servicers’ attorney. “It helps consumers avoid confusion to have one set of rules as opposed to 50.” 

Borrower advocacy groups and some states, on the other hand, argue that state-level action is needed to supplement the regulatory efforts of the DOE and the Consumer Financial Protection Bureau. In particular, states point to their historic role in regulating the field of consumer protection. 

This issue arose most recently at congressional hearings on March 20 at which DOE Secretary Elisabeth (“Betsy”) DeVos testified.