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1 This Webcast Will Begin Shortly If you have any technical problems with the Webcast or the streaming audio, please contact us via at: Thank You! 1

2 HOT TOPICS IN MARKETPLACE LENDING AND MOBILE BANKING LITIGATION June 7, 2017 Presented By: Jennifer Gray, Co-chair of Consumer Financial Services Litigation, Greenberg Traurig, LLP Paul Ferak, Shareholder, Greenberg Traurig, LLP Chris Hilliard, Chief Compliance Officer, Payoff.com 2

3 Thank you for attending another presentation from ACC s Webcasts Please be sure to complete the evaluation form for this program as your comments and ideas are helpful in planning future programs. If you have questions about this or future webcasts, please contact ACC at webcast@acc.com This and other ACC webcasts have been recorded and are available, for one year after the presentation date, as archived webcasts at 3

4 OVERVIEW Marketplace Lending Federal and state supervision True lender doctrine Madden and the valid-when-made doctrine Solutions to regulatory uncertainty? New Issues in Mobile Banking and Cybersecurity Existing banking laws and regulations New technologies new threats Data breach and privacy litigation 4

5 Marketplace Lending: Bank Partnership Model MPL enters into marke0ng agreement with FDIC-insured bank. MPL interfaces with customers MPL sets underwri0ng policies Bank originates and fund loans Bank sells loans to MPL within 2-3 days MPL guarantees Bank s financial obliga0ons MPL agrees to indemnify Bank for losses 5

Federal Banking Framework Na0onal banks may take, receive, reserve, and charge on any loan... interest at the rate allowed by the laws of the State where the bank is located. 12 U.S.C. 85.

6 Federal Banking Framework Na0onal banks may take, receive, reserve, and charge on any loan... interest at the rate allowed by the laws of the State where the bank is located. 12 U.S.C. 85. State-chartered, FDIC-insured depository ins0tu0on may take, receive, reserve, and charge on any loan interest... at the rate allowed by the laws of the State, territory, or district where the bank is located. 12 U.S.C. 1831d(a). Non-FDIC insured en00es are subject to state licensing requirements and the state laws of all states in which it makes loans Greenberg Traurig, LLP. All rights reserved.

7 State Law Framework Usury caps for consumer loans Viola0ons of usury laws can result in civil and some0mes criminal liability against the lender and voiding of loan States licensing regimes May apply to non-bank par0es engaged in lending ac0vity Lender licensing, consumer credit licensing, credit services, business licensing Engaging in covered ac0vi0es without required license results in civil and, in some states, criminal liability Ac0vi0es covered by state licensing regimes include Marke0ng of loans Loan origina0on Loan servicing Collec0ng interest on loans 7

8 True Lender Issue: Bright Line Test Bright-Line Test Looks to loan document and the rela0onship of the par0es at the 0me of loan origina0on, not who has predominant interest. Sawyer v. Bill Me Later: (MPL) was the true lender and therefore Sec0on 27 preempted state law usury claims. 1876(c) of the Bank Service Company Act, 12 U.S.C. 1867(c) (2014) -- loans serviced by third par0es, such as Bill Me Later, are subject to federal regula0on and oversight to the same extent as if they were directly serviced by an FDIC-insured bank. Bank was a party to the consumer loan agreements. 8

9 Does not limit its analysis of the rela0onship of the par0es to the 0me of loan origina0on. True Lender Issue: Predominant Economic Interest Test Usually leads to the conclusion that third party partnering with the bank was the true lender, not the bank, subjec0ng the third party to state law requirements. Court applied test in West Virginia v. CashCall: CC bore the economic burden and risk associated with the loan program CC acquired the loans from FB&T for more than no0onal loan amount CC s owner and only stockholder personally guaranteed financial obliga0ons to bank CC agreed to indemnify FB&T for any losses CC set underwri0ng policies For financial repor0ng purposes, CC treated loans as if it had funded them 9

10 Predominant Interest Test: W.Va. v. Cash Call AG sued CC and owner for viola0ng usury laws CC removed usury claims preempted because loans made by na0onal bank District court remanded -- case not preempted: Preemp0on defense applies to claims against banks, not non-banks preemp0on applies in private suits, not where AG sues non-bank en0ty for decep0ve conduct. State court applied predominant economic interest test 10

11 Tribal Lending Model: CFPB v. CashCall CFPB alleged: CC was covered person under Dodd-Frank CC commided UDAAP by: viola0ng usury laws of 16 states failing to disclose loans may be unenforceable under state laws crea0ng the net impression that loans were enforceable and that borrowers were obligated to repay them Court rejected Tribal choice of law: Tribe did not have any substan0al rela0onship with the true lender, the borrowers, or the transac0ons states had a greater interest in applica0on of their state usury laws than Tribe Court applies predominate interest test from West Virginia v. CashCall and held that CC was true lender 11

12 CFPB v. CashCall, cont d CashCall partnered with Western Sky Financial, LLC, an online lender offering small dollar consumer loan products. Western Sky was wholly owned by a member of the Cheyenne River Sioux Tribe As a federally recognized tribe, the Tribe is afforded cons0tu0onal sovereignty by the Indian Commerce Clause Western Sky loan agreements specified that they were governed exclusively by the laws of the Tribe and not by the laws of the US or any state. Western Sky made loans through its website CashCall sub would purchase loans three days aier funding and prior to the borrower s making any payments on the loan. 12

13 CFPB v. CashCall Open Issues Does CFPB have authority to enforce state laws? As federal agency, no apparent authority over state law First significant application of UDAAP to state law Choice of law and true lender analysis CFPB / Court ignored cases applying bright-line test. Does the true lender test even matter here? Court might have cited same reasons to reject tribal COL even if Western Sky was the true lender. UDAAP analysis Failure to disclose that loan may be unenforceable -- what s not UDAAP? District Court certified these issues for appeal, but 9th Circuit declined to address. 13

14 CFPB v. Golden Valley Lending, Inc. On April 27, 2017, CFPB sued 4 tribal-affiliated MPLs. CFPB Alleges: MPL failed to disclose that loans were void or voidable under state law. MPL received funding from companies that were not ini0ally owned or incorporated by the tribe. MPL returned profits to investors, not tribe Opera0ons not conducted on tribal lands. MPLs created no more than 15 jobs on tribal lands. MPLs had no storefronts on tribal lands Very few if any consumers applied for and signed loan agreements on tribal lands. 14

15 Valid-when-made Doctrine Valid-when-made doctrine: long-standing principle of state usury law which holds that a loan cannot be considered usurious if it was not considered usurious at the 0me it was made. MPLs take assignment of loans originated by banks on the assump0on that the loan s terms will follow the loan as ownership changes hands All secondary market trading depends on valid-whenmade doctrine. 15

16 Madden v Midland Funding, LLC Non-bank assignee of a loan originated by a federal bank was not exempt from state usury laws, even though loan was valid-when-originated. Par0es, court failed to address valid-when-made doctrine Affirmed by 2d Circuit -- Connec0cut, New York, and Vermont Undermines the valid when made theory and impedes the ability of na0onal and state-chartered banks to sell loans into secondary market. CHOICE Act would fix Madden State ac0ons to apply Madden to MPL: WV and Colorado 16

17 Colorado v. Avant and MarleJe Avant and Marlede are non-banks licensed lenders in Colorado, partnered with banks. Alleges that loans originated by state-chartered, FDIC insured banks and sold to Avant and Marlede are subject to state usury limits. Thus, non-bank assignee is the true lender. Aggressive reliance on Madden: Madden concerned the assignment of charged-off debt long aier origina0on. Madden dealt with preemp0ve effect of the NBA on loans originated by na0onal banks it did not address the preemp0ve effect of Sec0on 27 of FDIA upon loans originated by FDIC-insured state banks. 17

18 Banks Fight Back Bank seeking DJ that marketplace lending model is lawful Model endorsed by virtue of the FDIC, OCC, and interagency guidance on third-party lending. State usury laws preempted by FDIA. AG s ac0on is unlawful and directly challenge[s] the interstate banking system and infringe[s] on Cross River s core rights under federal law (including the [Federal Deposit Insurance Act]) to originate, sell, transfer, and securi0ze loans. Comm r did not join banks to avoid preemp0on issue. 18

19 Consumer claims against MPLs FCRA Shawn Heaton v. Social Finance, Inc., No. 3:14-cv (N.D. Ca. Oct. 13, 2016) FCRA-Class-wide settlement of FCRA claims based on alleged failure to obtain consent for soft credit pulls, but allegedly did both soft and hard credit pulls) EFTA De La Torre v. Cashcall, 2014 U.S. Dist. LEXIS (2014) FTA -- Court certified two classes of borrowers alleging EFTA claims. EFTA Data Security Kempsey v. CashCall, Inc., No. 08-cv MEJ2016 (N.D. Ca. March 16, 2016) (EFTA CashCall ordered lender to pay $500,000 in statutory damages under EFTA for conditioning online loans on borrowers agreements to repay such loans through automatic electronic funds transfers.) In the Matter of Dwolla, Inc., Administrative Proceeding File No CFPB-0007, Consent Order (Feb. 27, 2016) (UDAAP action against an online lender for failing to provide adequate data security practices). TILA Consumer Financial Protection Bureau v. Golden Valley Lending, Inc., et al., No. 17-cv-3155 (N.D. Ill. Apr. 27, 2017) (websites failed to disclose the APR in violation of TILA) TILA CFPB v. LendUp (LendUp was required to pay a restitution of $1.8 million to borrowers and another $1.8 million as a penalty for allegedly misleading consumers through false advertisements and other means with regard to the true cost of lending, shifting performers to lower APR loans and failing to report credit information to the bureaus.) RICO, state UDAP Beechum et al. v. Navient Solutions, Inc. No 15-cv-8239-JGB-KKx (C.D. Cal. Sept. 20, 2016). Putative class asserted RICO and other claims alleging that loan program was a pretext and a sham to avoid state usury laws by structuring its loan transactions through the bank. 19

20 Light at the end of the tunnel? Financial CHOICE Act PHH Li0ga0on? Federal charter Expanded use of Na0onwide Mul0state Licensing System (NMLS) Vision 2020 ini0a0ve to modernize state regula0on for non-banks 20

21 Financial CHOICE Act Overturns Madden v. Midland Funding Codifies valid-when-made doctrine into Dodd- Frank, HOLA, Federal Credit Union Act, and FDIA and extends doctrine to federal savings associa0ons, federal credit unions, and statechartered banks Eliminates supervisory authority Eliminates UDAAP enforcement and rulemaking authority 21

22 States, Fed Gov t Compete to Regulate MPLS Mul0-state Licensing System Conference of State Bank Supervisors and NYDFS sued to stop OCC from issuing op=onal special purpose charters. Senate Dems speak out against charter: "It is far from clear whether the OCC has authority to grant na0onal bank charters to them." NAFCU wrote a leder to the OCC urging the agency to hold FinTechs to the same standards as banks when it comes to regula0on and supervision. Independent Community Bankers of America expressed concern over the degree to which the OCC plans to regulate FinTechs that choose the bank charter. 22

23 State Laws Preempted by Federal Charter 23

24 New Issues in Mobile Banking and Cybersecurity 24

25 Banking How Has Technology Changed? Mobile banking users in the United States, 2012 to 2016 (in millions) These numbers are estimates. Aite Group. 25

26 Mobile Deposits as Percentage of Total Deposits 26

27 Banking: Key Governing Laws/Regulations Uniform Commercial Code Last Revision 2002 Regulation CC/Check 21 Act Enacted in 2003 Electronic Check Clearing House Organization ( ECCHO ) Operating Rules Does not address non-members Regulation J and Federal Reserve Operating Circular Addresses banks in the Federal Reserve System 27

28 Banking: New Technologies/New Threats 28

29 Banking: New Technologies/New Threats Duplicate Check Fraud/Remote Deposit $864M/Year Bank Customer A receives paper check from employer Customer A deposits check using smart phone Customer A receives funds in checking account Customer A cashes same check at currency exchange Employer of Customer A pays on first deposited check Bank of Employer catches double-deposit and refuses to pay currency exchange Currency exchange sues employer 29

30 Banking: New Technologies/New Threats Employer likely can t recover from employee Employer can t recover from own bank Employer can t recover from currency exchange Employer will look to bank of Customer A 30

31 Banking: New Technologies/New Threats Employer sued Customer A s Bank for negligence claiming banks use inadequate security Settled Law: The Hotel references cases dealing with general legal principles, but the Hotel fails to cite any case that would contradict the established state law... Under Illinois law, a bank such as [Bank] owe[] no duty to a non-customer under circumstances such as in this case. Preemption: The negligence claim that the Hotel seeks to bring would impose a common law obligation under Illinois law on banks that would significantly interfere with their authorized power to take deposits. Particularly as technology advances and paperless deposits become more prevalent allowing a state common law to micro-manage the deposit procedures of banks would intrude far into the realm reserved for federal law when regulating national banking institutions. Absent a preemption of such common law claims, banks could also face a myriad of conflicting laws across this county relating to deposit procedures. 31

32 Banking: New Technologies/New Threats Changes Coming Reg CC changes effective July 1, 2018: Expand Reg CC to electronically presented checks Creating indemnities for electronically created items Creating indemnities for remote deposit capture Key concepts: Bank accepting an original paper check should not bear the loss from multiple deposits Bank offering remote deposit bears the loss 32

33 Banking: New Technologies/New Threats Changes Coming Similar set of warranties regardless of form of check Indemnity for loss, including costs and attorneys fees Comparative negligence applies Indemnity not permitted if original check had restrictive endorsement 33

34 Banking: New Technologies/New Threats Preventative Measures Restrictive Endorsements Contract terms with customers Paperless checks Positive Pay service 34

35 Banking: New Technologies/New Threats Privacy & Cyber Attacks Over 169M personal records were exposed in 2015, stemming from 781 publicized breaches ITRC Data Breach Reports 2015 Year-End Totals In 2015, 38 percent more security incidents than in 2014 The Global State of Information Security Survey 2016 PWC Average global cost per lost/stolen record was $154 Cost of Data Breach Study: Global Analysis IBM/Ponemon 35

36 Predicted Next Wave of Class Actions 36

37 Predicted Next Waive of Class AcUons 37

38 Banking: New Technologies/New Threats Privacy & Data Breach Cases: Key Arguments/Defenses Spokeo v. Robins, 136 S. Ct (2016) Standing under Article III require a plaintiff to have suffered a concrete and individualized injury Mere violation of statute does not establish standing need de facto harm. Intangible injuries may be concrete. Congress may elevat[e] to the status of legally cognizable injuries concrete... injuries that were previously inadequate in law. 38

39 Banking: New Technologies/New Threats Privacy & Data Breach Key Cases Remijas v. Neiman Marcus, 794 F.3d 688 (7th Cir. 2015) Customers alleged that their card numbers were stolen during cyber attack on NM s computer system 9,200 customers had at least one fraudulent charge Court held that the customers had standing to bring class claims based on harm already suffered and also because there was an objectively reasonable likelihood of future injury to other class members 39

40 Banking: New Technologies/New Threats Privacy & Data Breach Key Cases In re: SuperValu, Inc., 2016 WL (D. Minn. Jan. 7, 2016) Hackers stole personal information of over 1,000 grocery customers Unlike Remijas, only one allegedly unauthorized transaction after the data breach Plaintiffs lacked standing because the risk of future harm was too speculative where there was only a single incident of misuse in over 18 months In re: Zappos.com, Inc., 2016 WL (D. Nev. Aug. 29, 2016) Hackers accessed 24M+ customer records, including partial credit card numbers Motion to strike granted because class allegations too broad and not limited to individuals who have suffered actual injury. It is possible that other individuals will suffer actual injury from the data breach, but there is no risk of real harm because the possible injury is not certainly impending and there is not a substantial risk that the harm will occur. 40

41 Banking: New Technologies/New Threats More Regulation... Current federal law requires banks to implement security programs to protect personal information Nearly all states have breach notification laws Effective March 1, 2017: NYDFS Regulation requiring specific safeguards to detect, stop, and report incidents: Hiring a Chief Information Security Officer Preparing written policies Encrypting all non-public information Reporting to DFS Certifying compliance annually 41

42 Banking: New Technologies/New Threats Privacy & Data Breach Key Cases: Takeaways Continued efforts at regulation Standing argument under Spokeo can work sometimes But standing-based arguments likely not enough Economic loss rule Lack of reliance/materiality No contract Best attack? Lack of evidentiary support for claims 42

43 THANK YOU! Jennifer Gray Paul Ferak

True Lender Developments: Litigation and State Regulatory Actions

True Lender Developments: Litigation and State Regulatory Actions By Catherine M. Brennan, Kavitha J. Subramanian, and Nora R. Udell* INTRODUCTION For many years, banks have partnered with non-bank companies