LEGL 4700 - Test 3

Marketplace (p2p) Platform Lending

(1) Collect applicant data; (2) post loan for investors to view and make bids on the loan or a portion of the loan; (3) platform makes money on fees

Disparate Impact Claim Steps

(1) Plaintiff must establish a prima facie case; (2) the burden shifts to the defendant to show a legitimate non-discriminatory purpose; (3) the burden shifts back to the plaintiff to show that the reasons given a pretext

Credit Card Responsibility & Disclosure Act of 2009 (CARD Act 2009)

-Amended TILA -Prohibits credit card issuers from extending credit without assessing the consumer's ability to pay -Limits fees in 1st year. -Limits over-limit/ late fees Disclosures: -Minimum money payment -Change in APR (w/ 45 days notice)

Fair Credit Bill Act (FCBA 1974)

-Amended TILA -Permits cardholder to withhold payments when there are billing errors (if notice is provided) -Permits cardholder to withhold payments due to merchant's non-performance (Must be local)

Risks of Credit Cards and Mobile Wallets

-Can be stolen -Can be skimmed -Can be hacked from online database

TILA Disclosures

-Fixed Fees -Annual Rate (APR) using standardized formula -Customer's liability for unauthorized use -Periodic billing statements.

TILA's Consumer Protection

-Liability for unauthorized use is $50 (Stronger than protection afforded to debit card users)

Credit Card Examples

1) An actual credit card 2) Mobile Wallet

Other Risks:

1) Billing errors (TILA requires creditors to promptly investigate and correct billing statements) 2) Merchang non-performance

Core Banking Functions

1) Lending Money 2) Facilitating Payments/ Transmitting Money 3) Making Deposits

Players in Credit Card Transactions

1) Merchant 2) Consumer 3)Acquiring Bank & Acquiring Processor 4)Issuing Bank 5) Network

Electronic Fund Transfer (EFT) Examples

1) Moving money from one account to another 2) ATM 3) Venmo

Ways Credit Cards Are Used

1) Swipe/ Dip 2) Tokenizations 3) Issued Electronically

Which Laws Apply to Credit Cards?

1) TILA: applies to creditors. Implements Reg. Z, Enforced by FTC, CFPB, OCC, FDIC, &Fed. Reserve (DOES NOT APPLY TO DEBIT CARDS)

Risk Retention Requirements for Securitized Loans

941(b) of the Dodd-Frank Act requires lender to retain an economic interest equal to at least five percent of the credit risk of the assets they securitize

TILA Enforcement

A borrower or agency can bring claims against the originating bank, any assignee of the loan (the platform) and investors who subsequently purchased the loans (if applicable)

Bank

A chartered financial institution that accepts deposits

Shelf Prospectus Requirements

A detailed description of the marketplace platform A discussion by management about the marketplace platform's performance over the previous twelve months An overview of the marketplace platform's financial condition and financial statements Material legal proceedings that could impact the marketplace platform's financial health A discussion of the applicable risk factors The distribution plan for releasing the securities

Applicable EFTA Rules

A lender cannot require a borrower to pay by EFT (but they may provide incentives) Authorization for electronic payments in required

Valid When Made Doctrine

A loan valid at its inception does NOT become usurious upon transfer to another entity even if that entity is not a bank Note: Loans are originated by Utah banks to avoid usury limits

Prima Facie

A specific policy caused a statistical disparity

Electronic Signature

An electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record

Investment Adviser

Any person or entity that (1) for the purpose of compensation is (2) engaged in the business of (3) providing advice or making recommendations on securities

Creditor

Any person/entity who "regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit"

SEC v. Prosper (2009)

Applied the Reves test and Howey test and determined that Prosper's notes were securities Resulted in Prosper closing down for 8 months to allow time to become compliant

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989

Applies to Institution Affiliated Party (IAP) Allows additional authority to impose sanctions against lawyers, accountants, appraisers and other third parties who negligence may contribute to a bank failure Third parties who perform bank functions are subject to oversight by the FDIC or OCC

Electronic Fund Transfers Act of 1979/Regulation E

Applies to all institutions that offer "electronic fund transfer" services to individuals in any state

Truth-in-Lending Act of 1968/Regulation Z

Applies to creditors Requires disclosures of fees Enforced by the FTC, CFPB, OCC, FDIC, and the Federal Reserve

CFPB v. Better Future Forward (2011)

BFF had falsely represented that its Income Sharing Agreements (ISAs) were not loans and did not create debt Decided that ISAs are loans Broader implications: TILA and other consumer protections apply to ISAs

Lending Business Models

Balance sheet lending; originate to sell; hybrid models

TILA Enforcement (OCC)

Banks: All national banks Non-banks: None

TILA Enforcement (FDIC)

Banks: Federally insured banks with less than $10 billion in assets Non-banks: None

TILA Enforcement (Federal Reserve)

Banks: Member banks Non-banks: None

TILA Enforcement (CFPB)

Banks: National banks with $10 billion in assets Non-banks: Non-banks with over $10 billion in assets

TILA Enforcement (FTC)

Banks: None Non-banks: All non-banks

Regulatory Risk for Marketplace Lenders

Being labeled as an "Investment Company" Being labeled as an "Investment Adviser" Risk Retention Requirements under Dodd-Frank

Online Lending Platforms and Disparate Impact

Biased output in algorithms; access to the internet, devices; accessibility for individuals with disabilities; ability to correlate online data to a protected class (via access to social media, other electronic data)

UDAAP (CFPB)

CFPB has authority to police "unfair, deceptive and abusive acts and practices" (UDAAP) CFPB supervises financial service companies and large banks (with at least $10 billion in assets)

De La Torre v. CashCall, Inc. (2018)

CashCall required borrowers to check a box before agreeing to electronic repayment of the loan but allowed borrowers to opt-out at any time The court found that CashCall violated the EFTA and allowing the borrower to opt-out did not cure the violation

Usury

Charging an excessive rate of interest

State Banks

Chartered by state agencies Certain federal regulations apply if FDIC member banks Ex: Regions

National Banks

Chartered by the OCC Federal statutes/regulations preempt state procedures Ex: Bank of America, Wells Fargo, JPMorganChase

Disparate Treatment

Creditor directly and intentionally discriminated against individuals on a prohibited basis

Disparate Impact

Creditor engages in practices that have a disproportionately negative impact on members of a protected class - and the lender is unable to demonstrate that the practice is justified by a legitimate business need and cannot reasonably be achieved by other less discriminatory means

RICO Punishment

Criminal violations: Fines or imprisonment of up to 20 years Civil violations/claims: Fines or damages

Increased Demand

Customer expectations; changing demographics (digital natives); decline in customer trust in banks

Reasons Consumers Borrow

Debt consolidation; credit card debt; other

Investment Company Act of 1940 Exemption

Entities not in the business of investing or holding loans but rather operating the website

Creditors

Entities that "regularly extend consumer credit"

Contract Formation and E-Sign Act

Establishes that electronic signatures and records have the same legal validity and enforceability as traditional signatures if consumers consent to the use

Sayers v. General Motors (1981)

Example of a disparate impact case Ms. Sayers applied for a car loan but was denied a loan after a review of her credit showed that she had some delinquencies Ms. Sayers sued GM, submitting evidence that 25 males with the same or similar credit histories had been approved for loans The court said that the plaintiff established a prima facie case of discrimination under the ECOA The court said that the defendant then had to prove a legitimate reason for denying the applicant credit The defendant showed evidence that the 25 males had prior dealing with the defendant The plaintiff did not provide evidence that this reason was a pretext

Heaton v. SoFi (2015)

FCRA prohibits obtaining credit data on "false pretenses" Plaintiffs alleged that SoFi falsely claimed that they only made "soft" credit pulls (that do not affect an applicant's score) when in fact it made "hard" credit pulls from Experian without the consent of consumers even before they applied for a loan Settlement: $2.4 million

UDAP (FTC)

FTC has authority to combat "unfair and deceptive acts and practices" (UDAP) FTC supervises non-bank businesses

FTC v. LendingClub (2018)

Falsely advertised "no hidden fees" Falsely claimed that applicants had been approved when they had been rejected to prevent customers from seeking loans from competitors

FTC v. Avant LLC (2019)

Falsely advertised that it would accept credit cards and debit cards for repayment Withdrew money from consumers' accounts without authorization Charged duplicate payments without authorization Settlement: $3.85 million

Shelf Offerings (Rule 415)

Filing full statements for each note is impractical Rule 415 allows marketplace platforms to file shelf statements that do not specify maturity dates or interest rates When the marketplace platform is prepared to make an issuance, it can then take the requisite amount of securities "off the shelf" and file a prospectus supplement specifying the amount of securities sold and applicable negotiated terms

FCRA Rules (Data Sharing)

If a user shares a credit report, then it falls into the definition of "consumer report agency" under the act Lenders structure their information to avoid this label

FCRA Rules (Less Favorable Terms)

If due to credit scoring, must provide notice to explain the terms offered based on the credit report

FIRREA Liability

If platform lenders are negligent in their underwriting, they can be responsible for bank failures

Racketeer Influenced and Corrupt Organizations Act (RICO) of 1970

Imposes criminal and civil liability on businesspersons who engage in prohibited activities and interstate commerce Prohibited activities: Proof of pattern of racketeering activity OR collection of an unlawful debt Prohibits unlawful debt collections (i.e., debt collection of usurious debt)

Military Lending Act

Intended to preserve military readiness and service member retention by protecting active-duty members and their families from lending practices that could cause undue hardship and distract them from performing their duties Maximum interest rate = 36% Bans prepayment penalties and limits debt cancellation charges Enforced by the CCFPB and FTC (for non-banks)

Madden v. Midland (2015)

Invalidated Valid When Made Doctrine in 2nd Circuit; however, OCC codified Valid When Made Doctrine in 2020 to overturn Madden v. Midland

Investment Advisers Act

Investment adviser: Any person or entity that (1) for purpose of compensation is (2) engaged in the business of (3) providing advice or making recommendations on securities Marketplace lenders run the risk of being deemed an investment adviser depending on how they operate the platform

Howey Test and Prosper

Investment of money: Lenders invest money to purchase a loan Common enterprise: (1) Lenders and borrowers are dependent on Prosper to engage in new loan origination; (2) vast majority of loans are funded by more than one investor; (3) all lenders would be affected if platform shut down; (4) borrowers pay Prosper an origination fee Reasonable expectation of profit: Lenders expect a return Depend upon the efforts of others: (1) Borrowers and lenders are prohibited from transacting directly; (2) lenders rely on Prosper to execute the loan creation and repayment process

Payments

Kade

FTC v. LendingClub (2018); 2

LendingClub failed to provide the privacy notice in a manner that was "clear and conspicuous" Users had to find the link to the notice in its terms of use

GBLA's Financial Privacy Rule

Limits disclosure of "nonpublic personal information" to nonaffiliated third parties (i.e., names, addresses, income, social security number) Requires a privacy notice to be sent that describes how the institution collects, discloses, and protects non-public information Applies to financial institutions

FTC/CFPB v. GreenTree Servicing (2015)

Loans were transferred to GreenTree after default If homeowners were late with a payment, collectors bombarded borrowers with calls from 5 AM to 11 PM and called the borrowers at their places of employment Collectors threatened the borrowers with arrest or prison, used obscene language and mocked borrowers' financial situations $63 million settlement

Family Resemblance and Prosper

Motivations of buyer and seller: Purchasers of notes were motivated to get a better return Plan of distribution: Offered and sold on the internet, wide plan of distribution Reasonable expectations of the investing public: Public believed the notes were investments as they were being marketed for their valuable returns Existence of an alternative regulatory regime: No alternative regulatory regime

Marquette National Bank of Minneapolis v. Omaha Service Corps. (1978)

National banks need only follow the usury laws of their home state regardless of the state where the borrower resides

Increased Supply

New digital innovations; ability to scale; cost advantages

Specific FDCPA Rules

No debt collection activities outside of 8 AM to 9 PM Notice of amount and names of original and current creditor required Debt collection activities must cease within 30 days of notice of a dispute Debt collection activities (outside of legal remedies) must cease one debtor has notified collector/creditor that he refused to pay and wishes the debt collector to cease communication

State Licensing Requirements

Non-bank lenders engaged in loan underwriting, origination or servicing will be subject to state-by-state licensing requirements

Reves Test Exemptions

Notes delivered in a consumer financing (used only for consumer goods) Notes secured by a mortgage on a home Short-term notes secured by a lien on a small business or its assets Short-term notes evidence by accounts receivable Notes evidencing "character" loans to bank customers Notes evidencing loans from commercial banks for ordinary operations

FCRA Rules (Denial)

Notice to applicant of the denial; disclosure of the credit score used; disclosure of the provider of the credit report; notice of the applicant's ability to obtain a copy of the report

Alexander v. Ameripro Funding, Inc. (2017)

Plaintiffs alleged that Wells Fargo violated the ECOA by promulgating guidelines for its secondary market mortgages that refused to buy mortgages whose borrowers relied on Section 8 housing funds and this lead Ameripro to reject loans from those applicants Plaintiffs sued Wells Fargo and Ameripro The court said that the ECOA only applies to originating lenders in the primary market, so the claim against Wells Fargo was dismissed

Bethune v. LendingClub Corp. (2016)

Plaintiffs claimed that the transaction used a sham party for sole purpose of charging a usurious rate and the scheme was perpetrated by an enterprise consisting of LendingClub and WebBank Ultimately, the parties had to arbitrate

Tucker V. JP Morgan Chase

Plaintiffs purchased crypto w/ Chase Credit Card Chase started treating these crypto purchases differently without providing a notice Plaintiffs claims Chase violated TILA and Chase settled for $2.5M

Reves Test

Platform notes as "notes" - (1) Is it one of the following exemptions? - (2) Family resemblance test (does the note resemble any of the limited exemptions or does it resemble a security?)

Fair Debt Collection Practices Act (1977)

Prohibits abusive debt collection practices Enforced by the FTC and CFPB CFPB has rulemaking authority Applies to "Debt Collectors"

Equal Credit Opportunity Act

Prohibits discrimination based on race, color, religion, national origin, sex, marital status, age, and source of income Implemented by Regulation B Primarily enforced by the CFPB Creates a private right of action

Miller v. American Express (1982)

Rare example of a winning disparate treatment case After 13 years of good credit history, Ms. Miller's credit card was canceled upon the death of her husband She sued under the ECOA alleging disparate treatment based on "martial status" The district court granted summary judgment to AmEx 9th Circuit reversed and held that AmEx violated the ECOA

Disclosure Requirements

Registration statement; prospectus for potential investors

Investment Company Act of 1940

Requires businesses holding securities that represent over 40% of total assets to register as an investment company Marketplace lenders tend to meet this definition So far, the SEC has not required marketplace lenders to register

FCRA History

Retail Credit Company announced plans to digitize its credit files Congress launched an investigation FCRA was passed when investigation revealed that Retail Credit Company's credit files included information about consumers' social, political, and sexual lives FCRA required producers expunge social, political, and sexual data from credit files Later, Retail Credit Company changed its name to Equifax

U.S. v. Rubin (2015)

Rubin owned businesses that issued payday loans in Pennsylvania Pennsylvania's usury laws prohibit interest rates above 36% Rubin's businesses charged rates as high as 780% Rubin paid an Indian tribe to pretend that it was the lender as part of a scheme to have the tribe claim that "sovereign immunity" prevent application of state usury laws Rubin was convicted under RICO and sentenced to 37 months in prison, plus fines, and forfeited $9.7 million

Special Risks for Marketplace Lenders

Securities laws make issuers liable for materially misleading information in the disclosures Marketplace lenders are dependant on information provided by Borrowers Marketplace lenders place disclaimers on disclosures that state information provided by Borrowers could be false

Hybrid Models

Sell some loans to investors, keep some loans on the balance sheet

State Usury Laws

Some states set maximums, others do not (e.g., Utah)

Section 27 of Federal Deposit Insurance Act

State-chartered banks need only follow the usury laws of their home state regardless of the state where the borrower resides

Point of Sale lenders (POS)

TILA does NOT apply -Terms are designed to avoid TILA.

ECOA Private Right of Action

The plaintiff was an "applicant" for a loan from the creditor The defendant was a "creditor" in the loan transaction involving the plaintiff The defendant discriminated against the plaintiff based on the plaintiff's membership in a protected class

Primary Market

The side facing the borrower (direct relationship between the lender and borrowers) Lender earns money from origination fees Ex: Applying for a loan

FDCPA Authority

Third-party collection agencies collecting on behalf of lenders Lenders collecting their own debts using an assumed name Any collection agency that acquires debt that is in default

FCRA Data Sharing Exemptions

Transaction-based information; sharing with entities with common ownership; affiliated companies so long as consumer is given opt-out notice

Balance Sheet Lending

Underwrite loans; keep loans on their balance sheets Revenue derived from the interest and fees, but bears risk of borrower default Ex: Wellesley, SoFi

No Action Letter to Upstart (CFPB)

Upstart creates behavioral profiles of applicants CFPB issued a "no action letter" to Upstart, although the behavioral profiles could have a disparate impact The issuance of the "no action letter" was conditional on Upstart providing data that demonstrated the behavioral profiles did not have a disparate impact BUT... graduates of historically black colleges were charged a higher rate in Upstart's credit model

Fair Credit Reporting Act (FCRA) of 1970

Users, furnishers, and producers of "consumer reports" (AKA credit reports)

ECOA Disclosure Requirements

Within 30 days of receiving an application, the creditor must respond with an approval, counteroffer, or rejection If the creditor rejects the applicant, the creditor is required to provide a reason or a notice of the applicant's right to request a reason within 60 days

Secondary Market

Your lender will sell your loan to another bank Second lender bears the risk of default, but benefits from interest payments and fees throughout the loan Ex: Marketplace lending