Alston & Bird Consumer Finance Blog

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As Economic Winds Blow, So Do Whistleblowers: How to Protect Your Company Through Turbulent Times

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A&B ABstract:

As recently reported by the Financial Times, banks are preparing for the “deepest job cuts since the financial crisis,” with firings to be “super brutal.” Already, nonbank lenders and service providers have been suffering with several rounds of layoffs and, potentially, more to come. Former employees, particularly disgruntled ones, may have information they want to share with the government.  An Insider article highlighted that remote work has resulted in a surge of whistleblower complaints.  If true, even current employees, including those whose complaints or grievances fall on deaf ears, also could be potential whistleblowers.

Alston & Bird Partners Nanci Weissgold, Joey Burby, and Cara Peterman (ably assisted by, and a special thanks to, Charlotte Bohn,  Andrew Brown, and Melissa Malpass) addressed today’s challenging economic conditions, and how companies can protect themselves during an expected surge in whistleblowing by disgruntled current and former employees.  The webinar slides address:

  • What you need to know about government whistleblower reward programs and laws with whistleblower incentives and protections, including the False Claims Act, FIRREA, and the SEC’s Whistleblower program.
  • Recent trends, developments, major settlements, and awards in whistleblower-related settlements and litigation.
  • Best practices for companies when responding to, de-escalating, and defending against whistleblower complaints.

Best Practices for Responding to Whistleblower Complaints

#1: Keep complaints internal. It is critical to have procedures in place for employees (as well as contractors and other agents) to report compliance concerns internally.

  • Establish a compliance hotline or other means of anonymous
  • Have an anti-retaliation policy to protect employees who make a report.
  • Promote these policies and procedures, and train employees on them.

This is a required element of an effective compliance program under DOJ and SEC guidance, and factors into their charging decisions; also considered under U.S. Sentencing Guidelines in determining corporate penalties.

Additionally, internal complaints allow companies to investigate and remediate (if necessary) and to consider whether/how to self-disclose. The 2023 revisions to DOJ’s Corporate Enforcement Policy strongly encourage self-disclosure, offering significant incentives to companies who do.

#2: Maintain a strong Compliance Management System (CMS). A strong CMS is one that establishes compliance responsibilities, communicates those responsibilities to employees, ensures the responsibilities are carried out and met, takes corrective action, and updates tools, systems, and processes as needed.

Scaled to the size of the company’s operations, a CMS requires:

  • A strong board of directors and management oversight – “tone at the top.”
  • Comprehensive written policies and procedures to demonstrate an understanding of all applicable laws and regulations.
  • Training of all applicable laws to ensure that employees can perform their functions.
  • Monitoring and testing based on an assessment of risk carried out through three lines of defense:
    (1) functions that own and manage risk; (2) functions that oversee risk; and (3) functions that provide independent assurance.
  • Timely corrective action that remediates past issues and prevents reoccurrence prospectively.
  • Consumer complaint response, root cause analysis, and enterprise-wide action.

#3:  Time is of the essence. Whether you learn of a whistleblower complaint internally, or via contact from a government agency, you should initiate an internal investigation into the subject matter of the complaint immediately. DOJ takes the immediacy of self-disclosure into account in determining whether to file charges. If there is ongoing problematic conduct, you want to stop it and cut off potential liability.

  • What the investigation will involve, and how it will be conducted, will vary depending on the seriousness of the complaint and how credible it appears.
  • Inside or outside counsel should generally conduct the investigation to ensure communications and work product are protected by the attorney-client privilege.
  • Some basic steps are common to almost every internal investigation:
    • Ensure that all potentially relevant documents (including emails and IMs) are preserved.
    • Collect and review relevant documents.
    • Interview involved employees (using Upjohn warning).

Takeaway

Given that a surge in whistleblower complaints is likely, financial institutions should ensure that they are adequately prepared to address them.

New York Amends Disclosure Requirements for Telemarketers

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A&B Abstract:

New York Governor Kathy Hochul signed legislation in December designed to limit unwanted telemarking calls by providing consumers the option to be added to a company’s do-not-call list at the outset of a call. The new law takes effect March 6, 2023.

Updated Requirements for New York Telemarketers:

The new legislation (S.8450-B/A.8319-C) amends New York General Business Law § 399-z as it relates to telemarketers.  New York currently regulates telemarketers, defined generally as entities that engage in solicitation by telephone call or electronic messaging text to a customer located in New York or that control or supervise such entities.  The law requires certain disclosures to be made at the time of the call.

The law is amended by the legislation to require telemarketers to give customers the option to be added to the company’s do-not-call list at the beginning of telemarketing sales calls, right after providing the telemarketer’s name and solicitor’s name. Currently, the law requires telemarketers to inform customers that they may request to be added to the company’s do-not-call list, but it does not specify when this disclosure must be made.

Takeaway:

Telemarketers doing business in New York should update their procedures and scripts to comply with this new requirement by March 6, 2023, as each violation of this rule can incur a fine of up to $11,000.

State Community Reinvestment Acts Reaching Beyond Banks

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A&B ABstract:

When Congress passed the federal Community Reinvestment Act (“CRA”) in 1977 to address redlining, it imposed affirmative requirements on insured depository institutions to serve the credit needs of the communities where they receive deposits. At that time, banks were extending the vast majority of mortgages nationally. However, non-banks have become the dominant mortgage lenders, by some estimates accounting for more than two thirds of residential mortgage loans in 2021.

Indeed, the non-bank mortgage market share has been increasing steadily since 2007, when non-banks were originating approximately 20 percent of mortgage loans. That year, Massachusetts became the first state to extend the scope of its state CRA to non-bank mortgage lenders, notwithstanding the proviso of the federal statute that tied credit obligations to depository activities.  Historically, deposits were gathered primarily from areas surrounding bank branches, and thus a bank’s CRA performance responsibilities were likewise focused on those same areas.  But today, both lending and depository activities can be conducted nationally.  In recognition of the more attenuated connection between bank branches serving the credit needs of communities, the Massachusetts CRA became the first state to impose CRA responsibilities on non-bank lenders.

The Various State CRAs

In March 2021, Illinois passed its CRA which also applies beyond banks to non-bank mortgage lenders, followed shortly by New York in November 2021.  (Note that this expansion has not taken mortgage servicers into the fold, as CRA is more focused on an institution’s loan originations and purchases than its loan servicing.)  Relatedly, other state CRA statutes apply to credit unions and banks, though not to other financial institutions.  Below is a brief update on where various state CRAs currently stand:

  • Connecticut. Connecticut’s CRA initially applied only to banks but was amended in 2001 to cover state credit unions as well.  It does not cover any other financial institutions, however.  Its provisions are similar to the federal CRA.
  • District of Columbia. The District of Columbia’s CRA applies to deposit-receiving institutions, which includes federal, state, or District-chartered banks, savings institutions, and credit unions.  It is also similar to the federal CRA.
  • Illinois. The Illinois CRA applies to financial institutions, which includes state banks, credit unions, and non-bank mortgage entities that are licensed under the state’s Residential Mortgage Lending Act that lent or originated 50 or more residential mortgage loans in the previous calendar year.  Following the expansion of its CRA (205 ILCS 735) last year, Illinois solicited comments and facilitated roundtables to assist the Department of Financial and Professional Regulation in developing rulemaking for non-bank entities. In particular, the Department’s August 31, 2021 Advance Notice of Proposed Rulemaking sought comment on whether the assessment areas of these non-bank entities should include the entire state of Illinois.  Importantly, the Department has referenced the potential suitability of either the federal CRA rules or Massachusetts’ CRA rules as a model for Illinois.  No proposed rule has been published as of the date of this writing.
  • Massachusetts. Despite mortgage lender concerns raised today regarding the feasibility and inapplicability of different elements of the general CRA examination framework, Massachusetts has imposed meaningful CRA requirements on non-bank lenders for more than a decade.  Indeed, Massachusetts has succeeded in implementing and conducting separate CRA examination processes for banks and non-banks. Yet despite this distinction, Massachusetts CRA exams for mortgage companies remain rigorous.
  • New York. In November last year, New York Governor Kathy Hochul signed legislation (S.5246-A/A.6247-A) to expand the scope of the state’s CRA to cover non-bank mortgage lenders. Specifically, the legislation creates a new section, 28-bb of the New York Banking Law, that requires non-depository lenders to “meet the credit needs of local communities.” Further, section 28-bb provides for an assessment of lender performance by the Superintendent that considers the activities conducted by the lender to ascertain the credit needs of its community, along with the extent of the lender’s marketing, special programs, and participation in community outreach, educational programs, and subsidized housing programs. This assessment also may consider the geographic distribution of the lender’s loan applications and originations; the lender’s record of office locations and service offerings; and any evidence of discriminatory conduct, including any practices intended to discourage prospective loan applicants.  The provisions of section 28-bb will go into effect on November 1, 2022.

Worth noting also is that while these state CRAs are generally aligned with the federal CRA requirements, the regulations implementing the federal CRA are expected to change.  The Federal Reserve Board, FDIC, and OCC are currently working on promulgating a modernized interagency CRA framework.  Once the federal CRA regulations change, the state CRAs may follow or risk subjecting their banks and any other covered financial institutions to the burden of complying with two different regulatory regimes.

Takeaway:

Much like in Massachusetts, non-bank lenders originating a significant number of loans in Illinois and New York should be developing a CRA compliance strategy that makes sense for their size and business model to comply with the state CRAs.  That said, all non-bank lenders would do well to contemplate whether Massachusetts, Illinois, and New York are a harbinger of what is to come.  Finally, state CRA covered financial institutions in Connecticut, the District of Columbia, Illinois, Massachusetts, and New York should be planning for potential compliance framework shifts once the federal CRA regulations are revised.

New CFPB Chief Rohit Chopra Confirmed by Senate and Takes Immediate Action Against Big Tech Firms

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A&B Abstract:

On September 30, 2021, the Senate confirmed Rohit Chopra to serve as director of the Consumer Financial Protection Bureau (CFPB) in a 50-48 vote along party lines. He had been serving as a member of the Federal Trade Commission (FTC) where he had been a vocal critic of big tech companies and advocated for increased restitution for consumers. He previously served as the CFPB’s private education loan ombudsman under former CFPB Director Richard Cordray. Prior to that, he had worked closely with Sen. Elizabeth Warren on the CFPB’s establishment. Consistent with his past practices, Chopra’s CFPB has now ordered six Big Tech companies to turn over information regarding their payment platforms.

Expectations for Chopra’s CFPB

President-elect Biden announced Chopra as his choice to lead the CFPB before Inauguration Day, and the Biden Administration subsequently referred his nomination to the Senate in February. Chopra succeeds Kathy Kraninger, who became Director in December 2018 after having served as a senior official at the Office of Management and Budget. She led the CFPB for two years before the incoming Biden Administration demanded her resignation on January 20. It is expected that Chopra will aggressively lead the CFPB and unleash an industry crack down. The October 21, 2021 order issued to Big Tech regarding payment products appears to be the first step in that plan. Additionally, credit reporting companies, small-dollar lenders, debt collectors, fintech companies, the student loan industry, and mortgage servicers are among the financial institutions expected to face scrutiny from Chopra’s CFPB. Prior to the Big Tech inquiry, the CFPB, under interim leadership, had already taken initial steps to implement pandemic-era regulations and to advance the Biden administration’s priorities. It is also expected that the enforcement practices under former-Director Cordray will be revived under a Chopra-led CFPB.

After his confirmation, Chopra stated an intent to focus on safeguarding household financial stability, echoing prior statements regarding his commitment to ensuring those under foreclosure or eviction protections during the pandemic are able to regain housing security. He has also declared an intent to closely scrutinize the ways that banks use online advertising, as well as take a hard look at data-collection practices at banks. In his remarks related to the market-monitoring order issued to Big Tech, Chopra was critical of the way companies may collect data and his concern that it may be used to “profit from behavioral targeting, particularly around advertising and e-commerce.”

Just one week later, Chopra delivered remarks in his first congressional hearing as Consumer Financial Protection Bureau director. In his prepared statements before both the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs, he cited mortgage and rent payments, small business continuity, auto debt, and upcoming CARES Act forbearance expirations as problems he plans to address. He also stated an intent to closely monitor the mortgage market and scrutinize foreclosure activity. And, echoing his action from a week earlier, Chopra reiterated an intent to closely look at Big Tech and emerging payment processing trends. Chopra also noted a lack of competition in the mortgage refinance market and stated an intent to promote competition within the market.

Although appointed to a five year term, the CFPB director serves at the pleasure of the president after a landmark decision last year from the Supreme Court.

Takeaway

Industry participants, including credit reporting companies, small-dollar lenders, debt collectors, fintech companies, the student loan industry, and mortgage lenders and servicers can anticipate additional scrutiny in the coming months and years from the CFPB. As Chopra gets settled into his new role, we will be keenly watching where he turns his attention to next.

The District of Columbia Continues to Fight the “True Lender” Rule in Court

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A&B ABstract:

Innovative partnerships between banks and nonbanks have expanded lending services to consumers and small businesses. These partnerships, known as marketplace lending arrangements, offer non-traditional loan products to consumers and small businesses. Significantly, state laws establishing interest rate caps do not apply to marketplace lending arrangements where the bank is the true lender. But with this innovation has come debate about whether the bank is the true lender. The Office of the Comptroller of the Currency’s “True Lender” rule, which became effective on December 29, 2020, was intended to address uncertainties in these partnerships.

Under the “True Lender” rule, a bank is deemed the true lender if, at the time of origination, it is named as the lender in the loan agreement or funds the loan. Proponents of the “True Lender” rule argue that marketplace lending arrangements expand access and that the rule provides necessary guidance to enable banks and their non-bank partners to comply with the law. Others, however, have sharply criticized the rule, arguing it allows payday lenders to circumvent state laws prohibiting predatory ultra-high interest-loans.

Several state attorneys general are challenging the “True Lender” rule in the courts. Earlier this year, District of Columbia Attorney General Karl. A. Racine joined eight other Attorneys General in filing a lawsuit against the Office of the Comptroller of the Currency to stop implementation of “True Lender” rule. This month, the D.C. Office of the Attorney General has taken its challenge to the parties themselves by filing its first lawsuit involving a marketplace lending arrangement since the “True Lender” rule’s enactment.

District of Columbia v. Opportunity Financial, LLC

On April 5, 2021, the District of Columbia (“the District”), by and through AG Racine, filed a complaint in the Superior Court of the District of Columbia against Opportunity Financial, LLC (“OppFi”), an online lending company. The District alleges in its complaint that OppFi violated the District of Columbia Consumer Protection Procedures Act and title 16 of the District of Columbia Municipal Regulations.

The Complaint

According to the complaint, OppFi has engaged in predatory lending practices that target the District’s most vulnerable citizens. Specifically, the District alleges that OppFi has been deceptively marketing illegal, high-interest loans. In 2018, OppFi partnered with FinWise Bank to launch a bank-sponsored product called “OppLoans,” which it offers to D.C. residents. However, OppFi has never held a money lender license as required by D.C. law. OppFi also offers loans to D.C. consumers at interest rates of up to 198%, a rate which dramatically exceeds D.C.’s interest rate cap of 24%. The District also alleges that OppFi falsely represents OppLoans as more affordable than payday loans, tells consumers that taking out an OppLoan will help improve the borrower’s credit score despite OppFi’s knowledge to the contrary, does not adequately disclose that OppLoans are high cost, risky loans that should only be used for emergencies, and fails to tell consumers that refinancing a current loan is often more expensive than obtaining a second loan.

Despite OppFi’s partnership with FinWise Bank, the District asserts that OppFi is the true lender because it has the predominant economic risk, bears the risk of poor performance, and funds the expenses for the provision of OppLoans. Meanwhile, FinWise’s fees and expenses related to OppLoans are capped per its agreements with OppFi. In support, the District also alleges that OppFi is the servicer for OppLoans, controls and pays for all OppLoans marketing, and owns the OppLoans trademark and associated intellectual property rights. Further, potential borrowers are screened using OppFi’s proprietary scorecard and can only obtain an OppLoan through opploans.com. Interested consumers attempting to obtain an OppLoan directly through FinWise Bank’s website are redirected to OppFi’s website.

The District seeks a court order voiding improperly made loans, as well as injunctive relief, restitution for consumers, civil penalties, and costs.

Takeaway

While states challenge the “True Lender” rule in court, Senate Democrats have mounted an attack aimed at overturning it. President Biden has yet to announce his nominee to lead the Office of the Comptroller of the Currency, which could provide additional insight on the administration’s direction with the rule. Financial institutions involved in marketplace lending arrangements should pay close attention to litigation that can provide insight into the practical effects of the “True Lender” rule’s bright-line test on state litigation.