March 3, 2020 Federal Reserve Highlights the Fair Lending Risks Posed by Targeted Internet Marketing

By: Keturah R. James

Internet-MarketingIn January 2020, the Federal Reserve’s Division of Consumer and Community Affairs published an article titled “From Catalogs to Clicks: The Fair Lending Implications of Targeted, Internet Marketing.”[1]  In the article, Federal Reserve staff Carol Evans and Westra Miller discuss how new technologies have made it possible for companies to obtain a “treasure trove of data about consumers”—including their race, gender, internet browsing patterns, where they live, and with whom they do business—and to use that data to target consumer groups.[2]  As the authors put it, this “targeted marketing” cuts both ways: it can facilitate financial inclusion and tailoring for consumers, but it may also be discriminatory under civil rights and consumer protection laws.[3]

In particular, Evans and Miller acknowledge that the use of consumer data to market credit can raise fair lending concerns, but also recognize that little regulatory guidance exists despite the increased use of Internet-based targeted marketing.[4]  Financial institutions are largely left to their own devices in determining how best to comply with laws that prohibit discrimination in lending, like the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).  Evans and Miller therefore provide specific recommendations to financial institutions who use targeted marketing, such as:

  • Lenders should “ensure that they understand how they are employing targeted, Internet-based marketing and whether any vendors use such marketing on their behalf.”[5]
  • Lenders that use online advertising services or platforms should “monitor the terms used for any filters, as well as any reports they receive documenting the audience(s) that were reached by the advertising.”[6]
  • Lenders should learn “whether a platform employs algorithms . . . that could result in advertisements being targeted based on prohibited characteristics.”[7]

Evans and Miller conclude by emphasizing the importance of carefully designing and monitoring online targeted advertising, especially given the high stakes that fair access to housing and credit have for minority consumers.[8]  Accordingly, as regulation in this area remains to be more thoroughly developed, financial institutions and others may choose to draw on the guidance in this article in their efforts to ensure that their marketing practices comply with applicable law.

 

[1] Carol A. Evans & Westra Miller, From Catalogs to Clicks: The Fair Lending Implications of Targeted, Internet Marketing, Consumer Compliance Outlook, Third Issue 2019, at 1.

[2] Id. at 2.

[3] Id. 

[4] Id. at 4. 

[5] Id. at 7. 

[6] Id. 

[7] Id.

[8] Id.

PEOPLE: Keturah R. James

February 25, 2020 House Hearing on Equitable Algorithms
By: Isabel F. Farhi
 
New-Development-IconOn February 12, the Task Force on Artificial Intelligence of the House of Representatives Committee on Financial Services conducted a hearing titled “Equitable Algorithms: Examining Ways to Reduce AI Bias in Financial Services.”  The purpose of this hearing, as articulated in the opening remarks of the Committee Chair, was to assess fairness and transparency in the use of algorithms in the financial services industry.  The panelists were public interest advocates, academics, and legal professionals working in the technology space. 
 
The comments at the hearing revolved around two major themes:  first, how to define ‘fairness’ and the consequences of choosing a definition, and second, how bias can result from using algorithms and how regulators might correct that bias.  The panelists and Congressional representatives also made some general suggestions about appropriate regulations and remedies Congress could implement to ensure fair algorithms.
 
On the first theme of defining fairness, the panelists explained that fairness can have an actual price, because inserting fairness can make the algorithm less accurate.  Therefore, choosing why to diverge from that accuracy is a key issue.  They observed that there were multiple definitions of fairness and proposed a few different ones, all of which were fairly abstract.  The panelists also discussed potential tradeoffs presented by choosing a definition, as the panelists opined that choosing a definition that creates more fairness on one metric (for instance, race) may create less, or be at the expense of more, fairness on another metric (for instance, gender).  There was also a dialogue on who should participate in the development of an algorithm to ensure proper tradeoffs were being made, with the panelists arguing for the importance of including the communities affected by the algorithm in the discussion at all stages. 
 
On the second theme, the Congressional representatives attempted to determine at what point in the algorithmic system bias entered the algorithm and thus where to direct the regulation: at the input data, at the algorithm process itself, at the outputs, or at the human decision makers who use the output.  Generally, the consensus among the panelists appeared to be that the whole system should be considered, but they also stressed focusing on the outputs.  In part that view seemed to stem from a belief by the panelists that the inputs to an algorithm could not be effectively regulated, leading them to stress the need to examine and constrain outputs instead.  In addition, the panelists argued for the need to also regulate the conduct of the individuals who develop and use algorithms. 
 
The panelists also opined that the technological capability to create fair algorithms existed, although they noted that there have been relatively few deployments of such capabilities in critical products at the big tech companies. 
 
While no one suggested specific policy actions, the panelists and Congressional representatives offered some general thoughts on appropriate regulations to ensure fair algorithms, including:
 
  • Strengthening the current regulatory framework, both for consumer finance regulations specifically and agencies generally.
  • Requiring disgorgement of profits made through the use of an unfair algorithm. However, the panelists noted that this would only be useful if disclosure of unfair algorithms was mandated, or regulators had better tools to detect unfair algorithms.
  • Requiring the maintenance of good records concerning the development, process, and evolution (through machine learning) of an algorithm that would allow for auditing.
  • Allowing market forces to ensure fairness through arbitrage or other economics concepts.
The hearing concluded with no overarching decisions or conclusions reached.  However, from the discussion, it appeared that lawmakers were considering how to define fairness in the context of using algorithms and artificial intelligence and how to determine where regulation should be used to ensure it.  Given the preliminary nature of the discussion, it will be important to continue to watch for developments in this space.
February 5, 2020 Consumer Finance Observer – Winter 2020

CFOJenner & Block has published its third issue of Consumer Finance Observer or CFO, a newsletter providing analysis of key consumer finance issues and updates on important developments to watch.  As thought leaders, our lawyers write about the consumer finance sector on topics ranging from artificial intelligence, compliance, data security, FinTech, lending and securities litigation.

In the Winter 2020 issue of the CFO, our consumer finance lawyers discuss the use of alternative data in credit underwriting; the New York action on UnitedHealth's algorithm; the next phase of Madden v. Midland Funding; the validity of arbitration agreements in bankruptcy proceedings; CCPA's impact on existing California consumer protection statutes; a quick look at HUD’s new Affirmatively Furthering Fair Housing Rule; and proposed amendments to the CCPA.  Contributors are Partners Landon S. RaifordMichael W. Ross, David P. Saunders, Damon Y. Smith, Kate T. Spelman and Andrew W. Vail; Associates Kevin J. Murphy, William S.C. Goldstein and Effiong K. Dampha; and Law Clerk Isabel F. Farhi.

To read the full issue, please click here

February 4, 2020 California’s Attorney General Appeals a Preliminary Injunction Barring Enforcement of AB-5, The State’s New Worker Classification Law
 
CaliforniaCalifornia’s new AB-5, which took effect January 1, 2020, revised the state’s worker classification law to make it very difficult to classify a worker as an independent contractor.  Under the so-called ABC Test codified in the new law, businesses must show (A) that the worker is free from the hiring entity’s control and direction, (B) performs work that is outside the usual course of the business, and (C) engages in an independently established trade, occupation or business.  A number of plaintiffs challenged the law, including Uber, freelance journalists and the California Trucking Association. 
 
On January 16, 2020, the California Trucking Association became the first plaintiff to succeed in its challenge (at least so far).  In California Trucking Assn v. Becerra, the Southern District of California issued a preliminary injunction barring the state from enforcing the law as to motor carriers.  2020 WL 248993 (S.D. Cal. Jan. 16, 2020).  As the court explained, the Federal Aviation Authorization Administration Act (FAAAA) expressly preempted state regulations that “related to . . . price, route, or service of any motor carrier.”  49 U.S.C. § 14501(c)(1).  The court cited past cases in the First and Ninth Circuits that held that the FAAAA preempted similar state employee classification statutes, and distinguished a Third Circuit case that held otherwise.  See id. at *6 (comparing Schwann v. Fedex Ground Package Sys., 813 F.3d 429 (1st Cir. 2016), California Trucking Ass’n v. Su, 903 F.3d 953 (9th Cir. 2018), and Bedoya v. Am. Eagle Express, Inc., 914 F.3d 812 (3d Cir. 2019)).  Notably, the court explained, AB-5 codified a test that “classif[ied] workers for the purpose of determining whether all of California employment laws do or do not apply, rather than a small group of those laws” as other states had done.  Id. at *9.  The result, according to the court, is that AB-5 will cause employers to reclassify a substantial amount of independent contractors as employees because they work “within ‘the usual course of the hiring entity’s business.’”  Id. at *7.
 
On January 29, the California Attorney General filed a notice of appeal.  Briefing before the Ninth Circuit is set to conclude in mid-April.  See Cal. Trucking Assn v. Becerra, No. 20-55106, ECF No. 6 (9th Cir. Jan. 30, 2020).  While the injunction being challenged is relatively narrow, as it applies only to certain motor carriers, the Ninth Circuit’s eventual decision could be notable if it provides insight into how that court might interpret AB-5, and, relatedly, how the other pending challenges to AB-5 may fare.  

PEOPLE: Gabriel K. Gillett, Philip B. Sailer

January 22, 2020 New York and California Aim to Provide Consumers with Additional Protections

By: Alexander N. Ghantous

New-Update-IconNew York Governor Andrew M. Cuomo recently introduced a number of new legislative proposals in his 2020 State of the State agenda, including proposals that would offer New York consumers increased protections.[1]  Additionally, California Governor Gavin C. Newsom also outlined how California will provide additional protections to its consumers in the Governor’s Budget Summary for 2020-2021.[2]  Below are some highlights from each state:

New York

I.  Regulating and Licensing Debt Collection Firms.

In Governor Cuomo’s 2020 New York State of the State agenda, legislation was proposed that would grant the Department of Financial Services (DFS) the power “to license debt collection entities, and empower DFS to examine and investigate suspected abuses, including by requiring the submission of information to DFS, and authorizing DFS investigators to enter a debt collector’s office at any time to review its books and records.”[3]  Consequently, DFS, with this new authority, would have the ability to initiate actions against debt collection organizations that could result in fines, or even the forfeiture of licenses that are required to conduct business in the state of New York.[4]   The proposed legislation would also protect individuals from fraudulent schemes in which they would pay non-existing debts.[5]  Governor Cuomo will also propose legislation that would authorize the state to “codify a Federal Trade Commission rule that prohibits confessions of judgement in consumer loans.”[6]                     

II.  Bolstering Consumer Protection Laws.

In Governor Cuomo’s 2020 State of the State Agenda, legislation was also proposed that would “mak[e] New York State consumer protection law consistent with federal law.”[7]  Currently, New York state authorities are unable to “bring the type of enforcement actions that federal authorities can bring for a broad range of unfair, deceptive, abusive acts and practices.”[8]  The proposed legislation would empower the state to oversee numerous consumer services and products by eradicating exemptions that are currently in play.[9]  Furthermore, the proposed legislation would eliminate loopholes and create an environment where regulated entities would all have the same chance to succeed.[10]

To assist with deterring illegal conduct, the proposed legislation would institute an increase in Insurance Law fines.[11]  Additionally, it would alter the current penalties under the Financial Services Law (FSL) “to parallel federal enforcement penalties and ensure that bad actors cannot profit from violations,” and would “also add to the FSL explicit authority for DFS to collect restitution and damages.”[12]

III.  Creating the Excelsior Banking Network and the Office of Financial Inclusion and Empowerment.

Governor Cuomo has “propose[d] the creation of the Excelsior Banking Network, which will increase access to safe, affordable bank accounts and small-dollar loans in underserved low-income communities across the State.”[13]  In low-income communities throughout New York, Community Development Financial Institutions (CDFIs) are often the only available financial service providers.[14]  Under the proposed legislation, “[t]he State will provide $25 million in new funding over five years for New York’s CDFI Fund, to be used in accordance with State criteria for expanding financial inclusion.”[15]  Under the proposed legislation, “participating CDFIs will leverage this funding up to an aggregate of $300 million in targeted investment in underserved communities [in] New York.”[16]

Governor Cuomo also proposed legislation for the “creation of a statewide Office of Financial Inclusion and Empowerment to meet the financial services needs of low- and middle- income New Yorkers across the state.”[17] The office of Financial Inclusion and Empowerment will be located at the Department of Financial Services and “will maintain a centralized list of financial services counseling providers – across housing, student loan, debt, and general financial literacy – throughout the State and coordinate state and local services aimed at expanding access to credit and enhancing financial empowerment.”[18]  The office will also maintain additional responsibilities, such as developing new programs.[19]

IV.  Eliminating Robocalls.

In Governor Cuomo’s 2020 New York State of the State agenda, a three-part legislation was also proposed that would eliminate robocalls.[20]  According to the Federal Trade Commission (FTC), a robocall takes place when individual receives a telephone call and only hears a recorded message as opposed to an actual person when the call is answered.[21]

Part one of the proposed legislation would hold telephone service providers accountable if they fail to block robocalls.[22]  Under the proposed legislation, telephone service providers would be obligated to implement technology that blocks these calls.[23]  This technology is currently offered by some companies, but its use is not mandatory.[24]    

Part two of the proposed legislation would mandate the prompt implementation of the “STIR/SHAKEN protocol.”[25]  The “STIR/SHAKEN protocol” is a technology that is used to help identify suspicious callers by giving call recipients supplementary caller identification information on phone numbers, including phone numbers that are located outside of New York.[26]  While the majority of telephone service providers have committed to the use of this technology, many have not taken substantial steps towards its implementation.[27]

Part three of the proposed legislation would impose penalties on telecommunication companies.[28]  “[C]ompanies that fail to [use] best efforts to stop robocalls will be held accountable and subject to investigation and fines of up to $100,000 per day by the Department of Public Services or the State Division of Consumer Protection.”[29]  Furthermore, “doubling the current maximum fines for bad actors who make unsolicited calls in violation of the ‘Do Not Call’ Law from $11,000 per call to up to $22,000 per call” has also been proposed.[30]

California

According to the Governor’s Budget Summary for 2020-2021, in California, the Department of Business Oversight (DBO) is tasked with regulating specific financial services.[31]  The DBO is also responsible for overseeing financial institutions that are licensed by the state.[32]  Furthermore, the DBO licenses and regulates other financial entities and professionals such as escrow agents, securities lenders and investment advisers.[33]

California’s 2020-2021 budget lengthens the DBO’s reach in the consumer financial protection arena, and, as a result, its name will be changed to the Department of Financial Protection and Innovation to more accurately reflect its new role.[34]  Included in the new budget are a “$10.2 million Financial Protection Fund and 44 positions in 2020-2021, growing to 19.3 million and 90 positions ongoing in 2022-23, to establish and administer the California Consumer Financial Protection Law, which will provide consumers with more protection against unfair and deceptive practices when accessing financial services and products.”[35]

Specific examples of activities that can be pursued by the Department of Financial Protection and Innovation include, but are not limited to, “[o]ffering services to empower and educate consumers, especially older Americans, students, military service members and recent immigrants,” and “[l]icensing and examining new industries that are currently under-regulated.”[36]   

 

[1] Gov. Andrew M. Cuomo, 2020 State of the State (NY), https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/2020StateoftheStateBook.pdf

[2] Gov. Gavin C. Newson, Governor’s Budget Summary – 2020-21 (CA), http://ebudget.ca.gov/FullBudgetSummary.pdf,

[3] Gov. Andrew M. Cuomo, 2020 State of the State (NY), pg. 127, https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/2020StateoftheStateBook.pdf

[4] Id

[5] Id

[6] Id. at 127-28

[7] Id. 131

[8] Id

[9] Id. at 132

[10] Id. at 132-33

[11] Id. at 133

[12] Id.

[13] Id. at 109

[14] Id.

[15] Id.

[16] Id.

[17] Id. at 110

[18] Id.

[19] Id. at 110-11

[20] Id. at 121 

[21] Fed. Trade Comm’n, https://www.consumer.ftc.gov/articles/0259-robocalls (last visited Jan. 20, 2020)

[22] Gov. Andrew M. Cuomo, 2020 State of the State (NY), pg. 121, https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/2020StateoftheStateBook.pdf

[23] Id

[24] Id. at 121-22

[25] Id. at 122

[26] Id.

[27] Id.

[28] Id. at 122-23

[29] Id.  122-23          

[30] Id. at 123                     

[31] Gov. Gavin C. Newson, Governor’s Budget Summary – 2020-21 (CA), http://ebudget.ca.gov/FullBudgetSummary.pdf, pg. 174

[32] Id.

[33] Id.

[34] Id

[35] Id

[36] Id

PEOPLE: Alexander N. Ghantous

January 15, 2020 HUD Publishes New Affirmatively Furthering Fair Housing Rule

By: Damon Y. Smith

Housing1Ever since the US Department of Housing and Urban Development (HUD) suspended certain reporting requirements of the Affirmatively Furthering Fair Housing (AFFH) rule for local governments in 2018, cities and affordable housing developers and lenders have awaited their proposed replacement.  After a year of review and revisions, HUD recently released a newly proposed AFFH rule.  The proposed regulation re-defines AFFH and makes substantial changes to the metrics for compliance.

The Department’s new definition of AFFH is “advancing fair housing choice within the program participant’s control or influence.”  However, the headline change for most program participants (state and local government and public housing agencies) is that they will no longer have to use a HUD-prescribed computer assessment tool to determine their compliance with AFFH.  That tool required program participants to answer questions about segregation levels and patterns in their communities and impediments to changing those patterns in the future.  Instead, the proposed rule has adopted three metrics to determine if a participating jurisdiction is (1) free of fair housing claims; (2) has adequate supply of affordable housing and (3) has adequate quality in that supply of affordable housing.  These metrics dovetail with the Department’s new definition of AFFH because “fair housing choice” is further defined to include choice that is (1) free of fair housing discrimination, (2) actual in fact, due to existence of informed affordable housing options and (3) capable of providing access to quality affordable housing that is decent, safe and sanitary.

Comments on this new rule are due on March 16, 2020.

January 8, 2020 Are E-Signed Arbitration Agreements Enforceable?

By: Amy M. Gallegos

LaptopAs more and more businesses conduct transactions electronically, courts and practitioners are increasingly faced with questions about the validity and enforceability of electronically signed documents.  In consumer law, this issue often arises when a company seeks to enforce an arbitration agreement contained in a document that was electronically signed by the consumer.  California courts are well known for their skepticism of arbitration provisions in consumer contracts.  Additionally, consumers may be more likely to challenge electronic agreements, perhaps because they believe electronic signatures are not legally binding, or because without a handwritten signature to prove up the contract, they think it makes sense to play the odds that the defendant will not be able to satisfy the court that an agreement was actually made.  Understanding how to prove up an agreement to arbitrate when the consumer’s signature is electronic is critical for consumer lawyers practicing in California.

In California, general principles of contract law determine whether the parties have entered a binding agreement to arbitrate.  California has enacted the Uniform Electronic Transaction Act, which recognizes the validity of electronic signatures. (Cal. Civ. Code Section 1633.1.)  Under that act, an electronic signature has the same legal effect as a handwritten signature, and “[a] … signature may not be denied legal effect or enforceability solely because it is in electronic form.” (Cal. Civ. Code, Section 1633.7, subd. (a).)  That said, any writing must be authenticated before the writing, or secondary evidence of its content, may be received in evidence. (Evid. Code Section 1401.)  “Authentication of a writing means (a) the introduction of evidence sufficient to sustain a finding that it is the writing that the proponent of the evidence claims it is or (b) the establishment of such facts by any other means provided by law.”

California Civil Code Section 1633.9 addresses how a proponent of an electronic signature may authenticate the signature—that is, show the signature is, in fact, the signature of the person the proponent claims it is.  The statute states: “An electronic record or electronic signature is attributable to a person if it was the act of the person.  The act of the person may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable.”

Authentication is where the rubber hits the road. A recent case out of the Fourth Appellate District of the California Court of Appeal underscores the importance of scrupulously authenticating an electronically signed arbitration agreement.  In Fabian v. Renovate America, a homeowner alleged that Renovate America (Renovate), a solar panel company, had violated the Consumer Legal Remedies Act and Unfair Competition Law in connection with the financing and installation of a solar energy system in Rosa Fabian’s home. (Fabian v. Renovate America, —Cal. Rptr.3d— (2019), 2019 L 6522978 (Nov. 11, 2019).)  Renovate filed a petition to compel arbitration, based on an agreement that it claimed the homeowner had electronically signed. The agreement at issue was signed using DocuSign, a company that provides a platform to electronically sign documents.  The words “DocuSigned by:” and the printed electronic signature of the homeowner appeared in a signature box at the end of the contract, along with the date, a 15-digit alphanumeric character, and the words “Identity Verification Code: ID Verification Complete.”  Renovate’s petition was supported by the declaration of a Renovate employee stating that the plaintiff had entered into the contract on the date referenced in the electronic signature.  However, the declaration did not include any information about what DocuSign was or how it worked.  The plaintiff denied she had signed the agreement and contended that her electronic signature was placed on the agreement without her consent, authorization or knowledge.

The trial court denied Renovate’s motion, and the Court of Appeal affirmed.  The Court of Appeal explained that because the plaintiff had “declared that she did not sign the contract,” Renovate had the burden of “proving by a preponderance of the evidence that the electronic signature was authentic.”  The Court of Appeal found that Renovate had not met this burden.  Although the court acknowledged that a federal court in California had accepted a DocuSign verified signature in Newton v. American Debt Services, 854 F. Supp. 2d 712 (N.D. Cal. 2012), the court found that case distinguishable because in that case the declarant proved that the electronic signature was authentic by explaining the process used to verify the signature.  In Fabian, by contrast, the defendant had offered “no evidence about the process used to verify Fabian’s electronic signature via DocuSign,” including who sent her the contract, how her signature was placed on the contract, who received the signed contract, how the signed contract was returned to Renovate, and how Fabian was verified as the person who actually signed the contract.

Fabian underscores that California courts can be skeptical of arbitration agreements especially when they require a consumer to arbitrate a claim against a corporate defendant. It is therefore critical that practitioners moving to compel arbitration based on a consumer’s electronic signature be painstakingly diligent about laying the proper foundation.  To establish that an electronic signature is authentic, defendants submit a declaration from a witness with personal knowledge explaining how the software used to generate the signature works and how it ensures that the signature is authentic—for example, by requiring the use of a unique, secure user name and password to create the signature.  (See, e.g., Smith v. Rent-A-Center, No. 1:18-CV-01351, (E.D. Cal. Jul. 10, 2019).)

Optimally, the declarant should describe all of the facts surrounding the transaction that support the conclusion that the plaintiff signed the contract. The declarant should describe how the contract was sent to the plaintiff, such as whether it was emailed to an address belonging to the consumer, or whether the consumer was sent a password-protected link to the contract.  The declarant should also describe all of the steps the plaintiff had to take in order to electronically sign the document—for example, creating a secure, password-protected account to use the software that generates the signature, or signing onto a secure website with a unique user name and password. (See id. at * 5 (E.D. Cal. Jul. 10, 2019); Espejo v. Southern California Permanente Medical Group, 246 Cal. App. 4th 1047, 1062 (2016).)  Courts have also approved the use of check boxes on documents when a secure username and password were required to access the document. (Smith, 2019 L 3004160 at *5.)  The declarant should describe how the signed document was transmitted to the company.  Although it should not be necessary if an employee of the company has the requisite personal knowledge, some courts might be more inclined to accept a declaration from the software vendor.

Additionally, practitioners should be aware that some courts, due to skepticism about technology or vigilance protecting consumers, may be uncomfortable accepting sworn testimony about the reliability of electronic signature technology, especially when faced with a consumer swearing she never signed the agreement.  In many cases, it would be helpful to bolster the declaration with other evidence that would tend to support the existence of a contractual relationship. Examples could include inquiries from the consumer about the status of the product purchased, or evidence that the company sent a “welcome” email to the consumer, and the consumer did not respond that it was sent in error.

Although the law states that electronically signed arbitration agreements are enforceable, lawyers defending consumer claims can’t make the assumption that courts will rubber-stamp motions to compel arbitration.  Practitioners must be diligent about providing the proper evidence to ensure that agreements are upheld when challenged.

Reprinted with permission from the January 8 issue of The Recorder. © [2020] ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. The original article can be viewed here.

January 6, 2020 Top 10 of 2019: The Year’s Most Popular Consumer Law Round-Up Posts

2019 was another busy year for the Consumer Law Round-Up.  Launched by the firm’s Consumer Law Practice, the blog updates readers on key developments within consumer law and provides insights that are relevant to companies and individuals that may be affected by the ever-increasing patchwork of federal and state consumer protection statutes.  In 2019, the Consumer Law Round-Up published 44 posts on a wide array of topics. 

Below is a list of the 10 most popular posts of the year. 

#1 Regulators Continue to Focus on the Use of Alternative Data
In a July article published by Law360 (and reprinted in our Consumer Finance Observer periodical), our lawyers highlighted the increasing focus of government enforcement authorities on how companies are using “alternative data” in making consumer credit decisions.  For example, the article highlighted that – as stated in a June 2019 fair lending report from the CFPB – “[t]he use of alternative data and modeling techniques may expand access to credit or lower credit cost and, at the same time, present fair lending risks.”  Regulators have continued to focus on this area...Read more

#2 Eleventh Circuit Rules: Receiving Text Message Was Not Injury Under the TCPA
The Eleventh Circuit recently decided a case that raised the bar for pleading injury under the Telephone Consumer Privacy Act (TCPA), 47 U.S.C. § 227, noting its disagreement with an earlier decision from the Ninth Circuit on the same issue and creating a possible roadblock for future plaintiff classes seeking to assert claims under the TCPA.  In Salcedo v. Hanna, the Eleventh Circuit held that “receiving a single unsolicited text message” in violation of the TCPA was not a “concrete injury” sufficient to confer standing...Read more

#3 New York SHIELD Act Expands Data Security and Breach Notification Requirements
On July 25, 2019, New York enacted the Stop Hacks and Improve Electronic Data Security Act (SHIELD Act), which significantly amended the state’s data breach notification law to impose additional data security and data breach notification requirements on covered entities.  Under the new law, the definitions of “private information” and “breach of the security system” have been revised in ways that broaden the circumstances that qualify as a data “breach” and could trigger the notification requirements...Read more

#4 Eighth Circuit Reminds: The First Principle of Arbitration Is Get Consent
In recent years, the Supreme Court has issued many decisions about arbitration, including the enforceability of arbitration agreements and employment agreements that bar classwide arbitration. In July, the Eighth Circuit issued a decision in a case involving those issues, holding that an employment agreement’s arbitration clause mandating individual arbitration was unenforceable. Shockley v. PrimeLending, -- F.3d. --, 2019 WL 3070502 (8th Cir. 2019). The arbitration clause provided that the employee and the company agree to...Read more

#5 En Banc Ninth Circuit Rejects Compelled Commercial Speech Ordinance on First Amendment Ground
On January 21, 2019, the en banc Ninth Circuit unanimously struck down San Francisco’s ordinance requiring warnings on ads for certain sugary beverages as a violation of the First Amendment.  In American Beverage Ass’n v. City and County of San Francisco, No. 16-16072, the court held that the Ordinance is an “unjustified or unduly burdensome disclosure requirement[] [that] might offend the First Amendment by chilling protected commercial speech.”  Zauderer v. Office of Disciplinary Counsel...Read more

#6 DC Court Again Dismisses Challenge to OCC’s FinTech Charter, Splitting with SDNY
On September 3, 2019, a federal district court in the District of Columbia dismissed, for the second time, a lawsuit brought by the Conference of State Bank Supervisors (CSBS) seeking to block the Office of the Comptroller of the Currency (OCC) from issuing national bank charters to certain non-bank financial technology (FinTech) companies. Conference of State Bank Supervisors v. Office of the Comptroller of the Currency, No. 18-cv-2449, slip op. at 1-6 (D.D.C. Sept. 3, 2019) (CSBS II)...Read more

#7 Crypto Corner – Updates on Cryptocurrency
In the first half of 2019, the “crypto-winter” that had set in during 2018 appeared to see signs of a thaw, albeit with new regulatory developments and controversy continuing to characterize the space.  On the regulatory front, the Securities and Exchange Commission (SEC) issued more detailed guidelines for companies seeking to sell digital tokens.  The 13-page “Framework for ‘Investment Contract’ Analysis of Digital Assets” provides a detailed analysis of the factors relevant to the Howey test that the SEC uses to determine the existence of a security (and all that designation entails)...Read more

#8 SDNY Decision Blocks National Bank Charters for FinTech
In May, a federal district court in New York handed a win to the New York State Department of Financial Services (DFS) in its long-running, closely watched suit seeking to block the Office of the Comptroller of the Currency (OCC) from issuing national bank charters to non-bank financial technology (FinTech) companies that don’t receive deposits. Judge Victor Marrero denied most of OCC’s motion to dismiss and found the agency’s interpretation of the National Bank Act, 12 U.S.C. § 21 et seq., to be unpersuasive...Read more

#9 Second Circuit Creates Split on Investment Company Act Private Right of Action
In a decision issued on August 5, 2019, the US Court of Appeals for the Second Circuit created a split with other courts, including the Third Circuit, on the issue of whether there is a private right of action for rescission under the Investment Company Act (ICA).  The Second Circuit held that, based on the text of the statute and its legislative history, “ICA § 47(b)(2) creates an implied private right of action for a party to a contract that violates the ICA to seek rescission of that violative contract.”  Oxford University Bank v. Lansuppe Feeder Inc., No. 16-4061 (2d Cir. Aug. 5, 2019), Slip op. 23...Read more

#10 The CFPB Rolls Out New Regulations for Debt Collection
Debt collectors have for years sought guidance on how and when digital messages could be sent to contact consumers. On May 7, 2019, the Consumer Financial Protection Bureau (CFPB) announced a notice of proposed debt collection regulations that would provide that guidance.  The new regulations would expand the potential avenues by which debt collectors could contact consumers and would establish a host of other regulations that would alter debt collection practices.  The proposed rulemaking announced by the CFPB is more than 500-pages long and would be the first substantive rules...Read more

January 2, 2020 Zero Calories, Zero Plausibility: Ninth Circuit Affirms Dismissal of “Diet” Soda Class Action

By: Alexander M. Smith

SodaIn 2017, several plaintiffs began bringing lawsuits in California and New York premised on the theory that “diet” sodas — i.e., sodas sweetened with zero-calorie artificial sweeteners rather than sugar — were mislabeled because the sodas falsely suggested they would help consumers lose weight, even though aspartame and other artificial sweeteners are supposedly associated with weight gain.  Courts have routinely dismissed these lawsuits on one of two grounds:

  • Some courts have concluded that this theory of deception is implausible because reasonable consumers understand the term “diet” to mean that the soda has zero calories, not that it will help them lose weight.  See, e.g., Geffner v. Coca-Cola Co., 928 F.3d 198, 200 (2d Cir. 2019) (“[T]he “diet” label refers specifically to the drink’s low caloric content; it does not convey a more general weight loss promise.”); Becerra v. Coca-Cola Co., No. 17-5916, 2018 WL 1070823, at *3 (N.D. Cal. Feb. 27, 2018) (“Reasonable consumers would understand that Diet Coke merely deletes the calories usually present in regular Coke, and that the caloric reduction will lead to weight loss only as part of an overall sensible diet and exercise regimen dependent on individual metabolism.”). 
  • Other courts have dismissed these lawsuits on the basis that the scientific literature cited by the plaintiffs does not support a causal relationship between zero-calorie sweeteners and weight gain.  See, e.g., Excevarria v. Dr. Pepper Snapple Grp., Inc., 764 F. App’x 108, 110 (2d Cir. 2019) (affirming dismissal of lawsuit challenging labeling of Diet Dr. Pepper, as “[n]one of the studies cited . . . establish a causal relationship between aspartame and weight gain”).

The Ninth Circuit recently joined the chorus of courts that have rejected this theory of deception.  In Becerra v. Dr. Pepper/Seven Up, Inc., the district court dismissed a lawsuit alleging that Diet Dr. Pepper was mislabeled as a “diet” soda, both because the plaintiff had not alleged that consumers construed the term “diet” as a representation about weight loss and because the plaintiff had not sufficiently alleged that aspartame is associated with weight gain.  On December 30, 2019, the Ninth Circuit issued a published decision affirming the dismissal of this lawsuit.  Becerra v. Dr. Pepper/Seven Up, Inc. --- F.3d ----, 2019 WL 7287554 (9th Cir. 2019).

The Ninth Circuit began by explaining that California’s consumer protection statutes require the plaintiff to allege that consumers are “likely to be deceived” — not simply a “mere possibility that Diet Dr. Pepper’s labeling might conceivably be misunderstood by some few consumers viewing it in an unreasonable manner.”  Id. at *3.  Applying this standard, the Ninth Circuit agreed that the term “diet” was not likely to mislead a reasonable consumer.  In so holding, the Ninth Circuit rejected the plaintiff’s reliance on dictionary definitions of the term “diet”; even though this term may imply weight loss when used as a noun, the court explained, it clearly implied that a product was “reduced in or free from calories” when used as an adjective.  Id.  And while the plaintiff argued that consumers could nonetheless “misunderstand” the term “diet” to suggest weight loss benefits when used in this context, the Ninth Circuit made clear that such “unreasonable assumptions” would not give rise to a plausible claim of deception.  Id. at *4. (“Just because some consumers may unreasonably interpret the term differently does not render the use of ‘diet’ in a soda’s brand name false or deceptive.”).

The Ninth Circuit also rejected the plaintiff’s remaining arguments about why consumers might interpret the term “diet” as a representation about weight loss.  It held that the use of “attractive, fit models” in its advertisements did not suggest to consumers that drinking Diet Dr. Pepper would “help its consumers achieve those bodies.”  Id.  It also rejected the plaintiff’s reliance on American Beverage Association blog posts suggesting that consumers associate diet soft drinks with weight loss, as those blog posts “emphasize that other lifestyle changes beyond merely drinking diet soft drinks are necessary to see weight-loss results.”  And it likewise rejected the plaintiff’s reliance on a survey showing that consumers expected diet soft drinks to help them lose weight or maintain their current weight: even accepting the survey’s findings at true, the Ninth Circuit nonetheless held that “a reasonable consumer would still understand ‘diet’ in this context to be a relative claim about the calorie or sugar content of the product.”  Id. at *4-5.  Because the survey “does not address this understanding or the equally reasonable understanding that consuming low-calorie products will impact one’s weight only to the extent that weight loss relies on consuming fewer calories overall,” the Ninth Circuit concluded that it did not support the plaintiff’s claims of deception.  Id. at *5.

CATEGORIES: Class Action Trends

PEOPLE: Alexander M. Smith

November 26, 2019 OCC and FDIC Propose “Madden Fix” Rules to Codify “Valid-When-Made” Principle

By: William S. C. Goldstein

New-Development-IconThe long-running saga of Madden v. Midland Funding is entering a new phase.  Last week, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) proposed rules that would codify the concept that the validity of the interest rate on national and state-chartered bank loans is not affected by the subsequent “sale, assignment, or other transfer of the loan.” See Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 84 Fed. Reg. 64229, (proposed Nov. 18, 2019); FDIC Notice of Proposed Rulemaking, Federal Interest Rate Authority, FDIC (proposed Nov. 19, 2019).  Under these rules, an interest rate that is validly within any usury limit for such a bank when it is made would not become usurious if the loan is later transferred to a non-bank party that could not have charged that rate in the first instance.

The proposed rules are a long-awaited response to the Second Circuit’s decision in Madden, which held that a non-bank purchaser of bank-originated credit card debt was subject to New York State’s usury laws.  786 F.3d 246, 250-51 (2d Cir. 2015).  In so holding, the Second Circuit cast doubt on the scope of National Bank Act (NBA) preemption, which exempts national banks from most state and local regulation, allowing them to “export” their home state interest rates without running afoul of less favorable usury caps in other states (FDIC-insured state banks are afforded similar protections).  Before Madden, it was widely assumed that “a bank’s well-established authority [under the NBA] to assign a loan” included the power to transfer that loan’s interest rate.  See Permissible Interest on Loans That Are Sold, 84 Fed. Reg. at 64231. The Madden decision also did not analyze the “valid-when-made” rule, a common law principle providing that a loan that is non-usurious at inception cannot become usurious when it is sold or transferred to a third party. See, e.g., Nichols v. Fearson, 32 U.S. (7 Pet.) 103, 109 (1833) (“[A] contract, which, in its inception, is unaffected by usury, can never be invalidated by any subsequent usurious transaction.”).  Madden has been widely criticized by a host of commentators, including the Office of the Solicitor General.

The OCC and FDIC rules aim to remedy the confusion caused by Madden.  OCC’s rule “would expressly codify what the OCC and the banking industry have always believed and address recent confusion about the impact of an assignment on the permissible interest.”  Permissible Interest on Loans That Are Sold, 84 Fed. Reg. at 64231-64232.  Likewise, the FDIC rule would rectify “uncertainty about the ongoing validity of interest-rate terms after a State bank sells, assigns, or otherwise transfers a loan.” Notice of Proposed Rulemaking at 2-3.  Both proposals cite Madden as the source of the confusion.

Notably, neither proposal purports to address the emerging “true lender” doctrine, which some courts have used to apply state usury or consumer protection laws to non-bank entities that have partnered with banks in issuing loans and that retain a “predominant economic interest” in the loan. See, e.g., People ex rel. Spitzer v. Cty. Bank of Rehoboth Beach, Del., 846 N.Y.S.2d 436 (N.Y. App. Div. 2007).  Under that doctrine, courts look at whether the bank or the third-party was the “true lender” in the first place, taking loans facing a true lender challenge outside the ambit of Madden and the OCC and FDIC fixes.  In that regard, the OCC proposal notes simply that “[t]he true lender issue . . . is outside the scope of this rulemaking.”  See Permissible Interest on Loans That Are Sold, Fed. Reg. at 64232.  The FDIC proposal likewise notes that the new rules do not address true lender issues, but goes on to express support for the concern animating the true lender doctrine: “the FDIC supports the position that it will view unfavorably entities that partner with a State bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing State(s).”  Notice of Proposed Rulemaking at 4.  

Comments are due on the OCC rule by January 21, 2020, and on the FDIC rule shortly thereafter.

CATEGORIES: FinTech

PEOPLE: William S. C. Goldstein (Billy)

November 25, 2019 NIST Releases Final Version of the Big Data Interoperability Framework

By: Alexander N. Ghantous

Data  platformsThe National Institute of Standards and Technology (NIST) announced on October 29, 2019, that the final, nine-volume version of the “NIST Big Data Interoperability Framework” (Framework) has been published.[1]  The Framework, which was developed by NIST in collaboration with hundreds of experts from an array of industries, provides ways developers can utilize the same data-analyzing software tools on any computing platform.[2]  Under the Framework, analysts can transfer their work to different platforms and use more sophisticated algorithms without revamping their environment.[3]  This interoperability provides a solution to data scientists who are tasked with analyzing increasingly diverse data sets from a multitude of platforms.[4]  Consequently, it could also play a role in solving modern day difficulties that include, but are not limited to, detecting health-care fraud and issues that arise during weather forecasting.[5]

 

[1]Nat’l Inst. of Standards and Tech., https://www.nist.gov/news-events/news/2019/10/nist-final-big-data-framework-will-help-make-sense-our-data-drenched-age (Oct. 29, 2019).

[2] Id

[3] Id

[4] Id.

[5] Id

PEOPLE: Alexander N. Ghantous

November 21, 2019 Big Data, Hedge Funds, Securities Regulation, and Privacy: Mitigating Liability in a Changing Legal Landscape

Abstract2-ATBi_600x285In an article published by Westlaw Journal Securities Litigation & Regulation, Partners Charles D. Riely and Keisha N. Stanford and Associate Logan J. Gowdey explain that the use of big data to analyze market activity is on the rise.  But with the opportunities that big data presents comes a complex regulatory landscape.  The authors introduce these issues and offer a starting point for general counsel and chief compliance officers to mitigate risks.

To read the full article, please click here.

 
 
November 13, 2019 Consumer Finance Observer – Fall 2019

CFOJenner & Block has published its second issue of Consumer Finance Observer or CFO, a newsletter providing analysis of key consumer finance issues and updates on important developments to watch.  As thought leaders, our lawyers write about the consumer finance sector on topics ranging from artificial intelligence, compliance, data security, FinTech, lending and securities litigation.

In the Fall 2019 issue of the CFO, our consumer finance lawyers discuss the use of alternative data; best practices to avoid TCPA wrong-number claims; the OCC’s FinTech Charter; the FTC monitoring of class action settlements; an Eleventh Circuit ruling in a TCPA case; a quick look at HUD’s FHA Lender Annual Certification Statements; FinCen's report on business email scams; and a brief history of the CFPB payday lending rule.  Contributors are Amy M. GallegosJoseph L. NogaMichael W. Ross, David P. Saunders and Damon Y. Smith; Associates Gabriel K. GillettWilliam S.C. Goldstein, Olivia Hoffman and Katherine Rosoff; and Staff Attorney Alexander N. Ghantous.

To read the full issue, please click here.

November 12, 2019 NY Action Against UnitedHealth Algorithm

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By: Isabel F. Farhi

HealthcareOn  October 25, 2019, the New York State Department of Financial Services (DFS) and Department of Health (DOH) jointly sent a letter to UnitedHealth Group, Inc. (UnitedHealth) calling for the company to address its use of an algorithm it uses to make health care decisions, which a recent study had shown may have a racially discriminatory impact.

Specifically, researchers Ziad Obermeyer, Brian Powers, Christine Vogeli and Sendhil Mullainathan published an article in the periodical Science concerning “Impact Pro,” an algorithm UnitedHealth has used to identify patients who should receive the benefit of “high risk care management,” a service for patients with complex health care needs.[1]  According to one source, UnitedHealth licenses this algorithm to hospitals.[2]  The Science article describes how one metric the algorithm uses to determine eligibility for the program is the cost of patients’ previous health care.  Yet, as the article explains, black patients typically spend less money on health care, in part because of historic barriers to access due to poverty and in part because of historic distrust of doctors.  The article concludes that because of these systemic problems with the reliance on historic cost expenditures as an eligibility metric, two patients, one white and one black, with the same illness and complexity of care, could be treated differently when being considered for enrollment in the high risk care management program.[3]

In the wake of this article, DFS and DOH sent a letter to UnitedHealth, calling on the company to act.[4]  The letter stated that the New York Insurance Law, the New York Human Rights Law, the New York General Business Law, and the federal Civil Rights Act all protect against discrimination for protected classes of individuals.  As described in the letter, that prohibition against discrimination by insurers holds true “irrespective of whether they themselves are collecting data and directly underwriting consumers, or using and developing algorithms or predictive models that are intended to be partial or full substitutes for direct underwriting.” Therefore, it stated, neither UnitedHealth nor any other insurance company may “produce, rely on, or promote an algorithm that has a discriminatory effect.”  The letter went on to say that the bias against black patients in the health care system makes such discrimination particularly troubling, such that the algorithm “effectively codif[ies] racial discrimination.”  Such an outcome, the letter stated, “has no place in New York or elsewhere.” Therefore the state agencies called on UnitedHealth to immediately investigate the racial impact of the algorithm, and cease using it (or any other algorithm) “if [the company] cannot demonstrate that it does not rely on racial biases or perpetuate racially disparate impacts.”

In a statement to Forbes.com in connection with a story about the algorithm, UnitedHealth said that the algorithm “was highly predictive of cost, which is what it was designed to do” and that gaps in the algorithm, “often caused by social determinants of care and other socio-economic factors, can then be addressed by the health systems and doctor to ensure people, especially in underserved populations, get effective, individualized care.”[5] 

As this letter demonstrates, regulators continue to focus their attention on the use of algorithms in making consumer-facing decisions,[6] and may expect companies to affirmatively justify that the algorithms they are using are non-discriminatory.

 

[1] Obermeyer et al., Dissecting racial bias in an algorithm used to manage the health of populations, 366 Science 447 (2019), available at https://science.sciencemag.org/content/366/6464/447.

[2] Erik Sherman, AI Enables Some Massive Healthcare Inequality According To A New Study, Forbes.com (Oct. 30, 2019), https://www.forbes.com/sites/eriksherman/2019/10/30/ai-enables-some-massive-healthcare-inequality-according-to-a-new-study/#70a9b90e3eec.

[3] Id.

[4] Letter from Linda Lacewell, Superintendent, N.Y. State Dep’t of Fin. Servs., & Howard Zucker, M.D., J.D., Comm’r, N.Y. State Dep’t of Health, to David Wichmann, Chief Exec. Officer, UnitedHealth Grp. Inc. (Oct. 25, 2019) (available at https://www.dfs.ny.gov/system/files/documents/2019/10/20191025160637.pdf ).

[5] Sherman, supra at 2.

[6] David Bitkower et al., Data-Misuse Enforcement Is Focusing on 3 Key Areas, Law360 (July 23, 2019), https://www.law360.com/articles/1180800/data-misuse-enforcement-is-focusing-on-3-key-areas.

November 11, 2019 Texas Jury Awards $200 Million In Mobile Banking Patent Dispute

By: Benjamin J. Bradford

IStock-1155413889

On November 6, a jury in the Eastern District of Texas awarded the United Services Automobile Association (USAA) a $200 million verdict finding that Wells Fargo willfully infringed two of USAA’s patents directed to the “auto-capture” process, which is used by banking customers to deposit checks using photographs taken from a mobile phone or other device.  (Civ. No. 2:18-cv-00245 (E.D. Tex.))  Based on the finding of willfulness, USAA may be entitled to enhanced damages beyond the $200 million verdict.

Despite the verdict, the fight between Wells Fargo and USAA is still ongoing.  Wells Fargo filed patent office challenges to the validity of USAA’s patents, which are still pending before the Patent Trial and Appeals Board, but may not be decided for another 15 months.  In addition, Wells Fargo will likely appeal the decision, including a recent denial of summary judgment that found the patents were not invalid under 35 U.S.C. 101.  Nevertheless, the verdict against Wells Fargo will likely embolden USAA to assert its patents against other banks and financial institutions that use an “auto-capture” process. 

CATEGORIES: FinTech

PEOPLE: Benjamin J. Bradford (Ben)