May 26, 2020
Stroock Special Bulletin
Julia B. Strickland, Brian C. Frontino, Stephen J. Newman, Arjun P. Rao, Quyen T. Truong
Julia Strickland recently chaired a panel of five senior officials from the most proactive State Attorney General Offices (“AGOs”) — California, Illinois, Massachusetts, New York and Washington — to discuss the broad range of consumer protection issues they currently are addressing and that they anticipate arising in the COVID-19 aftermath. Predictably, much of the focus of the AGOs will be on the conduct of financial services companies in handling the economic stresses befalling consumers, as well as the potential for bad actors to take advantage of the crisis.
We share below highlights of the AGOs’ observations and comments:
- Although there are similarities with the 2008-09 financial crisis (“2008”), the financial sector is not at fault here. Many of the problems arising from the current crisis appear similar to 2008 because people are having difficulty paying their bills. A primary difference, however, is that the cause of the current crisis is external. Unlike in 2008, not only is the financial sector free from fault but it also is potentially part of the solution. In part because of the 2008 experience, both the financial system and the regulators are better positioned to respond quickly. As a result, the AGOs expect enforcement efforts to be significantly different from those following 2008.
- Preemption arguments are expected. The AGOs thus far have not encountered any major pushback to regulations or executive orders on federal preemption grounds. That is likely to change, however, when enforcement actions begin since preemption generally is raised as an affirmative defense. In the view of the New York AGO, arguments will center on whether a particular state regulation does or does not fall within Cuomo v. Clearing House Association, L.L.C., 557 U.S. 519 (2009), in which the Supreme Court held that the “visitorial powers” doctrine does not preclude state enforcement activities against federally chartered institutions.
- The States expect intensified focus on “predatory” lending and servicing issues. As in 2008, the AGOs believe there is a real risk of what they perceive to be “predatory” lending practices. They will be watching for lenders offering deferred interest loans, no-income loans, loans with hidden fees or undisclosed terms, and other products that threaten consumer harm. The AGOs expect to see these practices across the entire financial sector, including housing, auto, education, retail installment and other short-term lending spaces. The AGOs also are watching for scams involving fraudulent foreclosure relief and mortgage modifications. The California AGO continues to focus on securitization issues, student lending, for-profit education and subprime auto lending.
- Servicers’ failure to assist distressed borrowers could be a UDAP violation. The AGOs expect mortgage servicers to proactively assist distressed borrowers with forbearance and modifications. This includes disclosing the parameters of the range of available forbearance or modification programs to borrowers and thoroughly examining whether borrowers qualify for such programs. Failure to do so could be considered an unfair or deceptive act or practice (“UDAP”) under state law.
- The States expect increased focus on debt collection practices. The AGOs uniformly identified debt collection activities as an anticipated area of threatened consumer harm and the resulting focus of enforcement efforts. While some states have issued regulations addressing debt collection, others have made their positions known through public statements and direct communications with lenders and servicers. Some states expect significant blowback from the debt collection community. For example, in late March, Massachusetts issued an aggressive set of emergency regulations to temporarily curb many common debt collection practices. In response to a lawsuit by a trade association of debt collectors, a federal court enjoined some aspects of the ban on First Amendment grounds, because a framework of robust federal and state consumer protection laws already exists, and the challenged regulations threatened to put debt collectors out of business. However, Massachusetts’ other emergency regulations remain in force, including prohibitions on wage garnishment, vehicle repossession, visiting a debtor’s home or workplace, and communicating with a debtor in a public place.
- Prohibitions on garnishing federal stimulus payments and a private right of action for “unlawful” activity. Multiple states, including Washington, New York and California, have issued regulations or executive orders prohibiting the garnishment of federal stimulus payments. The AGOs have received some positive feedback from lenders on these restrictions. Because California’s executive order has the force of law, the AGO believes that there is a private right of action for any attempt to unlawfully garnish federal stimulus payments, citing both California’s anti-theft statutes and the “unlawful” prong of the Unfair Competition Law. The New York AGO similarly has issued guidance that an attempt to garnish federal stimulus payments would violate state laws and the Dodd-Frank Act.
- Temporary moratoriums on evictions and foreclosures. Many states are prohibiting evictions and foreclosures during the current crisis and potentially for some period thereafter. In Washington, the moratorium bars late fees and rent increases. New York and California have taken similar measures. Massachusetts also has barred lenders and servicers from reporting missed mortgage payments to credit reporting agencies, and clarified that mortgage payments during forbearance are to be added to the end of the loan period. This too is an area of AGO concern and attention.
- Data security and privacy issues are an area of increased focus during the current crisis. California, New York and Massachusetts are looking closely at data security and privacy issues in connection with the current crisis. For example, the California AGO intends to promptly enforce the State’s comprehensive new privacy law — the California Consumer Privacy Act — beginning on the July 1, 2020, enforcement date, notwithstanding the industry’s urgings for a deferment in light of compliance challenges presented by the COVID-19 crisis. In New York, the AGO recently entered into an agreement with Zoom, the videoconferencing platform, to address issues related to “Zoom bombing,” alleged inadequate encryption and unauthorized sharing of data with Facebook.
- Concern over preferential treatment by private lenders in the federal Paycheck Protection Program. Complaints to the AGOs about the PPP allege that private lenders, who make the loans administered by the Small Business Administration, are giving preferential treatment to existing customers and charging fees in violation of UDAP laws. The New York AGO has taken an aggressive approach to address this conduct, including reaching out to banks regarding their marketing practices.
Many of these important issues, and the responses by state AGOs, are continuing to evolve with the COVID-19 crisis. Please do not hesitate to reach out to us to discuss these or other issues in further detail.
For More Information:
Julia B. Strickland
Brian C. Frontino
Stephen J. Newman
Arjun P. Rao
Quyen T. Truong
This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.