Yesterday, the head of the New York Department of Financial Services (DFS) became the first state regulator to use his authority under Dodd-Frank Section 1042 to bring a civil action for a violation of its prohibition of unfair, deceptive, or abusive acts or practices (UDAAP). Just last month, the Illinois Attorney General became the first state attorney general to file a state court lawsuit under this section of the law.

DFS Superintendent Benjamin Lawsky filed his complaint in New York federal court against a large subprime auto lender and its CEO and president seeking damages and injunctive relief under Sections 1031 and 1036 of Dodd-Frank, Sections 309 and 408 of the New York Financial Services Law, and Section 499 of the Banking Law. The DFS also obtained a temporary restraining order after alleging that the defendants “systematically hid from its customers the fact that they have refundable positive credit balances and then failed to refund those balances unless specifically requested.”

In addition, the complaint alleged that the lender submitted false unclaimed property reports to the New York State Comptroller’s Office denying that certain customers had positive credit balances. The DFS charged that the alleged misappropriation of the account balances totaled “millions of dollars.”

The complaint also asserted that the defendants lacked basic information security measures, placing at risk consumers’ most sensitive personally identifiable information. The DFS charged that hard-copy loan files were routinely left unattended in the office for prolonged periods and that backup tapes containing customers’ personally identifiable information were taken home daily by the executive vice president. In fact, the DFS alleged that the lender lacked “documented policies and procedures for virtually all of its operations.”

Similar to most other states’ laws prohibiting unfair or deceptive acts or practices (UDAP), Section 349 of New York’s General Business Law only allows UDAP actions to be filed by the state’s attorney general. Accordingly, by allowing the DFS and other state regulators to bring UDAAP claims, Dodd-Frank has given state regulators a significant new weapon. (Section 1042 authorizes state regulators to sue “any entity that is State-chartered, incorporated, licensed, or otherwise authorized to do business under State law.” It does not authorize state regulators to sue national banks or federal savings associations.)

In the UDAAP counts of its complaint, the DFS claims that the defendants’ alleged conduct is “unfair, deceptive and/or abusive” acts or practices under Sections 1031 and 1036 of Dodd-Frank. This is different from how the Consumer Financial Protection Bureau typically pleads UDAAP claims. Specifically, the CFPB tends to identify whether the alleged act is unfair, deceptive, or abusive, and not interchangeably group the terms. 

We have consistently predicted that the DFS would be the first agency to take advantage of its new authority under Section 1042. As we mentioned in an industry webinar last week, Mr. Lawsky has repeatedly emphasized his intent to “push the envelope” and foster a “healthy competition” among state regulators to protect consumers. As the DFS lacks authority to bring a UDAP action under New York law, we anticipate that Mr. Lawsky will continue to aggressively employ Section 1042 to target certain types of consumer financial services providers.

The lawsuit is another example of the increased emphasis on holding individuals accountable for alleged company misconduct. Both the CFPB and DFS have made clear that to properly deter future misconduct, the enforcement action cannot solely target the company.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). Our attorneys, including the attorneys who joined us from the New York City litigation firm Stillman & Friedman, P.C., to form Ballard Spahr Stillman & Friedman LLP, have substantial experience in handling matters involving DFS and the New York Attorney General.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, Justin Angelo at 646.346.8012 or angeloj@ballardspahr.com, Marjorie J. Peerce at 212.223.0200 x8039 or peercem@bssfny.com, or Denise L. Plunkett at 646.346.8036 or plunkettd@ballardspahr.com.


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