Tuesday, August 22, 2017

Failure to ensure accurate consumer information created standing to sue

By Richard Roth

Failure to ensure accurate consumer information created standing to sue

A consumer who claimed that an Internet company failed to assure the maximum possible accuracy of personal information the company provided about him described a concrete injury that gave him constitutional standing to sue for a Fair Credit Reporting Act violation, the U.S. Court of Appeals for the Ninth Circuit has decided. Resolving an issue put to it by the Supreme Court, the appellate court said the FCRA created a concrete, as opposed to a merely procedural, interest in accurate consumer reports and that the inaccurate information described by the consumer could have posed a real harm to his employment prospects (Robins v. Spokeo, Inc., (9th Cir.)).

Spokeo, Inc., operates what it calls a “people search engine” that provides information to users about other individuals. The consumer complained that Spokeo had provided a great deal of inaccurate information about his age, marital status, financial condition, education, and profession, finishing with a photograph of someone else. Claiming that the inaccuracies were interfering with his ability to find a job and causing him emotional distress, he sued Spokeo for violating the FCRA.

The U.S. district court judge dismissed the suit after deciding that the consumer had not described an injury-in-fact that would give him standing to sue. The Ninth Circuit reversed that decision, saying that the consumer had described a particularized and concrete injury.

The Supreme Court agreed to review that decision, but in the end decided not to make a decision. Dissatisfied with the Ninth Circuit’s analysis, the Court remanded the suit with instructions to consider specifically whether the injury was concrete, as opposed to being a “bare procedural violation” of the act that did not at least threaten concrete harm (Spokeo, Inc. v. Robins, (U.S.)).

Violation of statute as injury. According to the appellate court, the consumer argued that he did not need to claim any harm beyond Spokeo’s violation of the duty to assure the maximum possible accuracy of the information it reported about him. The FCRA “exists specifically to protect consumers’ concrete interest in credit-reporting accuracy.” If the FCRA violation harmed that interest, it gave him standing to sue, he asserted.

The court agreed that the FCRA seemed to say a consumer can sue for a violation without describing any harm that resulted from the violation. “But the mere fact that Congress said a consumer like Robins may bring such a suit does not mean that a federal court necessarily has the power to hear it,” the court pointed out. In the absence of a concrete injury, there would be no case or controversy over which a federal court could exercise jurisdiction.

On the other hand, an intangible harm can constitute a concrete injury, the court continued. Thus, some statutory injuries would suffice. History and Congress’s judgment were to be considered to decide whether that was the case.

Concrete interests. To decide whether the consumer had described a concrete injury, the court looked first at whether the FCRA provision on information accuracy had been created to protect consumers’ concrete interests rather than to establish purely procedural rights. The court said the act did protect concrete interests.

The FCRA had been enacted to see that consumer report information was accurate and that consumers’ privacy was protected, the court said. The act’s procedural requirements advanced those purposes, the court said; they were not “purely legal creations.”

Consumer reports affected credit and employment prospects, the court noted, and the very existence of inaccurate information could cause harm. It was reasonable that Congress would choose to protect consumers from that harm without requiring possibly difficult proof of a specific injury. Some libelous statements are actionable without proof of specific harm, the court pointed out.

Material risk of harm. However, not every bit of inaccurate information would allow a consumer to sue, the court conceded. The consumer would have to show more than just that Spokeo did not follow FCRA-required policies; he had to show that the failure to follow the FCRA at least threatened a material risk of harm to his concrete interest in the accuracy of the information. In other words, returning to the Supreme Court’s example of an incorrect zip code, the appellate court said that a minor inaccuracy that did not present a material risk of real harm would not create standing.

This required a look at the nature of the specific inaccuracies the consumer claimed, the court then said. However, while the Supreme Court had given little instruction other than the zip code example on what errors should be considered harmless, the appellate court said it was clear that the inaccuracies claimed by the consumer would not be harmless.

“It does not take much imagination to understand how inaccurate reports on such a broad range of material facts about Robins’s life could be deemed a real harm,” the court said. Information about age, marital status, education, and employment history would be of interest to prospective employers. Ensuring the accuracy of such information “seems directly and substantially related to FCRA’s goals,” according to the court.

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Monday, August 21, 2017

CFPB sues lending conduit for aiding Corinthian Colleges' predatory lending

The Consumer Financial Protection Bureau filed a complaint and proposed settlement in an Oregon federal court, against Aequitas Capital Management, Inc. and related entities, for aiding the Corinthian Colleges’ predatory lending scheme.

Aequitas Capital Management, Inc. was a private equity firm that purchased or funded about $230 million in Corinthian Colleges’ private loans, branded by the school as “Genesis loans.” On March 10, 2016, the Securities and Exchange Commission took action against Aequitas, alleging Aequitas, and related entities, had defrauded more than 1,500 investors. A receiver was appointed to wind down Aequitas and distribute its remaining assets.

Abusive acts and practices. The Bureau’s complaint alleged that Aequitas violated the Dodd-Frank Act’s prohibitions against abusive acts and practices by funding and supporting Corinthian’s predatory Genesis loan program. Specifically, the CFPB claimed that Aequitas and Corinthian plotted to make it seem as if the school was getting outside revenue in the form of the Genesis loans, when in reality Corinthian was paying Aequitas to support the loan program. Corinthian and Aequitas engaged in this arrangement to satisfy Corinthian’s obligations under the 90/10 rule, a federal law requiring for-profit schools to obtain at least 10 percent of their revenue from other sources in order to get federal loan dollars.

Loan forgiveness and reduction. Under a settlement agreement, that the federal court approved, Aequitas and related entities would be required to:

·        forgive Genesis loans in connection with certain closed schools;
·        forgive Genesis loans in default; and
·        reduce all other Genesis loans by more than half.

By the settlement’s terms, about 41,000 Corinthian students could be eligible for approximately $183.3 million in loan forgiveness and reduction.

Another step. Commenting on the Bureau’s action, CFPB Director Richard Cordray said, “Tens of thousands of Corinthian students were harmed by the predatory lending scheme funded by Aequitas, turning dreams of higher education into a nightmare.” He added, “Today’s action marks another step by the Bureau to bring justice and relief to the borrowers still saddled with expensive student loan debt. We will continue to address the illegal lending practices of for-profit colleges and those who enable them.”

In September 2014, the CFPB filed a lawsuit against Corinthian Colleges, Inc., alleging that it used fraudulent statistics and false promises to enroll students, induced students to take out predatory loans to pay inflated tuition, and then used illegal tactics to collect the loans.

Following the Corinthian Colleges lawsuit, Zenith Education Group and its parent, ECMC Group, Inc., reached a settlement with the Bureau and Department of Education that released the two companies from any possible liability for the actions of Corinthian Colleges, Inc., a for-profit education company from which they purchased a number of schools. As part of the settlement, Zenith and ECMC were to provide more than $480 million in loan forgiveness to Corinthian’s borrowers.

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Tuesday, August 15, 2017

Dodd-Frank Act does not displace right to access judicial records

By Thomas G. Wolfe, J.D.
The Dodd-Frank Act does not displace the common-law right of public access to judicial records, the U.S. Court of Appeals for the District of Columbia Circuit has decided in MetLife, Inc. v. Financial Stability Oversight Council. While the common-law right is not absolute, there is “a strong presumption in its favor,” and there is “nothing in the language of Dodd-Frank to suggest that Congress intended to displace the long-standing balancing test that courts apply when ruling on motions to seal or unseal judicial records,” the court determined. Consequently, the federal trial court should not have categorically prevented disclosure of the redacted—and sealed—briefs and joint appendix in the case without having conducted an analysis under the balancing test.
The D.C. Circuit’s recent decision stems from MetLife, Inc.’s underlying lawsuit challenging the Financial Stability Oversight Council’s designation of the insurer as a nonbank systemically important financial institution (SIFI) under the Dodd-Frank Act. The federal trial court decided to rescind MetLife’s SIFI designation as arbitrary and capricious and eventually unsealed its court opinion. However, the court did not unseal other judicial records in the case.
Dodd-Frank Act. Under the Dodd-Frank Act, when the FSOC considers a SIFI designation, the FSOC may require nonbank financial companies to submit financial data and information. At the same time, the FSOC must “maintain the confidentiality of any data, information, and reports” that a company submits.
Request to unseal records. While Better Markets, Inc., was permitted to intervene in the action, the trial court denied Better Markets’ request to unseal pertinent briefs and the joint appendix in the case. As relayed by the federal appellate court’s opinion, the lower court concluded that “Dodd-Frank’s confidentiality provision … required that relevant portions of the briefs and joint appendix remain sealed because they included data, information, and reports MetLife submitted to the FSOC.”
Agreeing with the positions taken by MetLife and the FSOC, the trial court: (i) questioned whether the applicable briefs and appendix material qualified as “judicial records” subject to the common-law right of public access; and (ii) determined that Dodd-Frank’s confidentiality provision superseded the traditional balancing test on motions to unseal judicial records under United States v. Hubbard, 650 F.2d 293 (D.C. Cir. 1980). However, on appeal, the D.C. Circuit disagreed.
Balancing test. The D.C. Circuit asserted that the common-law right to inspect and copy public records and documents, including judicial records and documents, is “fundamental to a democratic state.” While there is a strong presumption in favor of public access to judicial proceedings, that presumption may be outweighed in certain cases by competing interests, the court explained. Accordingly, as enunciated in Hubbard, when presented with a motion to seal or unseal, a court should weigh the traditional six-factor test to balance the interests:
  • the need for public access to the documents at issue;
  • the extent of previous public access to the documents;
  • the fact that someone has objected to disclosure, and the identity of that person;
  • the strength of any property and privacy interests asserted;
  • the possibility of prejudice to those opposing disclosure; and
  • the purposes for which the documents were introduced during the judicial proceedings. 
Are briefs, appendix ‘judicial records’? Next, the court was called to determine whether the briefs and joint appendix could be considered “judicial records” subject to the Hubbard balancing test. The court noted that not all documents filed with a court are judicial records; whether an item is deemed a judicial record depends on “the role it plays in the adjudicatory process.”
On appeal, MetLife contended that the redacted—and sealed—portions of the briefs and appendix “did not play a sufficient role in the adjudicatory process” to qualify as judicial records because the publicly available opinion by the district court “did not quote or cite any of those sealed (redacted) parts.” 
Rejecting MetLife’s argument, the court stressed that any portion of a brief or an appendix can affect a court’s decision-making process even if the court never quotes or cites it. By their very nature, the briefs and appendix played a substantial role in the adjudicatory process. MetLife’s argument, if adopted, would undermine the common-law right of access and would bypass a Hubbard analysis. The sealed briefs and appendix constituted judicial records. 
Does Dodd-Frank supersede common-law right? Next, the court addressed whether the Dodd-Frank Act superseded the common-law right of access to the sealed judicial records in the case. “Although it is true that the Hubbard inquiry must yield to a statute ‘when Congress has spoken directly to the issue at hand,’ … the Dodd-Frank Act is not such a statute,” the court stated. 
In reaching its decision, the court underscored that the applicable Dodd-Frank Act confidentiality provision (§5322(d)(5)(A)) required the FSOC, Office of Financial Research, and other member agencies to keep the materials confidential. However, the provision “imposes no such obligation on—and does not even mention—the courts.” In addition, the provision was not meant to categorically bar disclosure by the courts because nearby provisions (§5322(d)(5)(B) and §5322(d)(5)(C)) take into account privileges that litigants may have and requests for disclosures under the Freedom of Information Act. 
Further, the court noted that a party would not necessarily surrender the confidentiality of its information by seeking judicial review because the Hubbard test takes into account the importance of confidentiality and the fact that a party has objected to disclosure. “Non-categorical balancing tests analytically similar to Hubbard’s are the standard for ruling on motions to seal or unseal judicial records in every Circuit,” the court emphasized. 
Final disposition. Because the federal trial court did not apply the Hubbard balancing test to the request to unseal the court records at issue in the case, but instead ruled that they were “categorically exempt from disclosure,” the federal appellate court vacated the lower court’s judgment and remanded the case for the court to apply the Hubbard balancing test.
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Thursday, August 10, 2017

Fed unveils corporate governance, ratings system proposals for large financial institutions

By Andrew A. Turner, J.D.

The Federal Reserve Board has requested public comment on a corporate governance proposal to enhance the effectiveness of boards of directors by refocusing the Fed's supervisory expectations for the largest firms' boards of directors on their core responsibilities, to promote the safety and soundness of the firms. The proposed board effectiveness guidance would be used in connection with the supervisory assessment of board effectiveness under the proposed Large Financial Institution rating system, which the Federal Reserve issued for public comment concurrently.

For the largest domestic bank and savings and loan holding companies and systemically important nonbank financial companies, the proposal would establish principles for effective boards of directors. The proposal would also better distinguish between the roles and responsibilities of an institution’s board of directors and those of senior management. The comment period expires on October 10, 2017.

The corporate governance proposal is made up of three parts. First, it identifies the attributes of effective boards of directors, such as setting a clear and consistent strategic direction for the firm as a whole, supporting independent risk management, and holding the management of the firm accountable. For the largest institutions, Fed supervisors would use these attributes to inform their evaluation of a firm's governance and controls. Second, it clarifies that supervised firms must submit their findings to the firm's senior management for corrective action, rather than to its board of directors. And third, the proposal identifies existing supervisory expectations for boards of directors that could be eliminated or revised.

Rating system. The Fed is also requesting public comment on a proposal to better align the Fed's rating system for large financial institutions with the post-crisis supervisory program for these firms.

The current supervisory program for the largest firms sets higher standards to lower the probability of a firm’s failure or material distress, and also reduce risks to financial stability. The proposed changes would incorporate the regulatory and supervisory changes made by the Fed since 2012, which focus on capital, liquidity, and the effectiveness of governance and controls, including firms’ compliance with laws and regulations. Supervisors would assess and assign confidential ratings in each of these categories.

The proposed rating system would only apply to large financial institutions, such as domestic bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets, as well as the intermediate

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Wednesday, August 9, 2017

Severe stress test results for Fannie, Freddie point to $100B bailout

By J. Preston Carter, J.D., LL.M.

The Federal Housing Finance Agency released results of annual stress tests conducted by Fannie Mae and Freddie Mac (the Enterprises), showing that under the Severely Adverse scenario, Treasury Department draws are projected to range between $34.8 billion and $99.6 billion, depending on the treatment of deferred tax assets. Last year’s projection was between $49.2 billion and $125.8 billion.

The Dodd-Frank Act requires financial institutions with more than $10 billion in assets to conduct annual stress tests to determine whether they can absorb losses as a result of adverse economic conditions. The FHFA report, Dodd-Frank Act Stress Tests (DFAST)—Severely Adverse Scenario, provides updated information on possible ranges of future financial results of Fannie Mae and Freddie Mac under severely adverse economic conditions. The 2017 test is the fourth implementation of these tests for the Enterprises.

Severely Adverse scenario. The Severely Adverse scenario is based upon a severe global recession which is accompanied by a period of elevated stress in corporate financial and commercial real estate markets. It includes large reductions in asset prices, significant widening of corporate bond spreads, and strained market liquidity conditions.

In the 2017 DFAST Severely Adverse scenario, U.S. real GDP begins to decline immediately and reaches a trough in the second quarter of 2018 after a decline of 6.50 percent from the pre-recession peak. The rate of unemployment increases from 4.7 percent at the beginning of the planning horizon to a peak of 10.0 percent in the third quarter of 2018. The annualized consumer price inflation rate initially declines to about 1.25 percent by the second quarter of 2017 and then rises to approximately 1.75 percent by the middle of 2018.

Enterprise releases. The Enterprises also released results of their stress tests, as required by Dodd-Frank. Fannie Mae published its 2017 Annual Stress Testing Disclosure, and Freddie Mac published its 2017 Dodd-Frank Act Stress Test Severely Adverse Scenario Results.

Use of stress tests. In its Summary Instructions and Guidance document, the FHFA explains that its rule on Stress Testing of Regulated Entities (12 CFR Part 1238) requires each regulated entity to take the results of the annual stress test into account in making any changes to its capital structure (including the level and composition of capital); its exposures, concentrations, and risk positions; any plans for recovery and resolution; and to improve overall risk management. For regulated entities under FHFA conservatorship, any post-assessment actions would require FHFA’s prior approval.

Results for deferred tax assets. In its Frequently Asked Questions, the FHFA explained that in 2008 the Enterprises established a valuation allowance on DTAs, which significantly reduced their capital positions. The disclosure of results with and without the establishment of a DTA allowance eliminates the need to assess the recoverability of deferred tax assets in the Severely Adverse scenario and is provided for comparative purposes and transparency.

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Tuesday, August 8, 2017

CFPB enforcement action survives multiple attacks by student loan servicer

By Richard Roth

A Consumer Financial Protection Bureau suit claiming that Navient Corporation and its subsidiaries violated federal fair debt collection laws and the Dodd-Frank Act will not be dismissed based on challenges to the Bureau’s authority. According to a U.S. District Judge for the Middle District of Pennsylvania, the Bureau could act against the companies without first adopting rules that defined the specific practices as unfair, deceptive, or abusive, and the organization of the Bureau as an independent agency with a director who could be removed only for cause did not violate the Constitution (CFPB v. Navient Corp., Aug. 4, 2017, Mariani, R.)

The Bureau describes Navient and its subsidiaries as specializing in the management and servicing of student loans and the collection of delinquent loans. It works for both the Department of Education and private lenders. Navient Solutions is the organization’s servicing arm, while Pioneer Credit Recovery handles collections.

Alleged illegal activities. Both of the subsidiaries engage in practices that violate federal laws when dealing with borrowers, the CFPB claims. The Bureau says that Navient Solutions steered troubled borrowers into loan forbearance rather than more favorable income-based repayment plans. Income-based repayment plans usually are a better option for borrowers, according to the Bureau, but they take more time and effort for company employees and thus are disfavored by Navient Solutions. The company also did not give borrowers in these plans adequate notice of what was required to certify their continuing eligibility each year, which caused many of the borrowers to fall out of compliance at significant financial cost.

Navient Solutions also misallocated the payments of borrowers who had more than one outstanding loan, resulting in improper fees being charged and negative entries on the borrowers’ credit reports being made. The company’s practices made it difficult for borrowers to correct the misallocations, resulting in “the same processing errors month after month.”

Pioneer Credit Recovery had the ability to enroll troubled borrowers in federal loan rehabilitation plans. However, the company’s customer service representatives routinely exaggerated the benefits of these plans, the CFPB alleges.

Bureau authority. Navient argued that the CFPB did not have the statutory authority to act against the servicing processes because it had never adopted a regulation defining what practices would be considered to be unfair, deceptive, or abusive. The judge rejected that argument.

According to the judge, the Dodd-Frank Act provision allowing the Bureau to take action against practices that had been identified as unfair, deceptive, or abusive does not require the practices in question to have been declared as violations by law or regulation. There was no reason the Bureau could not use litigation to declare what practices are prohibited if it chose.

The Dodd-Frank Act language was permissive, the judge pointed out. It spoke of what the Bureau “may” do, not what it was required to do.

Neither was Navient being treated unfairly because it did not have notice of what the CFPB said was required, the judge said. In litigation, the court would decide whether Navient’s practices violated the UDAAP ban. Navient might have argued that the Dodd-Frank Act had not given fair notice, but it had not done so.

Constitutionality. The judge began his analysis of the attack on the CFPB’s structure by closely analyzing precedents, including cases that considered general principles and those that applied those principles to the Bureau. He concluded that the CFPB’s organization neither violated the Constitution’s separation of powers principles nor interfered with the President’s ability to ensure that the laws “be faithfully executed.”

Navient argued that the Bureau was unconstitutional because of a combination of three factors:
  1. The Bureau is headed by a single director who holds “executive power.”
  2. The director is removable only for cause.
  3. The Bureau is funded by drawing on the Federal Reserve Board’s assessments, not through appropriations.
Navient conceded that none of the three factors alone would be enough to make the CFPB’s structure impermissible; rather, the company claimed that the three in combination violated the Constitution.

From a presidential powers perspective, the judge first noted that the Dodd-Frank Act removal for cause restriction was essentially the same as the provision that protects members of the Federal Trade Commission, and that provision was expressly permitted by the Supreme Court in Humphrey’s Executor v. U.S., 295 U.S. 602, 55 S. Ct. 869 (1935). The FTC and CFPB have comparable functions and comparable authority, he continued.

The Bureau’s funding method and single director structure also have parallels in other federal agencies, the judge pointed out. Congress has the ability to allow agencies to fund themselves and has the ability to change its mind if it chooses. In any event, the funding argument method might impinge on congressional authority, but it did not affect presidential authority.

It was reasonable to believe that the single director structure actually increased the President’s ability to exert control over the CFPB, according to the judge. The President retained the power to remove the Bureau’s director for cause, and the CFPB could be remade by replacing a single individual. To affect the FTC, it might be necessary to replace several of the five commissioners.

Navient’s separation of powers arguments failed as well, the judge decided. Neither the legislative nor judicial branches of the government had usurped the powers of the President, and the Bureau’s structure simply did not interfere with the President’s authority under the Constitution.

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Monday, August 7, 2017

CFPB unveils new ‘Know Before You Owe’ overdraft disclosure forms

By Stephanie K. Mann, J.D.

In a new Know Before You Owe disclosure, the Consumer Financial Protection Bureau unveiled new overdraft disclosure prototypes to improve the model form that financial institutions provide to consumers weighing overdraft coverage. Aimed at making the costs and risks of overdraft protection easier to understand, the CFPB is testing four prototypes that each contains a simple, one-page design to help consumers understand the costs of opting in and evaluate the risks and benefits.

“Whether to opt in to overdraft is an important decision for consumers,” said CFPB Director Richard Cordray in prepared remarks at a press call. “They need their bank or credit union to describe the service fully and accurately while giving them a reasonable chance to consent. They need to know before they owe. We are working to develop disclosures that can help make this process easier for consumers and industry alike. If debit card and ATM overdraft is indeed a service that consumers want and value, then they will make an informed choice and opt to have it.”

Prototype disclosures. According to the press release, the decision of whether to opt into debit card and ATM overdraft services is especially important for consumers, considering the possibility of racking up fees and overall financial stability. Therefore, federal regulations already require financial institutions to give consumers information, provided in a model form. Developed following interviews with consumers, the new prototypes are designed to give consumers more clarity about a key financial decision.

If adopted, the CFPB believes that the prototypes could also make the disclosure forms more accessible for consumers by providing the forms on their website. Institutions would then be able to plug their specific program information into the online form and then download it for free, making it seamless for banks and credit unions to use a new form within their existing compliance systems.

Frequent overdrafters. A new CFPB study has shown that consumers who frequently attempt to overdraw their checking accounts often pay almost $450 more in in fees than those consumers who do not opt into debit card and ATM overdraft coverage. In addition, these consumers often have lower daily balances, lower credit scores, and use their debit card more frequently, making them more financially vulnerable.

According to the CFPB, it is important for consumers to understand overdraft because those who opt into overdraft typically pay substantially more in fees. The study spotlights frequent overdrafters—consumers who attempted to overdraw their accounts more than 10 times in a 12-month period. The study found that 9 percent of accounts are frequent overdrafters and they incurred 79 percent of overdraft fees.

“Our study shows that financially vulnerable consumers who opt in to overdraft risk incurring a rash of fees when using their debit card or an ATM,” said Cordray. “Our new Know Before You Owe overdraft disclosure prototypes are designed to help consumers better understand the consequences of the opt-in decision.”

Blog post. In a related blog post, the CFPB is seeking comments on the new prototypes. Specifically, the Bureau is asking consumers to answer the following questions:
  • Do these form designs do a better job of giving you the information you need before making your decision about overdraft service? 
  • Do you understand the fees for each option and what transactions might cause an overdraft fee? 
  • How do you think the updated forms compare to the current form? Do you think they are easier to use and understand?
  • Which of the layouts do you prefer? 
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