Tuesday, May 31, 2016

Bankruptcy Code doesn’t block collection practices suit over stale debt

By Richard Roth, J.D.

Debt collectors that knowingly filed claims in consumer bankruptcy cases seeking the payment of time-barred debts would have violated the Fair Debt Collection Practices Act, the U.S. Court of Appeals for the Eleventh Circuit has decided. There is no irreconcilable conflict between the Bankruptcy Code provision allowing creditors to file claims and the FDCPA ban on misleading or unfair debt collection practices (Johnson v. Midland Funding, LLC).

The significant facts of the two consolidated cases are essentially the same. In each case, a consumer filed a bankruptcy petition and a debt collector filed a proof of claim on a consumer debt. Also, in each case, the six-year Alabama statute of limitations on the debt had passed, meaning the debt collector could not legally collect the debt.

Prior decision. The case was not to be decided in a vacuum, the court noted. Instead, the district court judges reached their decisions in the light of Crawford v. LVNV Funding, LLC, a 2014 Eleventh Circuit case that considered the interaction between the Bankruptcy Code and the FDCPA. Crawford said that a debt collector’s proof of claim on a time-barred debt misrepresented that the debt was enforceable, which violated the FDCPA; however, it explicitly did not consider whether the Bankruptcy Code precluded a FDCPA claim.

That question now had to be answered.

No irreconcilable conflict. The Bankruptcy Code does not stand in the way of a FDCPA claim, the appellate court decided. In general, the Code allows creditors to file claims on debts that appear to be stale, the court conceded. “However, when a particular type of creditor—a designated ‘debt collector’ under the FDCPA—files a knowingly time-barred proof of claim in a debtor’s Chapter 13 bankruptcy, that debt collector will be vulnerable to a claim under the FDCP,” the court said.

The court rejected the consumers’ claim that the Code does not create a right to file a claim on a time-barred debt. To the contrary—the Code envisions that unenforceable claims may be filed and relies on the bankruptcy trustee to object to and prevent the payment of such claims.

However, the Code’s provision allowing a debt collector to file a proof of claim on a stale debt does not relieve the debt collector of the consequences of doing so, the court continued. There was no irreconcilable conflict between the two laws because they have different scopes, different goals, different coverage, and can be interpreted in a way that allows them to coexist.

The Bankruptcy Code applies to all creditors, while the FDCPA applies only to debt collectors, the court pointed out. Also, the Code addresses proofs of claim in bankruptcy, while the FDCPA addresses debt collection activity both inside and outside of bankruptcy. “The Bankruptcy Code’s rules about who can file claims do not shield debt collectors from obligations that Congress imposed on them,” according to the court.

The Code does not require creditors to file claims, the court added. It permits creditors to file claims. A debt collector who chooses to file a time-barred claim opens itself up to the consequences. The situation is similar to a litigant who chooses to file a frivolous lawsuit and must thereafter face the possibility of sanctions for doing so.

For more information about The Fair Debt Collection Practices Act, subscribe to the Banking and Finance Law Daily.

Friday, May 27, 2016

FDIC Vice Chairman calls more equity capital ‘better choice’ for sound banks

By John M. Pachkowski, J.D.

In remarks before the National Association for Business Economics and the Organization for Economic Cooperation and Development Global Economic Symposium in Paris, Thomas M. Hoenig, Vice Chairman of the Federal Deposit Insurance Corporation, spoke on the need for bank equity capital and noted that "considerable compelling data suggest that more equity capital—not less—is the better choice to attain sound banks and sustained economic growth."

Hoenig called equity capital the "most stable funding source for the banking industry" and noted that a number of academic studies have found that "the benefits of higher capital outweigh its costs."

He also raised concerns that the use of leverage ratios is in conflict over the appropriate amount of equity capital. Hoenig added, "As the memory of the 2008 financial crisis fades, however, the banking industry has begun to lobby for special treatment or exemptions from capital requirements for a host of assets included in the leverage ratio calculation for judging capital adequacy. If accepted, the effect of such proposals would be to again lower acceptable capital standards for this most important industry."

For more information about capital, subscribe to the Banking and Finance Law Daily.

Thursday, May 26, 2016

CFPB: Auto title loans steer borrowers into ‘cycle of debt’

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has completed a study on auto title loans and found that more than two-thirds of auto title loan business comes from borrowers who take out seven or more consecutive loans and find themselves “stuck in debt for most of the year.” The bureau’s report illustrates how the single-payment auto title loan market works and explains borrower behavior in this market.

The CFPB said that the auto title loan business is similar to the payday loan business. Payday borrowers get hit with steep bank penalties and risk losing their checking accounts because of repeated attempts by their lender to debit payments. With auto title loans, consumers risk their car or truck and a resulting loss of mobility and becoming caught in a “cycle of debt.” The CFPB said it is considering proposals to put an end to payday debt traps by requiring lenders to take steps to determine whether borrowers can repay their loan and still meet other financial obligations.

Report highlights. Auto title loans are high-cost, small-dollar loans borrowers use to cover an emergency or other cash-flow shortage between paychecks or other income. Borrowers use their vehicles for collateral, and the lender holds their title in exchange for a loan amount. If the loan is repaid, the title is returned to the borrower. The typical loan is about $700, and the typical annual percentage rate is about 300 percent. For the auto title loans covered in the CFPB report, a borrower agrees to pay the full amount owed in a lump sum plus interest and fees by a certain day, generally within 30 days. These single-payment auto title loans are available in 20 states. Five other states allow only auto title loans repayable in installments, according to the report.

The CFPB found that:

  1. one in five borrowers has a vehicle seized by the lender for failure to repay the loan;·
  2. four in five auto title loans are not repaid in a single payment; and
  3. more than half of all auto title loans become long-term debt burdens.

Cordray press call. In his prepared remarks for a press call on auto title loans, CFPB Director Richard Cordray noted, “Most borrowers resort to rolling over loans through repeated reborrowing, paying high fees each and every time.” The fact that about two-thirds of the auto title business comes from borrowers “mired in debt for most of the year” is evidence that “the long-term pitfalls of this form of borrowing and another sign that so-called single-payment loans are often anything but that in reality.”

Cordray added that the bureau “has consistently recognized that consumers may need affordable credit to cover emergency expenses. If a product is structured to make repayment realistic, then the loans may help consumers. “But if the payments are not affordable, those in a financial jam with nowhere else to turn may find themselves on a perpetual treadmill of debt, laden with mounting costs that disrupt the precarious balance of their financial lives. Although these products are usually marketed for short-term financial emergencies, the long-term costs of such loans often just make a bad situation even worse.”

For more information about the CFPB stance on auto title loans, subscribe to the Banking and Finance Law Daily.

Tuesday, May 24, 2016

Will Supreme Court review constitutionality of state laws prohibiting credit card surcharges?

By Thomas G. Wolfe, J.D.

Recently, the U.S. Supreme Court was asked to review whether New York’s credit card “no surcharge” law constitutes an unconstitutional abridgement of free speech under the First Amendment to the Constitution.

The petition to the Supreme Court, which was filed on May 12, 2016, as Expressions Hair Design v. Schneiderman, notes that, along with New York, nine other states have enacted laws that “allow merchants to charge higher prices to consumers who pay with a credit card instead of cash, but require the merchant to communicate that price difference as a cash ‘discount’ and not as a credit-card ‘surcharge’.” Accordingly, the petition asks whether New York’s and other similar state laws banning credit card surcharges “unconstitutionally restrict speech conveying price information” or whether those state laws “regulate economic conduct” instead.

In the underlying Expressions case, the U.S. Court of Appeals for the Second Circuit upheld the constitutionality of New York’s credit card “no surcharge” law. Similarly, in alignment with the Second Circuit’s decision, the Fifth Circuit determined earlier this year that a Texas “no surcharge” law was a permissible economic-pricing regulation that did not implicate the free-speech protections of the First Amendment.

However, in November 2015, the Eleventh Circuit struck down Florida’s credit card “no surcharge” law as an unconstitutional abridgement of free speech. Consequently, the petition underscores this split among the federal circuits. Stay tuned.

For more information about constitutional issues affecting the financial services industry, subscribe to the Banking and Finance Law Daily.

Thursday, May 19, 2016

Treasury combats money laundering with customer due diligence rule and proposed legislation

By Andrew A. Turner, J.D.

The Treasury Department has issued customer due diligence requirements and proposed beneficial ownership legislation to Congress to counter money laundering threats. Final rules under the Bank Secrecy Act for banks, brokers or dealers in securities, mutual funds, and futures commission merchants, and introducing brokers in commodities contain explicit customer due diligence requirements and include a new requirement to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.

The rules issued by Treasury’s Financial Crimes Enforcement Network take effect on July 11, 2016. The compliance deadline is two years from date or issuance, May 11, 2018, to accommodate changes to systems and processes required for implementation.

Customer due diligence requirements. Covered financial institutions must identify and verify the identity of the beneficial owners of all legal entity customers at the time a new account is opened. The financial institution may comply either by obtaining the required information on a standard certification form or by any other means that comply with the substantive requirements of this obligation. Financial institutions are then required to maintain records of the beneficial ownership information they obtain, and may rely on another financial institution for the performance of these requirements, in each case to the same extent as under their customer identification program rule.

The AML program requirement for each category of covered financial institutions is being amended to explicitly include risk-based procedures for conducting ongoing customer due diligence.

In addition, customer due diligence also includes conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. When a financial institution detects information (including a change in beneficial ownership information) about the customer in the course of its normal monitoring that is relevant to assessing or reevaluating the risk posed by the customer, it must update the customer information, including beneficial ownership information. Such information could include a significant and unexplained change in the customer’s activity, such as executing cross-border wire transfers for no apparent reason, or a significant change in the volume of activity without explanation. It could also include information indicating a possible change in the customer’s beneficial ownership, because such information could also be relevant to assessing the risk posed by the customer.

Legislative proposal. Companies formed within the United States would be required to file beneficial ownership information with the Treasury Department, and face penalties for failure to comply, under proposed legislation sent to Congress. Passage of the bill is needed to remedy a weakness in anti-money laundering laws that enable companies to hide beneficial ownership, according to Treasury. In a letter to Congress, Treasury Secretary Jacob J. Lew, said that “existing authorities do not provide all the tools” needed by Treasury in the fight against financial crime.

Lew argued that requiring companies to disclose “the real person behind a company at the time of its creation” is needed to prevent the misuse of companies. Lew also urged the Senate to approve pending tax treaties. In addition, he also asked Congress to provide Foreign Account Tax Compliance Act reciprocity that would require U.S. financial institutions to provide other jurisdictions with the same information that foreign financial institutions must provide to the IRS. Additional statutory authority is necessary “combat bad actors who seek to hide their financial dealings,” he said.

For more information about anti-money laundering measures, subscribe to the Banking and Finance Law Daily.

Wednesday, May 18, 2016

Kleptocracy, money laundering, and bribery, subject of DOJ legislative proposals

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

The Department of Justice is submitting legislative proposals to Congress regarding the illegal proceeds of transnational corruption and bribery. The proposals are intended to advance the DOJ’s anti-corruption programs aimed at public integrity prosecutions, bribery prosecutions, prosecutions of taxpayers who seek to conceal foreign accounts, money laundering prosecutions, its Kleptocracy Initiative, and assistance to foreign counterparts to fight corruption.

The DOJ’s press release says five proposals relate to illegal proceeds of transnational corruption. One would permit administrative subpoenas for money laundering investigations, which would allow for speedier law enforcement actions than waiting on grand jury subpoenas under current law. Another proposal would enhance the ability of U.S. investigators to obtain foreign bank or business records as a form of legally admissible evidence when serving subpoenas on branches in the United States.

Three of the transnational corruption proposals involve kleptocracy. The first would allow prosecutors to directly pursue kleptocracy cases and bring money laundering actions with respect to the full range of foreign corruption activities criminalized pursuant to the 2003 U.N. Convention Against Corruption. The second amendment would create a framework for the use of classified information in kleptocracy-related civil asset recovery cases. The third would make the time period in which the United States can restrain property based on a request from a foreign country, which is currently 30 days, parallel to the domestic restraint period, which is 90 days. It would also extend the procedures to authenticate foreign records of regularly conducted activity in criminal cases to civil asset recovery cases.

Finally, the DOJ is advancing two amendments to 18 U.S.C. §666—“Theft or bribery concerning programs receiving Federal funds.” The first would resolve a conflict among federal circuit courts on the issue of whether after-the-fact gratuities are covered by Section 666 and would also be consistent with the interpretations of six of eight Circuit Courts of Appeals that have addressed this issue, finding that the plain language of the statute criminalizes the corrupt offer or acceptance of rewards.

The second proposal would correct a drafting error regarding bona fide salary and lower the dollar threshold to address those cases where the dollar amount involved may be low but the threat to the integrity of a government function is high.

For more information about money laundering prosecutions, subscribe to the Banking and Finance Law Daily.

Tuesday, May 17, 2016

Supreme Court sidesteps hard questions in consumer financial services cases

By Richard A. Roth

Supreme Court opinions addressing debt collection and credit reporting laws issued on May 16, 2016, avoided deciding the questions that had led the Court to grant certiorari. In Spokeo, Inc. v. Robins, an 8-to-2 majority of the Court decided to send a Fair Credit Reporting Act suit back to the appellate court for a more complete analysis of whether the consumer had Constitutional standing to sue. In Sheriff v. Gillie, the Court unanimously decided a Fair Debt Collection Practices Act suit on narrow grounds, allowing it to avoid the question of who was a state official that was exempt from the act's requirements.

Standing to sue. Spokeo, Inc. v. Robins, dealing with standing to sue, had the potential to affect suits under a number of different federal laws. The precise issue was whether a consumer who did not describe an actual, present injury from a consumer reporting agency's FCRA violations could nevertheless describe an injury in fact that gave him standing. In the absence of an injury in fact there would be no case or controversy, meaning there would be no federal court jurisdiction.

The problem for the Court, however, was that there are two distinct parts of an injury in fact: the injury must be both particular to the consumer and concrete. There was no question that any injury from reporting incorrect information about a consumer would be particular to that consumer, the Court conceded, but that did not mean the injury also was concrete.

In its 2014 decision (Robins v. Spokeo, Inc.), the U.S. Court of Appeals for the Ninth Circuit had not adequately considered whether there was a concrete injury--an injury that was actual or imminent, not simply hypothetical--the Court's majority decided. Over the objections of two dissenting justices, the case was returned to the Ninth Circuit for a specific analysis of the concreteness factor.

Concreteness. In returning the case to the Ninth Circuit, the majority opinion did not foreclose the possibility that the suit will survive. The opinion explicitly recognized that when it passed the FCRA, Congress intended to “curb the dissemination of false information by adopting procedures designed to decrease that risk.” It also recognized that an intangible injury can be concrete. However, the majority also said that “a bare procedural violation” that resulted in no harm would not cause a concrete injury.

Debt collection violation. Sheriff v. Gillie was presented as an opportunity for the Court to decide whether private attorneys who collected debts on behalf of the state of Ohio were state officials who were exempt from the FDCPA. The Court instead simply assumed that the special counsel were covered by the act and then decided they had not violated it.

In collection letters sent to consumers who owed the state money, the special counsel used the Ohio attorney general's letterhead, signing as special counsel. The consumers claimed this practice misrepresented the private attorneys' status as state officials and that this misrepresentation violated the FDCPA. The private attorneys and the state of Ohio argued that the attorneys were state officials and thus exempt from the act.

Noting that the state of Ohio described the special counsel as independent contractors, the U.S. Court of Appeals for the Sixth Circuit decided they therefore could not be state officers (Gillie v. Law Office of Eric A. Jones, LLC). The Supreme Court decided the case without reaching the question.

No misrepresentations. The use of the official letterhead was neither false nor misleading, the Court said. Instead, it “accurately conveys that special counsel, in seeking to collect debts owed to the State, do so on behalf of, and as instructed by, the Attorney General.” The consumer’s attorneys admitted that the FDCPA would not have been violated if the collection letters, rather than using the letterhead, had stated that the private attorneys were acting as special counsel to the attorney general to collect a debt. It would be irrational to say that using a combination of the official letterhead and the private attorney’s signature block to convey the same information was somehow misleading, according to the opinion.

Federalism. The Court also was more receptive to the state's federalism argument than the Ninth Circuit had been. Collecting money owed is a “core sovereign function,” the Court said. Federal law should not unnecessarily be interpreted in a way that impinged on the state’s choice of how to carry out a sovereign function.

No consumer harm. The Court also was unconcerned about whether consumers might be confused or intimidated by the letterhead’s appearance on a collection letter. First, a single telephone call to the AG’s office would resolve any confusion, the opinion pointed out.

The letters in question did not threaten criminal prosecution, civil penalties, or any other enforcement actions that were unique to the state, the opinion continued. However, there was nothing wrong with the possibility that consumers might be coerced into putting their obligations to the state above other debts, the Court added. The state did have unique collection powers, and the FDCPA “does not protect consumers from fearing the actual consequences of their debts.”

For more information about financial services consumer protection, subscribe to the Banking and Finance Law Daily.

Monday, May 16, 2016

Organizations oppose bill to kill Operation Choke Point

By Stephanie K. Mann, J.D.

A coalition of community, consumer, and civil rights organizations has submitted a letter to members of the Senate, urging them to oppose S. 2790, the Financial Institution Consumer Protection Act of 2016. The bill, introduced by Sen. Ted Cruz (R-Texas), would end Operation Choke Point, the program created by the Department of Justice to “choke out” companies that were seen as posing a high risk of payment fraud, money laundering, or other abuses by denying them access to the banking and payments system. The House passed a similar bill, H.R. 766, earlier this year.

According to the letter, the bill would hamper critical Department of Justice and banking regulator efforts to detect fraud and money laundering, putting consumers and financial institutions at risk of serious financial loss.

With escalating data breaches, terrorism threats, and internet fraud, the trade associations emphasized that efforts to deprive criminals of access to the banking system must be encouraged, not discouraged. “S. 2970 will only frustrate the efforts of Federal regulators that to date, have successfully halted numerous mass-market fraud schemes, protected countless consumers from the financial hardship that follows fraud and have done so without any evidence of misconduct or targeting of lawful businesses.”

No evidence of wrongdoing. According to the associations, an inquiry by the Department of Justice Office of Professional Responsibility found no evidence of misconduct or targeting of legal business by Operation Choke Point. In addition, a report from the Federal Deposit Insurance Corporation Inspector General found that the FDIC’s involvement in Operation Choke Point was inconsequential to the direction and outcome of the initiative.

To the contrary, said the letter, every case brought by the DOJ as part of its investigation “clearly indicated” that the banks and payment processors involved were knowingly engaged in fraudulent activity that resulted in millions of dollars drained from consumers’ bank accounts.

The letter also cited the Obama Administration’s strong opposition to the House version of the bill.

For more information about Operation Choke Point, subscribe to the Banking and Finance Law Daily.

Thursday, May 12, 2016

Debt collector to pay FTC price for FCRA violations

By Katalina M. Bianco, J.D.

The Federal Trade Commission has reached a settlement with Credit Protection Association (CPA), a Texas-based debt collection agency, on charges that the agency violated the Fair Credit Reporting Act by mishandling consumer disputes. CPA will pay $72,000 in civil penalties to settle the charges. The case is part of Operation Collection Protection, an ongoing federal, state, and local crackdown on debt collectors that use illegal practices.

“When consumers dispute potentially incorrect information in their credit reports, companies must not only investigate those disputes, but also let consumers know whether the information has been corrected. Otherwise, consumers may be unaware of additional steps they may need to take under the FCRA, including filing dispute statements directly with credit reporting agencies,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection.

In its complaint, the FTC charges that CPA did not follow the requirements of the FCRA’s Furnisher Rule by not having adequate policies and procedures in place to handle consumer disputes regarding information the company provided to credit reporting agencies. The FTC also alleges that CPA did not have a policy requiring notice to consumers of the outcomes of investigations about disputed information and that in many cases consumers were not informed whether information they disputed had been corrected.

The FTC alleges that while CPA had written policies on consumer disputes, the agency did not adequately train employees on the policies. Additionally, the policies did not address the requirements of the Furnisher Rule. The complaint further charges that CPA often relied on its clients—the original debt holders—to investigate credit reporting disputes, but used inconsistent processes for transmitting consumers’ dispute information to its clients. The agency also lacked any “meaningful way” to audit how it handled consumer disputes, said the FTC.

Stipulated final order. Under the stipulated final order, CPA, in addition to paying $72,000 in penalties, will be required to put in place policies and procedures that comply with the requirements of the FCRA and the Furnisher Rule. The company also will be required to follow the rule’s requirements related to conducting dispute investigations and informing consumers of their outcome.

For more information about FTC enforcement activity, subscribe to the Banking and Finance Law Daily.

Tuesday, May 10, 2016

Mortgage loan servicer violated federal debt collection, state consumer protection laws

By Thomas G. Wolfe, J.D.

Recently, the Supreme Court of Montana was called to address an action by a pair of homeowners against their mortgage loan servicer, Bayview Loan Servicing, LLC. The homeowners not only sought to prevent the foreclosure of their home, they also sought monetary damages against Bayview for its conduct in connection with the servicing of their loan—including representations Bayview made for a supposed loan modification—and for its communications and notifications pertaining to its foreclosure efforts.

Ultimately, in Jacobson v. Bayview Loan Servicing, LLC, Montana's high court ruled that Bayview violated the federal Fair Debt Collection Practices Act (FDCPA) and the Montana Consumer Protection Act (MCPA). In reaching its decision, the court determined that the trial court did not err in finding that Bayview made false representations to the homeowners and engaged in unfair trade practices in connection with the loan servicer’s efforts to purportedly “offer” a loan modification while simultaneously pursuing foreclosure proceedings to collect on the secured debt. Moreover, the court upheld the trial court’s damages awards, including emotional distress damages, totaling approximately $286,000, and awards of attorney’s fees and costs totaling about $140,000.

According to the court’s opinion, in March 2009, the loan servicing duties on the homeowners’ $391,400 mortgage securing their Montana home were transferred from the original lender and servicer to Bayview. However, from March 2009 to July 2012, Bayview sent the homeowners legally deficient notices, transmitted faulty written communications about their mortgage loan default and impending foreclosure, or omitted to send them required notices and communications. Moreover, on several occasions, Bayview’s written or oral communications did not conform to the requirements of the homeowners’ promissory note or trust indenture securing the loan.

To compound matters, as a result of a series of purported assignments and legal constructs during 2010, Bayview made certain representations to the homeowners that simply were not true because Bayview did not actually possess the required authority to make the representations. On a separate but parallel track, a Bayview representative told the homeowners to “stop making payments on their loan” so that they might better qualify for a loan modification. Eventually, in September 2009, Bayview informed the homeowners that they did not qualify for a loan modification under the federal Home Affordable Modification Program “even though the [homeowners] were never given an application for modification under the program.”

After the homeowners complained to the Better Business Bureau and a U.S. senator about the matter, Bayview offered terms for a loan modification that would also dismiss its foreclosure action. Although the homeowners accepted the proposed loan modification, Bayview “refused to put the offer in writing.” As a result, “no agreement was finalized between the parties,” the court noted.

FDCPA claim. At the outset, the Montana Supreme Court rejected Bayview’s arguments that it was not subject to the FDCPA under the facts of the case. Among other things, the court pointed out that, as part of the ongoing foreclosure proceeding, Bayview had filed a “Notice of Trustee’s Sale” containing a statement in bold letters that the notice constituted “an attempt to collect a debt.” 

In affirming the trial court’s determination that Bayview committed multiple FDCPA violations, the court emphasized that the trial court based its rulings on substantial and reliable evidence. Accordingly, the court concluded that:
  • Bayview’s false representations regarding the loan modification were materially misleading in violation of the FDCPA;
  • Bayview’s false representations about the homeowners’ legal rights violated the FDCPA prohibition against the use of any false representation or deceptive means to collect or attempt to collect any debt and violated the FDCPA prohibition against unfair practices;
  • since Bayview made false and unsubstantiated assignments and was never a “beneficiary” on the homeowners’ loan, the “least sophisticated consumer” would “clearly have difficulty ascertaining who owns the loan, and who can foreclose or resolve the loan”; consequently, Bayview made material misrepresentations and engaged in deceptive practices in violation of the FDCPA; and
  • even though Bayview knew that the homeowners were represented by counsel, the loan servicer improperly contacted the homeowners on several occasions in violation of the FDCPA.
MCPA claim. Turning to the homeowners’ state-law claim, the court observed that, under the applicable provision of the MCPA, “unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are unlawful.”

Reviewing Montana case law on the issue, the court concluded that the trial court’s findings with regard to Bayview’s FDCPA violations also established state-law grounds for violations of the MCPA provision. Stressing that Bayview told the homeowners “not to make payments, while at the same time commencing foreclosure,” the court determined that Bayview not only violated the MCPA, the loan servicer violated various provisions of the trust indenture as well.

For more information about mortgage loan servicing issues, subscribe to the Banking and Finance Law Daily.

Friday, May 6, 2016

CFPB proposes to ban mandatory arbitration ‘gotcha’ clauses

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has issued a proposed rule that would ban mandatary arbitration clauses that “deny groups of consumers their day in court.” The proposal prohibits companies from putting mandatory arbitration clauses, referred to by the bureau as “gotcha contracts,” in new contracts that prevent class action lawsuits. Under the proposed rule, companies would be able to include arbitration clauses in their contracts, but for contracts subject to the proposal, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court. The proposed rule would provide the specific language that companies must use.

The bureau also is proposing to adopt official interpretations to the proposed regulation. The CFPB is requesting public feedback on the proposal for 90 days after publication in the Federal Register.

“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” said CFPB Director Richard Cordray. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”

Mandatory arbitration clauses. According to the CFPB, mandatory arbitration clauses typically provide that either the company or the consumer can require that disputes between them be resolved by privately appointed arbitrators except for cases brought in small claims court. Either party generally can block lawsuits from proceeding in court. These clauses also generally bar consumers from bringing group claims through the arbitration process. No matter how many consumers are injured by the same conduct, consumers must proceed to resolve their claims individually against the company.

Preparing for rulemaking. As required by Section 1028(a) of the Dodd-Frank Act, the CFPB conducted a study of pre-dispute mandatory arbitration clauses that was published in March 2015. The CFPB’s study showed that very few consumers bring individual actions against their financial service providers either in court or in arbitration and that class actions provide a more effective means for consumers to challenge problematic practices by these companies. According to the study, class actions succeed in bringing hundreds of millions of dollars in relief to millions of consumers each year and cause companies to alter their legally questionable conduct. However, when mandatory arbitration clauses were in place, companies were able to block class actions.

In October 2015, the CFPB published an outline of the proposals under consideration and convened a Small Business Review Panel to gather feedback from small companies. The bureau also sought input from the public, consumer groups, industry, and other stakeholders before continuing with the rulemaking. That process concluded in December 2015 with a written report to CFPB Director Richard Cordray. The bureau released the report in conjunction with its proposal.

Proposal provisions and benefits. The proposed rule would create a new 12 CFR Part 1040 to govern mandatory arbitration clauses. In addition to requiring that the clauses explicitly state that they cannot be used to stop consumers from being part of a class action in court, the proposed rule would require that companies with arbitration clauses submit to the CFPB claims, awards, and certain related materials that are filed in arbitration cases. The bureau said that this requirement would allow it to monitor consumer finance arbitrations to ensure that the arbitration process is fair for consumers. The CFPB added that it is considering publishing information it would collect in some form so the public can monitor the arbitration process as well.

According to the bureau, the proposed rule would not only provide consumers with their day in court, but would act as an incentive to companies to comply with the law and avoid group lawsuits. “Arbitration clauses enable companies to avoid being held accountable for their conduct. When companies know they can be called to account for their misconduct, they are less likely to engage in unlawful practices that can harm consumers,” noted the CFPB. Finally, the proposed rules would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit any claims filed and awards issued in arbitration to the CFPB.

Cordray on arbitration. The CFPB held a field hearing on arbitration in Albuquerque, N.M., on May 5, 2016. In his prepared remarks, Cordray said that the practice of using pre-dispute arbitration clauses “has evolved to the point where it effectively functions as a kind of legal lockout.” According to the CFPB director, companies insert these clauses into their contracts for consumer financial products or services and “with the stroke of a pen” can prevent consumers from filing class action lawsuits. Through the studies it has conducted, the bureau has come to understand that consumers know very little about these clauses and how they can block them from their day in court.

Cordray stated that Congress spoke on mandatory arbitration clauses by directing the CFPB to conduct a study and provide a report to Congress on the use of mandatory arbitration clauses in other consumer financial contracts. Once the study was completed, “Congress stated that ‘[t]he Bureau, by regulation, may prohibit or impose conditions or limitations on the use of ‘such arbitration clauses in consumer financial contracts if the Bureau finds that such measure’ is in the public interest and for the protection of consumers’ and such findings are ‘consistent with the study’ we performed.”

The CFPB director said that “the essence” of the proposed rule is that it would “prevent mandatory arbitration clauses from imposing legal lockouts to deny groups of customers the right to pursue justice and secure meaningful relief from wrongdoing.”

U.S. Chamber of Commerce. In oral testimony at the field hearing, Travis Norton, Executive Director for the U.S. Chamber of Commerce, Center for Capital Markets Competitiveness, called the CFPB’s proposed rule “a back-door attack on arbitration, taking the form of a prohibition on class action waivers” that is “no more in the public interest than a direct prohibition on arbitration.” Travis stated that if companies that currently subsidize arbitration programs for their customers are also required to reserve millions for class action defense, many of them will stop funding their arbitration programs. “No rational company is going to pay more to provide customers less.”

Hensarling statement. House Financial Services Committee Chairman Jeb Hensarling (R-Texas), referring to the CFPB director as the “de facto dictator,” said that the proposed rule would restrict consumers’ ability to resolve financial contract disputes through arbitration. “This move—which will apply to some of the most common financial contracts including credit cards, checking accounts, and even cell phones—essentially hands over the keys of the CFPB’s luxury office building to the wealthy, powerful, and politically well-connected trial lawyer lobby.” Hensarling stated that the proposal was based on the bureau’s 2015 arbitration study that “was met with widespread criticism from academics and industry alike for failing to make useful comparisons between the outcomes of the various permutations of individual and class litigation versus similar claims under arbitration, as well as awards versus settlements.

Proskauer weighs in on proposal. Timothy Karcher, Proskauer Rose LLP, commented, “No one who has been actively watching the CFPB for the past several years should be surprised by the proposed rulemaking. This has been on the CFPB’s agenda for a long time—Section 1028 of the Dodd-Frank act directed the CFPB to study the use of arbitration clauses, and these proposed rules come directly from that mandate.” After conducting the study, the CFPB concluded that as long as the risks of class action are low, the incentive for non-compliance is too great, he said. “It’s very hard to argue with that.” Karcher stated further, “The likely result may be more class-action type lawsuits, but the CFPB asserts that the mere threat of a class action will make compliance with consumer protection laws a greater priority.”

Regarding criticism of the proposal, Karcher said, “This is not about whether the CFPB has too much power or unchecked authority. Boilerplate agreements designed to deprive consumers of access to the courts should raise concern among CFPB supporters and critics alike. I welcome any rule that prohibits depriving consumers of the option to seek redress in the courts.”

Consumer reviews. Several consumer groups released a joint statement commending the CFPB on its proposed rule “to restore consumers’ right to join together to hold corporations accountable when they break the law.” The groups noted in their statement that the proposed rule would limit the financial industry’s use of forced arbitration, which they referred to as “an abusive practice in which corporations bury ‘ripoff clauses’ in the fine print of take-it-or-leave-it contracts to block consumers from challenging predatory practices such as hidden fees, fraud, and other illegal behavior.”

For more information about the CFPB's proposed rule on mandatory arbitration clauses, subscribe to the Banking and Finance Law Daily.

Thursday, May 5, 2016

CFPB reports on fair lending supervisory efforts, small business data collection on tap

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau has released its fourth Fair Lending Report to Congress describing the bureau’s fair lending activities in supervision, enforcement, rulemaking, interagency coordination, outreach, and interagency reporting. The report covers the bureau’s fair lending work during calendar year 2015. During that year, the bureau’s fair lending supervisory and public enforcement actions directed institutions to provide approximately $108 million in remediation and other monetary payments. Looking ahead, the CFPB has begun to explore some of the issues involved in a small business data collection rulemaking, including consideration of statutory reporting requirements.

Cordray message. According to the CFPB Director Richard Cordray, the past year was especially productive for its Office of Fair Lending and Equal Opportunity, including the resolution of the largest redlining case in history, as well as a significant discrimination case. The Office’s continued examination and investigation of indirect auto lenders for compliance with the Equal Credit Opportunity Act resulted in the issuance of two prominent consent orders. In addition, the Office helped revise the Home Mortgage Disclosure Act’s Regulation C.

Ficklin message. Patrice Alexander Ficklin, Director of Fair Lending and Equal Opportunity, added that while the Office’s settlement administration, and mortgage and auto work continue to be priorities, there were significant strides in expanding efforts to assist consumers in other priority areas, including the credit card market. She also pointed out that the Office added small business lending to its priorities in order to address fair lending risks in that market.

Rulemaking. In October 2015, the bureau published a final rule to amend Regulation C, which implements HMDA. Among other changes, the final rule requires covered lenders to report additional data elements. In response to ongoing conversations with industry about compliance with Regulation C, the bureau, in January 2016, published a Request for Information on its HMDA data resubmission guidelines.

Small business data collection. Section 1071 of Dodd-Frank requires financial institutions to submit to the CFPB data on credit applications for women-owned, minority-owned, and small businesses. After outreach and research, the CFPB “will begin developing proposed rules concerning the data to be collected and determining the appropriate procedures and privacy protections needed for information-gathering and public disclosure.” The CFPB anticipates that small business lending supervisory activity will provide insight into “the credit process; existing data collection processes; and the nature, extent, and management of fair lending risk.”

Small-business lending. The report affirmed the bureau’s commitment to assessing and evaluating fair lending risk in all credit markets under its jurisdiction. In that regard, the bureau recently began targeted ECOA reviews of small-business lending, focusing in particular on the quality of fair lending compliance management systems and on fair lending risks in underwriting, pricing, and redlining.

Mortgage lending. The report stated that mortgage lending supervision and enforcement remains a key priority, with the Office focusing on Home Mortgage Disclosure Act data integrity and potential fair lending risks in the areas of redlining, underwriting, and pricing. In addition to resolving two public enforcement actions, the bureau’s mortgage origination work has covered institutions responsible for close to half of the transactions reported pursuant to HMDA. The Office’s supervisory work on mortgage servicing has included use of the ECOA Baseline Review Modules that help identify potential fair lending risk in mortgage servicing and inform prioritization of mortgage servicers.

Indirect auto lending. The bureau continued to oversee and enforce compliance with ECOA in indirect auto lending through both supervisory and enforcement activity, including monitoring compliance with previous supervisory and enforcement actions. According to the report, the bureau’s auto finance targeted ECOA reviews generally included an examination of three areas: (1) credit approvals and denials; (2) “buy rates”—the interest rates quoted by a lender to a dealer; and (3) any discretionary markup or adjustments to buy rates. The bureau’s indirect auto work has covered more than 60 percent of the auto loan market share by volume and, as noted in Cordray’s message, resulted in two public enforcement actions involving discriminatory pricing and compensation structures.

Credit cards. The bureau’s fair lending supervisory and enforcement work in the credit card market focused mostly on the quality of fair lending compliance management systems and on fair lending risks in underwriting, line assignment, and servicing, including the treatment of consumers residing in Puerto Rico or who indicate that they prefer to speak in Spanish. The work covered institutions responsible for more than 75 percent of outstanding credit card balances in the U.S.

Guidance. In May 2015, the bureau issued a compliance bulletin on the Section 8 Housing Choice Voucher (HCV) Homeownership Program. The bulletin reminded creditors of their obligations under the ECOA and Regulation B to provide non-discriminatory access to credit for mortgage applicants by considering income from the Section 8 HCV Homeownership Program. The Office also provided guidance and information on market trends through its Supervisory Highlights.

Outreach. According to the report, the bureau continues to initiate and encourage industry and consumer engagement opportunities to discuss fair lending compliance and access to credit issues, including through speeches, presentations, blog posts, webinars, rulemaking, public comments, and communication with Members of Congress.

Interagency coordination, collaboration. The bureau also continues to coordinate with the Federal Financial Institutions Examination Council agencies, as well as the Department of Justice, Federal Trade Commission, and Department of Housing and Urban Development, to enforce fair lending laws and regulations. In 2015, for example, the Office entered into a Memorandum of Understanding with HUD to formalize information-sharing between our agencies and maximize opportunities for joint investigations, when possible.

For more information about CFPB fair lending regulatory activities, subscribe to the Banking and Finance Law Daily.

Wednesday, May 4, 2016

Fidelity Bank to invest $1M to settle HUD fair housing claims

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

The U.S. Department of Housing and Urban Development announced a $1 million agreement between Fidelity Bank and the Fair Housing Project of Legal Aid of North Carolina to resolve allegations the mortgage lender engaged in unfair lending practices against minority applicants. The agreement stems from a complaint that was filed by the Fair Housing Project, a HUD Fair Housing Initiatives Program agency based in Raleigh, N.C.

“Whether intentional or not, stark disparities exist in lending patterns and access to credit along racial and ethnic lines,” said HUD Assistant Secretary for Fair Housing and Equal Opportunity Gustavo Velasquez. “HUD remains committed to not only enforcing the law, but also facilitating productive relationships between lenders and advocacy groups that help make lenders more aware of their obligations under the Fair Housing Act.”

Under the agreement, North Carolina-based Fidelity, without admitting fault or liability, will make investments and community development loans in predominantly minority census tracts where at least 40 percent of these loans will specifically promote affordable housing. For this purpose, the bank has committed to earmarking at least $500,000 each year for two years, for a total of $1 million.

In addition, Fidelity will display a HUD Fair Housing poster at its Oberlin Road branch in Raleigh. The bank will also prominently display its non-discrimination policies at that branch in English and Spanish, and provide fair lending training to staff, including loan originators and employees engaged in loan processing and underwriting.

For more information about compliance with mortgage lending rules, subscribe to the Banking and Finance Law Daily.

Tuesday, May 3, 2016

Financing property tax payments doesn’t create a debt under TILA

By Richard Roth

Homeowners who borrowed to pay their Texas property taxes were not entitled to disclosures required by the Truth in Lending Act and Reg Z.—Truth in Lending (12 CFR Part 1026) because the tax payment financing method prescribed by state law did not create a debt, the U.S. Court of Appeals for the Fifth Circuit has decided. Taxes are not debts under TILA and Reg. Z, the court said, and the method of financing tax payments transferred the tax lien from the government to the lender without creating a new obligation (Billings v. Propel Financial Services, L.L.C.).

In Texas, property taxes impose a lien on the property until they are paid. A property owner can authorize a lender to pay delinquent property taxes on his behalf, in which case the lien is transferred from the government to the lender. The property owner signs a promissory note, and any repayment contracts must be recorded in the county deed records. If the note is not paid, the lender can foreclose on the tax lien.

In the four cases consolidated before the Fifth Circuit, homeowners claimed that this arrangement called for TILA and Reg. Z disclosures.

No debt created. TILA and Reg. Z apply to consumer credit and define “credit” as the right to defer payment on a debt. However, neither the law nor the regulation defines “debt”; instead, they defer to the definition provided by the relevant state law. The question, then, was whether the tax payment-financing arrangement created a debt under Texas law.

Reg. Z says that taxes and tax liens do not constitute debts, the court said. The Texas tax payment-financing arrangement does not result in the tax lien being extinguished and replaced by a debt to the lender, the court said. Rather, the lien is transferred to the lender. This means the tax lien is preserved, and the only change is the person who can assert that lien.

No new debt was created, the court reasoned, so TILA and Reg. Z did not apply.

For more information about Truth in Lending and Reg. Z, subscribe to the Banking and Finance Law Daily.

A game plan for addressing student loan delinquencies: Payback Playbooks

By Lisa M. Goolik, J.D.

The Consumer Financial Protection Bureau is soliciting feedback on three "Payback Playbooks" that are intended to inform student loan borrowers of their repayment options. The bureau will use the feedback when considering potential options to improve written communications made to student loan borrowers by student loan servicers, and may be used to inform the development of certain disclosures required of the Department of Education. Comments are due by June 12, 2016.

Growing debt and delinquencies. The bureau estimates that approximately 42 million Americans owe student loan debt, and a quarter of those borrowers are delinquent or in default. By the end of the first quarter of 2016, outstanding federal student loan debt rose to more than $1.2 trillion.

To address the issue, the bureau, along with the Department of Education and the Treasury Department, developed a vision for market-wide reform, including an emphasis on the importance of accurate and actionable information for borrowers seeking to make decisions about student loan repayment.

In early 2016, the bureau engaged in a series of structured interviews with individual student loan borrowers in order to better understand the barriers student loan borrowers face when repaying their loans, and to identify opportunities for improving borrower communications about repayment options.

The agencies learned that inconsistent and incomplete information from servicers can be a direct impediment to successful repayment. Borrowers noted that current written communications often do not provide the information necessary to make informed decisions about various repayment options.

Student loan servicers complained that the expansion of income-driven repayment plans and other alternative options creates challenges for servicers seeking to counsel borrowers about how to navigate loan repayment. The bureau also noted that a trade association representing the student loan servicing industry observed that the breadth of options available to consumers is “so confusing as to be counter-productive."

'Payback Playbooks.' The interviews led to the development of a series of potential borrower "Payback Playbooks," which are intended to inform borrowers of their repayment options. The bureau is seeking comments discussing how the three proposed playbooks— Payback Playbooks A, B, and C—could affect borrowers when evaluating available alternative repayment plans and facilitate enrollment in alternative repayment plans, when appropriate.

Feedback needed. The bureau is seeking general feedback on the playbooks, as well as responses to specific questions related to the draft playbooks and the general communication of information related to student loans.

Comments, identified by Docket No. CFPB- CFPB-2016-0018, may be sent to Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1700 G Street, NW, Washington, D.C. 20552, or electronically through www.regulations.gov.

For more information about the CFPB's student loan initiative subscribe to the Banking and Finance Law Daily.