Tuesday, June 20, 2017

CFPB report helps consumers plan for retirement

By Thomas G. Wolfe, J.D.
As part of its stated mission to “empower consumers to take more control over their financial lives,” the Consumer Financial Protection Bureau has issued a report, titled “Consumer insights on managing funds at the time of retirement.” As the June 2017 report explains, the CFPB commissioned research to better understand solutions to some of the challenges that consumers face in planning for their retirement and in spending their funds during those retirement years. In reporting the results of its research, the CFPB aims to “help consumers more effectively plan for retirement and manage personal retirement accounts.”
In her blog post about the research study, the CFPB’s Irene Skricki notes that the bureau recognizes that when people approach retirement age, “they have to make many difficult, often irreversible choices.” Accordingly, the CFPB “tested ways to help people better visualize the results of their retirement choices and plan ahead for significant decisions.”
Report highlights. According to the CFPB’s report:
  • 40 percent of “late baby boomers” are approaching retirement with limited or no savings and “are projected to face a savings shortfall;”
  • more than 50 percent of consumers have indicated that they “worry about running out of money” in retirement;
  • about 62 percent of workers between the ages of 55 and 64 have accumulated, during the course of their working lives, less than one year’s worth of income in retirement savings;
  • when making decisions about retirement at or before age 55, consumers generally reported an interest in “an advance planning tool;” and
  • when making decisions about retirement after age 55, consumers generally reported a preference for receiving information about retirement accounts, including “simplified forms” for managing the accounts.

In addition to the research results, the CFPB’s report promotes “optimal choices” for consumers through two approaches: simplification and pre-commitment. The report encourages consumers to overcome “common biases and challenges in the decision context.” Further, the CFPB indicates that its research findings “can be used by a wide variety of participants in retirement financial decisions, services, and products, including employers, retirement plan administrators, financial educators, and others who help consumers with retirement choices.”
For more information about reports issued by the Consumer Financial Protection Bureau, subscribe to the Banking and Finance Law Daily.

Friday, June 16, 2017

Two flood insurance bills pass Financial Services Committee

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

The House Financial Services Committee passed two bills to reform and reauthorize the National Flood Insurance Program (NFIP), which is set to expire on Sept. 30, 2017—the National Flood Insurance Program Policyholder Protection Act of 2017 (H.R. 2868) and the 21st Century Flood Reform Act of 2017 (H.R. 2874). The Committee will reconvene on June 21, 2017, to consider an additional four measures to reauthorize the NFIP.

H.R. 2868, sponsored by Rep. Lee Zeldin (R-NY), would protect NFIP policyholders from unreasonable premium rates and require the Federal Emergency Management Agency to conduct a study to analyze the unique characteristics of flood insurance coverage of urban properties. The bill passed the Committee by a vote of 53-0.

H.R. 2874, sponsored by Rep. Sean Duffy (R-Wis), would improve the financial stability of the NFIP, enhance the development of more accurate estimates of flood risk through new technology and better maps, increase the role of private markets in the management of flood insurance risks, and provide for alternative methods to insure against flood peril. The bill passed the Committee by a vote of 30-26.

Hensarling opposes program bailout. In the Committee press release, Chairman Jeb Hensarling (R-Texas) said, “We cannot continue to call on the American taxpayer to bailout a program that is currently drowning in $25 billion of red ink and suffers a $1.4 billion annual actuarial deficit. These bills put the National Flood Insurance Program on a path toward actuarial soundness where all will be protected, no one will be denied a policy, all will benefit from competition, the NFIP will be sustainable, and the national debt clock will spin a little less rapidly.” In his opening statement, Hensarling said he opposed a permanent taxpayer subsidy. “[P]eople should gradually—gradually—be expected to pay actuarial rates.”

Waters promises amendments.
In her opening statement at the Committee markup, Rep. Maxine Waters (D-Calif) expressed concern that “in many respects the package of bills would actually make matters worse by restricting coverage, increasing costs, and opening the door to cherry-picking by the private sector.” She added that “Democrats will offer amendments to provide the reauthorization language needed to keep the NFIP’s doors open and keep the real estate market from spiraling out of control.”

Committee members Reps. Carolyn B. Maloney (D-NY) and Lee Zeldin (R-NY) praised passage of the NFIP Policyholder Protection Act, stating that it would result in a credit to homeowners with NFIP policies who invest in mitigation activities, such as elevating their homes, adding porous foundations, or moving boilers to a higher floor, which would result in lower premiums and help reduce the cost to homeowners.

ABA’s grave concerns. In its memorandum to the Committee, the American Bankers Association expressed “grave concerns” over a section of the 21st Century Flood Reform Act of 2017 that would “provide for the elimination of coverage for properties with excessive lifetime claims, defined in the bill as claims exceeding twice the replacement cost of the property.” The ABA stated that “Cutting off such properties from NFIP coverage will likely lead to significant hardship for homeowners, lenders and communities.” The association also opposes the bill’s increase in penalties for lender non-compliance from $2,000 to $5,000.

FSR applauds package. The Financial Services Roundtable applauded the Committee’s legislative package of “reforms to improve the consumer experience and increase private sector involvement.” The FSR stated that many reforms will better enable the Write-Your-Own insurance program to deliver insurance coverage to consumers.

For more information about flood insurance reforms, subscribe to the Banking and Finance Law Daily.

Thursday, June 15, 2017

CFPB turns attention to credit card promotions, debt collection

By Andrew A. Turner, J.D.
The Consumer Financial Protection Bureau has sent a number of letters to retail credit card companies, encouraging them to consider using more transparent promotions. Many of these retailers offer credit cards with no interest over a set period if the promotional balance is paid in full by the end of the term. The letters outline bureau concerns that these promotions may surprise consumers with high, retroactive interest charges after the promotional period ends. Therefore, the CFPB has suggested that companies consider using a zero-percent-interest promotion that is more transparent and carries less risk for consumers.
“With its back-end pricing, deferred interest can make the potential costs to consumers more confusing and less transparent,” said CFPB Director Richard Cordray. “We encourage companies to consider more straightforward credit promotions that are less risky for consumers.” Turning his attention to another topic, Cordray affirmed the bureau's intention to move forward on debt collection regulation.
Retail cards. These credits are typically offered through retail stores to allow consumers to finance large purchases such as appliances, furniture, and medical or dental services, and pay the cost over time. Under a deferred-interest plan, the consumer pays no interest if the purchase amount is paid off within a set period, typically six to 12 months. If any promotional balance remains when the promotional period ends, consumers are charged accrued interest, usually 25 percent, on the promotional balance from the time of purchase.
The bureau has urged these retailers to use a more straightforward zero-percent-interest promotion where consumers are charged interest only on the balance that remains. 
Consumer tips. The CFPB has published consumer tips to help individuals understand the different credit card interest-rate promotions. According to the bureau, consumers should be aware of factors that determine the cost of borrowing, which include:
  • length of the promotional period;
  • interest rate after the promotional period; and
  • payment each month needed to pay off the purchase during the promotional period
Debt collection rules. The CFPB intends to adopt rules to regulate debt collections by both debt collectors and first-party creditors, according to CFPB Director Richard Cordray. In remarks prepared for a Consumer Advisory Board meeting, Cordray said that the bureau has changed its plan to adopt separate rules for debt collectors and creditors and now intends to write what he termed a right consumer, right amount” rule that will apply across the debt collection market.
According to Cordray, the debt collection industry and consumer advocates agree that updated FDCPA interpretations are needed due to changes in technology and the growth of debt buying since the Act was passed in 1977. The bureau outlined its initial plans for debt collection rules last July, addressing debt information integrity, disclosures, limits on communications, and debt disputes. Initially, the intent was to adopt a rule that would have applied only to companies who were covered by the Fair Debt Collection Practices Act, with creditors collecting their own debts to be addressed separately.
However, the bureau’s analysis of the comments it has received on the July 2016 proposal has revealed that separating the debt information integrity issues into different rules for debt collectors and creditors was problematic, the director said. Creditors create the data and then pass it on to debt collectors; however, all companies that collect debts need to have complete and accurate data. That will be better addressed by a single regulation, he said.
For more information about actions taken and planned by the CFPB, subscribe to the Banking and Finance Law Daily.

Tuesday, June 13, 2017

Debt buyer is not debt collector under federal consumer debt collection law

By Richard Roth

Companies that buy debts originated by others and then collect the debts for themselves are not debt collectors under the Fair Debt Collection Practices Act and therefore are not required to comply with the FDCPA’s consumer protection provisions, according to the Supreme Court. The unanimous opinion in Henson v. Santander Consumer USA Inc.—the first opinion attributed to Justice Gorsuch—affirmed a decision by the U.S. Court of Appeals for the Fourth Circuit (Henson v. Santander Consumer USA Inc.).

According to the Supreme Court opinion, Santander Consumer USA bought defaulted auto loans from CitiFinancial Auto, the original lender. Santander then attempted to collect the loans without complying with the FDCPA’s requirements. The question was whether buying the debts made Santander a company that “regularly collects or attempts to collect . . . debts owed or due” someone else, i.e. whether it made Santander a debt collector (15 U.S.C. §1692a(6)).

The text of the FDCPA makes clear that “All that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another’,” the opinion said. How the debt owner came to own the debt, whether by origination or by purchase, is irrelevant.

Parsing the text. The consumers attempted to rely on the FDCPA’s use of “owed . . . another,” which they argued covered any debts that previously were owed to someone other than the current owner. If Congress intended to exclude debt buyers from the definition of debt collectors, the act would have referred to debts “owing . . . another.”

The Court rejected that argument as contrary to both proper grammar and common understanding. After all, the FDCPA actually refers to debts “owed or due . . . another,” the opinion pointed out. Accepting the consumers’ argument would require that to mean “debts that were owed or are due another.” “[S]upposing such a surreptitious subphrasal shift in time seems to us a bit much,” Gorsuch wrote.

The words used elsewhere in the FDCPA did not support the consumers’ position, the opinion added. Congress was able to distinguish between debt originators and debt buyers when it wanted to.

Significance of default. It is true that the FDCPA excludes from its debt collector definition those who buy debts that are not in default, the opinion conceded. However, that did not imply that anyone who bought a debt after default was a debt collector.

Assuming for the sake of argument that a company must be either a debt collector or a creditor, and not both, with respect to a specific debt, there was no reason that a debt buyer like Santander could not be a creditor, the opinion added.

Public policy. The court believed that the consumers preferred to rely on their public policy argument—the FDCPA was intended to protect consumers from improper tactics by independent debt collectors, and furthering that purpose required applying the act to debt buyers. However, the consumers also conceded that debt buying arose after the FDCPA was enacted, the opinion observed, which meant that Congress never had the opportunity to consider whether the practice should be covered.

“[I]t is never our job to rewrite a constitutionally valid statutory text under the banner of speculation about what Congress might have done had it faced a question that, on everyone’s account, it never faced,” Gorsuch wrote. Regardless of the public policy argument urged by the consumers, it had to be presumed that the FDCPA text meant what it said.

Excluded questions. Gorsuch’s opinion also noted that two related issues were not being considered. The Court was not addressing whether Santander should be considered a debt collector because, regardless of the ownership of these debts, it does regularly collect debts owned by other persons. Neither was it addressing whether the company was a debt collector because it was engaged in a business that had debt collection as its principal purpose.

For more information about fair debt collection, subscribe to the Banking and Finance Law Daily.

Thursday, June 8, 2017

CFPB debt-relief suit survives challenge under practice-of-law exclusion

By Katalina M. Bianco, J.D.
Law firms and attorneys engaged in providing consumer debt relief services were unable to convince a U.S. district judge that the Consumer Financial Protection Act practice-of-law exclusion required the dismissal of the Consumer Financial Protection Bureau’s enforcement suit. The bureau’s suit claiming violations of the Federal Trade Commission’s Telemarketing Sales Rule also survived several other arguments for dismissal raised by the attorneys (CFPB v. Howard, May 26, 2017, Staton, J.).
According to the CFPB, the attorneys and their law firms continued the illegal debt-relief business of Morgan Drexen after the bureau essentially forced the company into bankruptcy. The attorneys’ financial arrangements with clients included what was termed an "upfront engagement fee" of between $1,000 and $3,250, as well as an administrative fee. While the CFPB claims these fees constituted advance fees that are prohibited by the Telemarketing Sales Rule provisions on debt relief services, the attorneys claim they were fees for bankruptcy case legal services that actually were performed.
Legal provisions. The TSR, adopted by the FTC under the Telemarketing and Consumer Fraud and Abuse Prevention Act, prohibits debt relief service providers from seeking or accepting any payments until at least one of the consumer’s debts has been renegotiated and the consumer has made at least one payment. Any fee charged must be proportionate to either the consumer’s total debt or the amount the debt renegotiation saved the consumer (16 CFR §310.4(a)).
Debt relief services fall under the CFPB’s general enforcement authority under the CFPA. The Act says that the bureau has no enforcement authority over a licensed attorney’s activities that are part of the practice of law (15 U.S.C. §5517(e)). However, the CFPA adds a limitation on that exclusion—the exclusion does not apply to the activities of an attorney who is "otherwise subject to any of the enumerated consumer laws" that the bureau is to enforce.
The Telemarketing and Consumer Fraud and Abuse Prevention Act is one of those enumerated consumer laws when consumer financial products or services are involved, the judge pointed out. Moreover, the FTC considered including an exclusion in the TSR for attorneys but declined to do so.
Practice of law exclusion. The attorneys claimed that the limitation on the exclusion simply meant that an attorney engaged in activities that are not part of the practice of law is subject to the CFPB’s authority. The judge disagreed, saying that this interpretation would make the limitation unnecessary. The CFPA denies the bureau the authority to regulate the practice of law under its general enforcement authority but allows the bureau to act against legal practices that are subject to other consumer financial protection statutes, she said.
The judge also disagreed with the attorneys’ assertion that the upfront fees were permitted by the Bankruptcy Code and thus not banned by the TSR. The bureau claimed that the bankruptcy services contracts had been created to evade the TSR upfront-fee ban, and that was enough to prevent the dismissal of the suit.
Other arguments. Other arguments for dismissal that were raised by the attorneys were disposed of quickly:
  • The CFPB could seek an injunction even though the attorneys had ceased the challenged conduct because the attorneys could easily resume it.
  • The bureau’s complaint was not subject to the Federal Rules of Civil Procedure heightened pleading standards for fraud complaints because the bureau’s claim that the attorneys had facilitated Morgan Drexen’s conduct "does not sound in fraud." The attorneys could have facilitated Morgan Drexen’s fraud without themselves making any fraudulent statements.
  • The bureau’s choice to proceed separately and first against Morgan Drexen did not, under theories of estoppel or issue preclusion, prevent its subsequent enforcement action against the attorneys.
For more information about the CFPB and practice of law exclusion, subscribe to the Banking and Finance Law Daily.

Tuesday, June 6, 2017

Florida, Nevada senators urge Administration to protect seniors under reverse mortgage program

By Thomas G. Wolfe, J.D.

Expressing their concern that President Donald Trump’s fiscal-year 2018 budget would “remove protections for widows and widowers facing eviction under the reverse mortgage program,” Senators Catherine Cortez Masto (D-Nev) and Marco Rubio (R-Fla) have jointly submitted a letter to the Secretary of the Department of Housing and Urban Development and the Director of the Office of Management and Budget. The May 31, 2017, letter asks the HUD Secretary and OMB Director to provide a written response “outlining the rationale underlying this proposed change.”

Both legislators are members of the Senate Special Committee on Aging. While seeking to address a nationwide concern, the letter observes that Rubio’s home state of Florida has the “largest percentage of seniors in the country and countless retirement communities,” and Cortez Masto’s home state of Nevada has a “booming elderly population” with unique housing challenges.

Concerns. The two senators note that while reverse mortgages “can provide an important source of financial security,” a significant concern arises “when a homeowner dies, and is survived by a spouse that was not an original borrower on the reverse mortgage.” Under previous Home Equity Conversion Mortgage (HECM) rules, such a surviving spouse often faced having to pay the loan balance in full or face eviction at a time when he or she was already grieving the loss of a spouse.

While Rubio and Cortez Masto observe that, in recent years, HUD has taken action to “reform the HECM program, protect consumers, and shield taxpayers from the risk posed to the FHA’s insurance fund,” the senators discern a different trend under the Trump Administration. “It appears that the President’s FY 2018 budget seeks to make a change to the reverse mortgage program,” they state. In particular, the senators point out that a “portion of the HUD budget seeks to amend language in the National Housing Act pertaining to safeguards which protect widows and widowers from displacement.”

Request. Accordingly, Cortez Masto and Rubio request additional information about the President’s budget impacting the ability of seniors to stay in their homes after the death of a spouse. Moreover, the letter asks HUD and the OMB to provide the rationale for the apparent policy change.

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

Thursday, June 1, 2017

CFPB begins assessment of mortgage rules

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau is conducting an assessment of the Ability-to-Repay/Qualified Mortgage rule (ATR/QM rule) and mortgage servicing rule with a request for recommendations and information. The Dodd-Frank Act requires the CFPB to review some of its rules within five years after they take effect to assess effectiveness. The rules being assessed were adopted in Jan. 2013 and took effect in Jan. 2014.
The CFPB is asking for comments on the assessment plan for the ATR/QM rule under the Truth in Lending Act (Regulation Z) by July 31, 2017. The comment date on the assessment plan for the mortgage servicing rule under the Real Estate Settlement Procedures Act (Regulation X) expires on July 10, 2017. The CFPB intends to issue the assessment reports by January 2019. 
In the Dodd-Frank Act, Congress established new standards for mortgage lending that, among other things, required lenders to assess consumers’ ability to repay. The Dodd-Frank Act also provided for a class of “qualified mortgage” loans that cannot have certain risky product features and are presumed to comply with the ATR requirement. The ATR-QM rules require lenders to consider and verify a number of different underwriting factors, such as a mortgage applicant’s assets or income, debt load, and credit history, and make a reasonable determination that a borrower will be able to pay back the loan.
The RESPA servicing rule requires mortgage servicers to provide disclosures to borrowers related to force-placed insurance, respond to errors asserted by borrowers in a timely manner, and follow procedures related to loss mitigation applications and communications with borrowers. For example, servicers generally must acknowledge written notices of error within five days and investigate and respond to the borrower in writing within 30 days.
Specific research activities. The CFPB will examine the impact of major provisions of the ATR/QM rule on a set of consumer outcomes, including: mortgage cost; origination volumes; approval rates; and subsequent loan performance. In addition to these measurable outcomes, the bureau will also consider changes in creditors’ underwriting policies and procedures which might affect consumer outcomes.
The CFPB plans to conduct or has begun conducting several research activities in connection with the assessment of the ATR/QM rule:
  • quantitative research on loan originations, rejection rates, and loan performance, using available mortgage data;
  • analysis of cost of credit before and after the rule, as well as recent trends;
  • interviews with creditors regarding their activities undertaken to comply with the requirements of the ATR/QM Rule; and
  • consultations with government regulatory agencies, government-sponsored enterprises, and private market participants.
To assess the effectiveness of the 2013 RESPA servicing rule, the CFPB also plans to analyze a variety of metrics and data to the extent feasible. Feasibility will depend on the availability of data and the cost to obtain any new data.
Issues for comment. In particular, the CFPB invites the public, to submit the following:
  • comments on the feasibility and effectiveness of the plans, as well as the outcomes, metrics, baselines, and analytical methods for assessing the rules:
  • data and other factual information that may be useful;
  • recommendations to improve the assessment plan, as well as data, other factual information, and sources of data that would be useful;
  • data and other factual information about the benefits and costs of the rules for consumers, creditors, and other stakeholders in the mortgage industry; and about the impacts of the rules on transparency, efficiency, access, and innovation in the mortgage market;
  • data and other factual information about the rules' effectiveness in meeting Dodd-Frank Act objectives; and
  • recommendations for modifying, expanding, or eliminating the rules.
For more information about CFPB mortgage lending requirements, subscribe to the Banking and Finance Law Daily.

Wednesday, May 31, 2017

Target to pay states $18.5M to settle data breach case

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

Target Corporation has reached an $18.5 million settlement with 47 states and the District of Columbia to resolve the states' investigation into the retail company's 2013 data breach, which affected more than 41 million customer payment card accounts and exposed contact information for more than 60 million customers. Target’s settlement payout represents the highest valuation of a multi-state data breach investigation to date.
The states' investigation found that in November 2013, cyber attackers accessed Target's gateway server through credentials stolen from a third-party vendor. The credentials were then used to exploit weaknesses in Target's system, which allowed the attackers to access a customer service database and to install malware on the system that was used to capture consumer data, including full names, telephone numbers, email and mailing addresses, payment card numbers, expiration dates, CVV1 codes, and encrypted debit PINs.
Under the settlement document, Target is required to:
  • develop, implement, and maintain a comprehensive information security program;
  • employ an executive or officer who is responsible for executing the plan;
  • hire an independent, qualified third-party to conduct a comprehensive security assessment:
  • maintain and support software on its network for data security purposes;
  • maintain appropriate encryption policies, particularly as they pertain to cardholder and personal information data;
  • segment its cardholder data environment from the rest of its computer network; and
  • undertake steps to control access to its network, including implementing password rotation policies and two-factor authentication.
California Attorney General Xavier Becerra said that California will be receiving more than $1.4 million from the settlement, the largest share of any state. California’s complaint alleged that Target violated California Civil Code section 1798.81.5 by failing to implement and maintain reasonable security procedures and practices appropriate to protect the personal information of California residents that Target owned.
Illinois will receive more than $1.2 million from the settlement, according to Attorney General Lisa Madigan. "Today’s settlement with Target establishes industry standards for companies that process payment cards and maintain secure information about their customers," Madigan said.
New York Attorney General A.G. Schneiderman said the settlement will bring "over $635,000 into the state, in addition to the free credit monitoring services for those impacted by the data breach." He added that "New Yorkers need to know that when they shop, their data will be protected."
New Jersey will receive $680,411 from Target, Attorney General Christopher S. Porrino announced. "Major retailers—including Target—routinely ask their customers to entrust them with personal information in service of payment card contracts, mailing lists, e-coupons and other promotions," Porrino said. "But, if retailers are going to solicit such personal information and retain it in a data base, they have a duty to be vigilant about securing that data base."
Massachusetts will receive $625,000, Attorney General Maura Healey announced. "Consumers should be able to shop without fear that their credit card information will be stolen," said Healey. "This settlement makes clear that we expect retailers to take meaningful steps to protect consumers’ credit and debit card information from theft."
Pennsylvania Attorney General Josh Shapiro said 1.6 million consumer transactions affected by the Target data breach took place in Pennsylvania. His state’s share of the settlement is $469,000. "The long-term value of this settlement is the reform effort Target must undertake to protect the personal financial data of Pennsylvania consumers and consumers across the country," said Shapiro.
Michigan will receive nearly $400,000 from the settlement, according to Attorney General Bill Schuette. "Keeping customers’ personal information safe must be a top priority for all retail companies," Schuette said. "Target’s data breach broke some of the trust they had built with consumers and hopefully their willingness to change their security practices will restore faith in the company."
Georgia Attorney General Chris Carr said, "It is important to remember that in a world where cybersecurity threats are evolving, so too must our efforts to combat them." His announcement noted that Georgia will receive $394,592.86 from the settlement.

For more information about data breaches and cybersecurity, subscribe to the Banking and Finance Law Daily.

Tuesday, May 30, 2017

CFPB is constitutional, company must comply with bureau’s information demand, U.S. district judge says

By Richard Roth

A claim by an income stream marketing company that the Consumer Financial Protection Bureau’s structure is unconstitutional, raised by the company as part of its challenge to a civil investigative demand, has been rejected by a U.S. district judge. The Constitution’s separation of powers requirements are not offended by organizing the CFPB with a single director who can be discharged only for cause, the judge decided. She also determined that there were no other impediments to enforcing the CID and ordered the company, Future Income Payments, LLC, to turn over the described information within 15 days (CFPB v. Future Income Payments, LLC, May 17, 2017, Staton, J.).

The decision marks FIP’s second major defeat this year. In March, the U.S. Court of Appeals for the District of Columbia Circuit denied the company’s request for an injunction halting the CFPB’s investigation during the appeal of an order that the bureau was constitutional and was acting within its authority. The appellate court also decided that the company could not sue the bureau anonymously (John Doe Co. v. CFPB). That suit remains pending in the U.S. District Court for the District of Columbia.

Separation of powers. FIP, and others who challenge the CFPB’s authority, have asserted that the Dodd-Frank Act’s discharge-for-cause provision violates the Constitution because it impermissibly restricts the President’s power to remove executive officials. Supreme Court precedents make clear that the “guiding question” is whether the provision interferes with the President’s executive power and his obligation to “take care that the laws be faithfully executed,” according to the judge.

The most important precedent is Humphrey’s Executor v. U.S., 295 U.S. 602 (1935), the judge said. This case upheld the for-cause restriction that protected Federal Trade Commission members, and the CFPB now “executes essentially the same responsibilities that the FTC did” in 1935. The judge also noted that the President has more power to affect the CFPB because (1) cause would need to be found to remove only one CFPB director, while there are five FTC members, and (2) FTC members serve staggered seven-year terms as opposed to the bureau director’s five-year term.

The judge observed that the Social Security Administration, Federal Housing Finance Agency, and Office of Special Counsel clearly have the same single-head, for-cause organization as the CFPB. The Comptroller of the Currency probably does as well, she noted.

Rejection of PHH Corp. FIP based much of its argument on the D.C. Circuit majority opinion in PHH Corp. v. CFPB, which would have reformed the bureau by making the director subject to discharge at the President’s discretion. However, that decision was vacated when the appellate court agreed to rehear the appeal en banc, the judge pointed out.

More importantly, the judge made her disagreement with the PHH Corp. decision clear. The panel majority by implication improperly rejected the Supreme Court’s Humphrey’s Executor reasoning, she charged. The two reasons relied on by the appellate court panel for its decision—that there was no historical precedent for the CFPB structure and that a multimember commission would better prevent abuses of power and protect individual liberty—were not persuasive.

CID enforcement. The CID should be enforced even if the for-cause provision was unconstitutional, the judge continued. Enforcement could be denied for constitutional reasons only if the executive branch of government was the sole branch with the authority to demand information from businesses or investigate them. This clearly was not the case.

For more information about the Consumer Financial Protection Bureau, subscribe to the Banking and Finance Law Daily.

Thursday, May 25, 2017

Does CFPB encroach on presidential power? DC Circuit hears arguments

Hearing arguments by PHH Corporation that the Consumer Financial Protection Bureau’s structure as an independent agency with a single director violates the Constitution’s separation of powers requirements, judges of the U.S. Court of Appeals for the District of Columbia Circuit seemed to want to shift the focus. During oral arguments on PHH Corporation v. CFPB, several judges made clear a preference to look not at what authority the CFPB director had but rather at whether the bureau’s structure diminished the President’s power. Whether the court could side with the company while adhering to Supreme Court precedent was an issue as well.

In October 2016, the majority of a three-judge panel decided that the bureau’s structure was unconstitutional and that the appropriate remedy was to strike the provision that the director could be discharged only for cause. This would effectively convert the CFPB from an independent agency into an executive branch agency, which could operate with a single director rather than under a commission (Banking and Finance Law Daily, Oct. 11, 2016). However, this decision was vacated when the full court decided to rehear the case.

Binding precedents. During the arguments, there was agreement that the court is bound by three prior Supreme Court decisions:
  • Humphrey’s Executor v. U.S., 295 U.S. 602 (1935), which upheld the statutory provision allowing the President to discharge Federal Trade Commissioners only for cause;
  • Morrison v. Olson, 487 U.S. 654 (1988), which held that the independent counsel statute did not violate separation of powers principles, even though the officer could not be directly fired by the President; and
  • Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010), which said that the two layers of "for cause" protection granted to Public Company Accounting Oversight Board members violated separation of powers principles.
There was less agreement over whether those precedents applied.

PHH Corp. arguments. On behalf of PHH Corp., Theodore B. Olson claimed the CFPB’s power infringed on the President’s power to ensure that the laws are faithfully executed. However, several of the judges challenged that assertion, questioning how the CFPB’s authority infringed on presidential power more than that of other agencies. It is the President’s power that is at issue, they pointed out.

As to the CFPB, most banking regulatory agencies are not subject to the appropriations process, and the requirement that the CFPB director appear before Congress periodically would encourage agency accountability. The director’s five-year term means that most Presidents will have the opportunity to appoint a replacement, and the power to discharge the director for cause always is available. One judge pointed out that a President has to appoint FTC members who are not from his party, a restriction that does not apply to CFPB director appointments.

Comparing the CFPB to the FTC, one member of the en banc court noted that most presidents would have the ability to choose the single CFPB director, while few would be able to appoint a majority of the FTC. No President is likely to be able to appoint a majority of the powerful Federal Reserve Board.

Another judge pointed out that the independent counsel statute considered in Morrison clearly infringed on the President’s power, yet it was upheld.

According to Olson, this case is meaningfully different from Humphrey’s Executor because of the CFPB’s extensive powers and the effect of the five-year term of office. While that case and Morrison permit some encroachment on the separation of powers principles, they also drew a line that should not be crossed. The sum of the CFPB’s authority takes it across that line, according to Olson.

CFPB arguments. The three controlling Supreme Court decisions make clear that the President’s power to "take care" that the laws are executed faithfully cannot be seen as subject to no limitation, said Lawrence DeMille-Wagman, arguing for the bureau. Rather, they say that there must be sufficient accountability to the President. Morrison shows that the discharge-for-cause power is enough to provide that accountability.

DeMille-Wagman responded directly to some points Olson raised. First, to ease any concerns over a possible unlimited holdover tenure if no successor could be confirmed, he said the CFPB agrees that after the director’s five-year term ends the official would be subject to discharge at the President’s discretion.

He also attempted to address arguments that the accumulation of the bureau’s powers rendered it unconstitutional. Taken individually, none of the CFPB’s various powers infringe on the President’s power to see that the laws are enforced, he asserted, so there could be no impermissible infringement if they were combined—an argument he described as zero plus zero equals zero.

The CFPB attempted to emphasize the similarities between itself and the FTC, which was upheld in Humphrey’s Executor. If the Supreme Court said the FTC did not violate separation of powers principles, the CFPB should be in the same situation.

DeMille-Wagman had to fend off efforts by a number of judges to induce him to address hypothetical questions, such as a single director with a 20-year term or whether the CFPB truly is the most powerful federal agency in history. However, one judge made a potentially telling point. If the CFPB is constitutional, could Congress create five or six independent agencies that each would handle one executive branch function, resulting in a "nominal presidency"?

PHH rebuttal. Responding to the bureau’s arguments, Olson offered a rather emotional warning about the threat of placing so much power in the hands of an agency headed by a single director who was protected from discharge. He argued that if the CFPB structure is deemed to be permissible, executive agencies could "swallow up" the President’s powers. "There is no stopping point," he asserted.

Olson also made clear in the end that the real concern is the totality of the power the CFPB holds. This, not the single-director structure, is the issue for PHH Corp. Presumably this argument was presented to steer the court toward invalidating the bureau completely instead of only requiring a structural change.

Chaos theory? The Justice Department, which agrees with the earlier panel’s decision and remedy, based its presentation on a single argument—the difference between a single director and a multi-member commission is what matters. Humphrey’s Executor does not provide the rule for the CFPB because the FTC is a five-member, deliberative commission, according to Hashim M. Mooppan, who argued for the Department.Humphrey’s Executor allowed an encroachment on the President’s powers due to the quasi-legislative, quasi-judicial, deliberative aspects of the FTC. These aspects are not characteristic of the CFPB, Mooppan argued. If the discharge-for-cause protection could be applied in the absence of those considerations, there would be no difference in principle between the CFPB director and a cabinet officer. Congress could provide by law that even the Treasury Secretary could be discharged only for cause.

Mooppan conceded that other agency directors, such as the Social Security Administrator, might be in a situation similar to that of the CFPB director. However, he resisted the idea that this might affect the current case. Whether each agency’s structure violated separation of powers principles should be considered on its own merits.

He also made clear that the Justice Department’s concern is not related to the degree to which the CFPB structure encroaches on presidential powers. Even if the CFPB is no more problematic than the FTC, the for-cause restriction must be removed because the factors on which Humphrey’s Executor relied are not present.

The case is No. 15-1177.
For more information about PHH Corporation v. CFPB, subscribe to the Banking and Finance Law Daily.

Tuesday, May 23, 2017

Claim against collector rejected because plaintiff not a ‘consumer’ under state law

By Thomas G. Wolfe, J.D.

An individual who received numerous phone calls from a debt collection company in its effort to locate another person who was delinquent on his account was not a ‘consumer’ under the West Virginia Consumer Credit and Protection Act (WVCCPA), the West Virginia Supreme Court of Appeals recently determined. In Young v. EOSSCA, West Virginia’s high court held that “by limiting the right to recover for a violation of the Act to those persons defined as ‘consumers,’ the Legislature has expressly prohibited any persons falling outside the definition of a ‘consumer’ from seeking damages and statutory penalties pursuant to the provisions of [the WVCCPA].” Concluding that the plaintiff lacked standing to pursue her WVCCPA claim, the court upheld a summary judgment in favor of the debt collector.

As relayed by the court’s opinion, although the plaintiff, Edith Young, received over 70 phone calls from a debt collection company, EOSCCA, she almost never picked up the phone to speak with the caller. Instead, Young “just registered the caller’s identifying information that appeared on her phone.” Although Young stated in her deposition that “Bank Americard” appeared on her caller ID for these calls, the collection company did not have any affiliation with Bank Americard. Still, the collection company’s records corroborated Young’s receipt of these numerous calls to her home.

There was some evidence showing that, on at least one occasion, the collection company called Young asking for “Jim or James,” and Young responded to the effect that “he’s not home or he’s not available or he’s not there.” In any event, it was well established that Young herself did not have any specific debt pertaining to the company’s calls. Rather, the calls were made by the company as “an attempt to locate an AT&T customer who was delinquent on his account.”

Complaint. In her complaint, Young alleged that the collection company violated the WVCCPA by “engaging in unreasonable or oppressive or abusive conduct in an attempt to collect a debt.” She further contended that the company attempted to communicate with her after she indicated she was represented by counsel. Young also brought state common-law claims against the company.

Appeal. After the state trial court granted summary judgment to the collection company and dismissed her complaint, Young appealed to the West Virginia Supreme Court of Appeals. Young maintained that, even though the collector was not seeking to contact her about a debt she personally owed, she should be permitted to pursue her WVCCPA claim because: (i) she qualified as a WVCCPA consumer in a “generic fashion” based on debts she owed to other creditors, or, alternatively; (ii) the WVCCPA covers abusive debt collection practices made in connection with a debt owed to a third party.

WVCCPA. The court noted that the WVCCPA provides a definition of a “consumer” under two provisions. Under the general definition section, a consumer refers to “a natural person who incurs debt pursuant to a consumer credit sale or a consumer loan, or debt or other obligations pursuant to a consumer lease.” Next, under a separate section pertaining to improper credit collection practices, the WVCCPA refers to a consumer as “any natural person obligated or allegedly obligated to pay any debt.”

Court’s analysis. Since Young had invoked the more specific provision in her complaint, the court viewed that statutory section as the more dominant of the two definitional provisions for purposes of its analysis.

Alleged debtor. In rejecting Young’s argument that she should be considered an “alleged debtor,” based on the repeated phone calls to her residence, the court stressed that the phone calls were not directed toward her as an alleged debtor. The WVCCPA allowed the collection company to lawfully contact her to “locate the actual debtor.” Moreover, Young later learned, at least from one answered call, that she was not the individual with whom the collection company was seeking to communicate. In the court’s view, Young was not able to show that she was “at least allegedly obligated” on the debt under state law.

Person v. consumer. Next, the court rejected Young’s contention that the WVCCPA provision governing prohibited debt collection practices against “any person” was rendered meaningless to non-consumers if statutory remedies were limited elsewhere to only “consumers.” The court maintained that the WVCCPA provision was not rendered meaningless because non-consumers could file a complaint with the West Virginia Attorney General’s Consumer Protection Division and could bring a private action against a debt collector under a negligence theory, for example. Also, the West Virginia Legislature was entitled to limit WVCCPA recovery in private actions to “consumers” as the class of people most likely to be harmed by violations, the court asserted.

Generic consumer. Young’s argument that she should be considered a generic consumer for purposes of the WVCCPA did not prevail as well. In underscoring the WVCCPA’s statutory definition of a “claim,” the court stated that Young “was neither obligated to AT&T on the debt at issue nor was she ever advised by its debt collector … that she was obligated on the subject debt.” No obligation or alleged obligation was present to satisfy the “claim” definition, the court concluded.

FDCPA contrasted. Although Young pointed to federal case law in support of her position, the court distinguished the coverage of the federal Fair Debt Collection Practices Act from the coverage of the WVCCPA. In particular, the court noted that the FDCPA broadly extends its rights of enforcement with respect to any person. In contrast, the WVCCPA “expressly limits its grant of civil enforcement suits” to a consumer.

For more information about debt-collection litigation, subscribe to the Banking and Finance Law Daily.

Thursday, May 18, 2017

Debt collection law not applied to stale debt bankruptcy claim

By Andrew A. Turner, J.D.

A debt collector’s filing of a time-barred proof of claim in a consumer bankruptcy proceeding is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the Fair Debt Collection Practices Act, according to the U.S. Supreme Court. Refusing to apply precedent from ordinary civil suits, the Court said that concerns of a consumer unwittingly repaying a time-barred debt have diminished force in a Chapter 13 bankruptcy (Midland Funding, LLC v. Johnson, May 15, 2017, Breyer, J.).

After the bankruptcy court dismissed the debt collector’s claim for credit-card debt because the six-year Alabama statute of limitations had passed, the consumer sought damages for a violation of the Fair Debt Collection Practices Act.

Bankruptcy Code “claim” definition. Under the Bankruptcy Code, the running of a limitations period is an affirmative defense to an unenforceable claim. This led the Court to reject the argument that the proof of claim fell outside of the Code’s definition of the term “claim.” Thus, the proof of claim was not “false, deceptive, or misleading.”

Differences between bankruptcy and debt collection. Turning to the “closer question” of whether the assertion of an obviously time-barred claim is “unfair” or “unconscionable,” the Court began by pointing out the differences between a bankruptcy proceeding and a civil action to collect a debt. A Chapter 13 bankruptcy is initiated by the consumer, a knowledgeable trustee has the responsibility for investigating claims, and procedural rules guide the claims evaluation process, making payment of a stale claim less likely. The consumer may even benefit from the disallowance of a stale claim resulting in removal of the debt from a credit report. The Court was also concerned that a change in approach would require courts to define the boundaries of a new exception to the normal Bankruptcy Code process.

The Court was troubled by the prospect of creating a new bankruptcy-related remedy involving administrative and procedural complexities, with the duty to investigate the staleness of a claim shifted to the creditor, which would disturb the “delicate balance” of protections and obligations provided by the Code. Lastly, contrary to the argument of the United States, the Court did not believe that Bankruptcy Rule 9011 resolved this issue. Under all of the circumstances, the assertion of a stale claim in bankruptcy did not constitute an unconscionable method of debt collection.

Dissenting opinion. Saying that professional debt collectors have built a business out of attempting to collect stale debt in bankruptcy proceedings, a dissenting opinion argued that the practice is “unfair” and “unconscionable.” The dissent viewed this as a “trap for the unwary,” based on the hope “that no one notices that the debt is too old to be enforced by the courts.”

Justice Breyer authored the majority opinion, in which Chief Justice Roberts and Justices Kennedy, Thomas, and Alito joined. Justice Sotomayor filed a dissenting opinion, in which Justices Ginsburg and Kagan joined. Justice Gorsuch did not participate.

For more information about debt collection issues, subscribe to the Banking and Finance Law Daily.

Wednesday, May 17, 2017

Global shadow banking continues to grow, Financial Stability Board reports

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

The Financial Stability Board’s narrow measure of shadow banking was $34 trillion in 2015, an increase of 3.2 percent from 2014, according to the Global Shadow Banking Monitoring Report 2016. The report presents data from 28 jurisdictions accounting for about 80 percent of global GDP.
The FSB report describes the "shadow banking system" as "credit intermediation involving entities and activities (fully or partially) outside the regular banking system" or non-bank credit intermediation in short. Properly conducted, this intermediation provides a valuable alternative to bank funding that supports real economic activity, the report stated. However, it continued, experience from the financial crisis demonstrates the capacity for some non-bank entities and transactions to operate on a large scale in ways that create bank-like risks to financial stability, such as longer-term credit extension based on short-term funding and leverage.
Mark Carney, Chair of the FSB, said, "The enhanced and coordinated system-wide monitoring by authorities continues to improve our understanding of non-bank financial activities and risks to the financial system. This helps to inform our judgement on appropriate policy responses as we transform shadow banking into resilient market-based finance."
The main findings from the 2016 exercise are as follows:
  • The activity-based, narrow measure of shadow banking was $34 trillion in 2015, increasing by 3.2 percent compared to the prior year, and equivalent to 13 percent of total financial system assets and 70 percent of GDP of these jurisdictions.
  • Credit intermediation associated with collective investment vehicles (CIVs) comprised 65 percent of the narrow measure of shadow banking and has grown by around 10 percent on average over the past four years. The considerable growth of CIVs in recent years has been accompanied by liquidity and maturity transformation, and in the case of jurisdictions that reported hedge funds, relatively high level of leverage.
  • Non-bank financial entities engaging in loan provision that are dependent on short-term funding or secured funding of client assets, such as finance companies, represent 8 percent of the narrow measure, and grew by 2.5 percent in 2015. In at least some jurisdictions, finance companies tended to have relatively high leverage and maturity transformation, which makes them relatively more susceptible to rollover risk during periods of market stress.
  • In 2015, the wider aggregate comprising "Other Financial Intermediaries" (OFIs) in 21 jurisdictions and the euro area grew to $92 trillion, from $89 trillion in 2014. OFIs grew quicker than GDP in most jurisdictions, particularly in emerging market economies.
The 2016 exercise also collected new data to measure interconnectedness among the bank and the non-bank financial sectors and to assess the trends of short-term wholesale funding, including repurchase agreements. While the data availability needs to be improved, the report acknowledged, the data collected suggested that on an aggregated basis, both banks’ credit exposures to and funding from OFIs have continued to decline in 2015, although they remain above the levels before the 2007-09 financial crisis.
For more information about shadow banking, subscribe to the Banking and Finance Law Daily.

Tuesday, May 16, 2017

Collector can’t verify debt using post on CFPB complaint portal

By Richard A. Roth

A debt collector did not fulfill its Fair Debt Collection Practices Act obligation to verify a debt by reaffirming the payment demand in a letter posted on the Consumer Financial Protection Bureau’s consumer complaint portal, a U.S. district court judge has decided. The debt collector’s post was not mailed, as required by the FDCPA, and did not include enough information to constitute verification. The judge also said that the FDCPA violation resulted in a concrete injury that was adequate to give the consumer standing to sue (Ghanta v. Immediate Credit Recovery, Inc.).

Debt collector Immediate Credit Recovery, Inc., was hired to collect unpaid college tuition the consumer was said to owe. The company took the correct first step, informing the consumer that if he disputed the debt within 30 days it would obtain verification of the debt and mail that verification to him. Under the FDCPA, collection efforts could not resume until requested verification was provided.

The consumer sent Immediate Recovery a request for verification of the tuition bill, but apparently the company did not reply. Four and a half months later, the consumer made a complaint about the lack of verification on the CFPB portal. The bureau asked Immediate Recovery for a response, and on the same day the company uploaded a statement that the consumer “does in fact owe the balance” and “is responsible” for payment. However, the debt collector offered no details.

The next month, the company sent the consumer a new dunning letter. This, according to the consumer, was an FDCPA violation because the company restarted its collection efforts without having provided him the required verification of the claimed debt.

Standing to sue. The consumer’s first hurdle was convincing the judge that he had described an injury-in-fact that gave him standing to sue. Immediate Recovery claimed he had not.

The long-standing injury-in-fact requirement that a consumer describe an injury that is both concrete and particularized has taken on greater significance in the wake of the Supreme Court’s decision in Spokeo, Inc. v. Robins. According to the judge, Spokeo made clear that an injury must be shown but did not require the showing of an injury beyond what the statute described. An intangible injury that is “closely related to the harm the statute seeks to prevent” can be a concrete injury.

The FDCPA was intended to prevent abusive debt collection practices, the judge said. The consumer said he had been the victim of an act the FDCPA said was an abusive practice, and that was enough to constitute a concrete injury.

Verification method. If a consumer requests the verification of a debt, the FDCPA says collection efforts must cease until that verification “is mailed to the consumer” (15 U.S.C. §1692g(b)). Immediate Recovery argued that “mailed” allowed any method of sending verification, including uploading a statement to the CFPB’s complaint portal.

The judge was not convinced. It is true there are methods of communication available now that did not exist when the FDCPA was enacted 40 years ago, he conceded, but the act said “mailed.” Only Congress could change that language. He also noted that other parts of the same section used “send” rather than “mailed,” which implied that Congress had made an intentional distinction.

Immediate Recovery’s post on the CFPB website was directed to the bureau, not to the consumer, the judge added. There was no reason to conclude that the post resulted from the consumer’s knowing waiver of the right to a mailed verification. Whether the consumer received the verification was irrelevant.

Verification information. Even if the debt collector could verify a debt by posting on the bureau’s portal, this post did not provide adequate verification, the judge then said. While there was no precise description of what information was required, verification required at a minimum that the consumer be given enough information to dispute the claimed debt.

Immediate Recovery’s post did not offer enough information for the consumer to determine if he already had paid the debt or if the debt collector was dunning the wrong consumer. It stated neither the amount of the debt nor when the debt accrued, and it said nothing about the nature of the transaction from which the debt arose.

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

Monday, May 15, 2017

State regulators aim to create more efficient supervision over non-banks

By Stephanie K. Mann, J.D.

The Conference of State Bank Supervisors has set forth a series of initiatives to modernize state regulation of non-banks, including financial technology firms. Titled “Vision 2020,” CSBS is seeking to create a regulatory system that creates a more efficient supervisory system that recognizes standards across state lines. According to the press release, this will better support start-ups while protecting consumers and the financial system.

“We are committed to a multi-state experience that is as seamless as possible,” added CSBS Chairman and Texas Commissioner of Banking Charles G. Cooper. “Through Vision 2020, state regulators will transform the licensing process, harmonize supervision, engage fintech companies, assist state banking departments, make it easier for banks to provide services to non-banks, and make supervision more efficient for third parties.”

The first set of actions that CSBS and state regulators are taking, include:
  • Redesign the Nationwide Multistate Licensing System (NMLS). CSBS has launched a technology effort that redesigns and expands NMLS, the common platform for state non-bank regulation. The redesign will use data and analytics to provide a more automated licensing process for new applicants, streamline multi-state regulation, and shift state resources to higher-risk cases. 
  • Harmonize multi-state supervision. CSBS has created working groups to establish model approaches to key aspects of non-bank supervision. The groups will work to enhance uniformity in examinations, facilitate best practices, and capture and report non-bank violations at the national level. To further streamline the process, CSBS will create a common technology platform for state examinations.
  • Form an industry advisory panel. CSBS will establish a fintech industry advisory panel to identify points of friction in licensing and multi-state regulation, and provide feedback to state efforts to modernize regulatory regimes. The panel will focus on lending and money transmission, and discuss a wide range of solutions. 
  • Assist state banking departments. CSBS education programs will make state departments more effective in supervising banks and non-banks. Updated standards and analytics will help states determine where new expertise is most needed, identify and address weaknesses, update supervisory processes, and compare themselves to and learn from other state departments. 
  • Make it easier for banks to provide services to non-banks. CSBS is stepping up efforts to address regulatory uncertainty by increasing industry awareness that strong regulatory regimes exist for compliance with laws for anti-money laundering, the Bank Secrecy Act, and cybersecurity.
  • Make supervision more efficient for third parties. Banks of all sizes work with a variety of third-party service providers, including fintech companies. CSBS supports federal legislation that would allow state and federal regulators to better coordinate supervision of bank third-party service providers.
For more information about state regulator actions, subscribe to the Banking and Finance Law Daily.

Thursday, May 11, 2017

CFPB launches inquiry into small business lending industry

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau is seeking to gain insight into the availability of credit for small businesses. The bureau has published a request for information into ways to collect and use information to identify the financing needs of small businesses, especially those owned by women and minorities. According to the CFPB, small businesses typically need access to credit to take advantage of growth opportunities, but public information on this lending market is inconsistent and incomplete. In addition to the request for information, the CFPB has released a white paper reviewing the available evidence concerning the small business lending industry.
Request for information. Section 1071 of the Dodd-Frank Act amends the Equal Credit Opportunity Act to require financial institutions to compile, maintain, and report information concerning credit applications made by women-owned, minority-owned, and small businesses. In prepared remarks for a small business lending field hearing, CFPB Director Richard Cordray noted that the act specifically directs the bureau to develop regulations for financial institutions that lend to small businesses. The request for information is intended to help the bureau "better understand how to carry out this directive in a way that is careful, thoughtful, and cost-effective."
Comments on the request for information will be due 60 days after the notice is published in the Federal Register.
White paper. The CFPB’s white paper reflects the initial findings of the bureau’s research on the small business lending market. According to the report, the CFPB’s preliminary research suggests the following:
  • Small businesses play a key role in fostering community development and fueling economic growth both nationally and in their local communities. Women-owned and minority-owned small businesses in particular play an important role in supporting their local communities.
  • Data on how small businesses engage with credit markets are incomplete and provide only a limited picture of the relationships between small businesses and financial institutions.
The paper also explores:
  • how readily-available financing assists in the development and growth of small businesses;
  • the impact of the recent recession on the ability of small businesses to access credit; and
  • the need for additional data and how implementing data collection can further understanding of the market.
For more information about the CFPB's inquiry into the small business lending industry, subscribe to the Banking and Finance Law Daily.

Tuesday, May 9, 2017

New York proposes regulations to combat 'unscrupulous' title insurance practices

By Thomas G. Wolfe, J.D.

As a result of its investigation, the New York State Department of Financial Services has proposed new regulations to provide stronger protections against “unscrupulous practices in the title insurance industry.” The NYDFS’s investigation revealed that title insurance companies and agents were spending “millions of dollars on inducements, which the industry has charged back to consumers as ‘marketing costs’.”

In a May 1, 2017, release, New York Governor Andrew Cuomo remarked, “The industry-wide practices uncovered by [the NYDFS] were nothing short of shocking, and these reforms will help ensure prospective homeowners will be charged their fair share of title insurance fees and not a penny more.” Similarly, NYDFS Superintendent Maria Vullo commented, “Many New Yorkers who buy or refinance a home have been footing the bill without explanation for excessive fees that contribute to high closing costs. This action lets title insurers and agents know that these unscrupulous practices stop now.”

Proposed regulations. Under the first component of the NYDFS’s proposal, a newly created regulation would clearly prohibit inducements for future title insurance business, and would set forth restrictions as well as more detailed reporting and disclosure requirements pertaining to expenses, rate filings, expense allocations, and ancillary or other discretionary fees by title insurance companies and agents.

Likewise, the second component of the NYDFS’s proposal creates a new regulation and amends existing state regulations. In conjunction with certain provisions of the first component, the second component would require title insurance companies or agents that generate a portion of their business from affiliates to function separately and independently from any affiliate and obtain business from other sources.

For more information about state regulatory activity in the financial services industry, subscribe to the Banking and Finance Law Daily.

Thursday, May 4, 2017

Mortgage assistance services rule still can’t regulate attorneys practicing law

By Andrew A. Turner, J.D.

A district judge has refused to reconsider an earlier ruling that the Consumer Financial Protection Bureau’s Reg. O—Mortgage Assistance Relief Services (12 CFR Part 1015) cannot be applied to attorneys who are performing services that are part of the licensed practice of law. The court expressed concern that a contrary ruling relied upon by the CFPB could open a “can of worms” if federal courts were called upon to decide what constitutes the unlawful practice of law in each state (CFPB v. The Mortgage Law Group, LLC).

Even if the challenge had not been waived due to a failure to seek reconsideration until the eve of trial, a new judge in the case could find no basis for rescinding the earlier ruling that the regulation’s exemptions for attorneys are too narrow because they would permit the CFPB to regulate the practice of law, which the Dodd-Frank Act placed beyond the bureau’s authority. Regulatory provisions that conditioned exemptions on the attorney’s compliance with state laws were too restrictive, in the court’s view.

Subsequently, the judge said the rule provisions that are permissible retain their effectiveness, without deciding whether the attorneys and their affiliated companies actually had violated either the rule or the Dodd-Frank Act ban on unfair, deceptive, and abusive acts or practices. Now, the court was unwilling to eliminate the primary defense in a case set to go to trial in a week.
CFPB rulemaking authority. The CFPB sought reconsideration, citing a later decision by a different court agreeing with its reading of the statute, that the bureau inherited the Federal Trade Commission’s authority to regulate attorneys engaged in the practice of law based on a 2009 Omnibus Act which authorized the FTC to regulate mortgage lending practices. Refusing to rely on the contrary opinion, the court pointed to direct conflict with the 2010 Consumer Financial Protection Act’s general prohibition against regulating attorneys engaged in the practice of law and the failure of the Omnibus Act to address the regulation of attorneys. As a result, the court could not find “clear error” in the earlier rejection of the CFPB’s rulemaking authority in this area.

For more information about CFPB oversight of conduct involving mortgage issues, subscribe to the Banking and Finance Law Daily.

Wednesday, May 3, 2017

Human trafficking targeted by Warren/Rubio bill

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

Hoping to help banks identify human traffickers and deny them access to the financial system, Sens. Elizabeth Warren (D-Mass) and Marco Rubio (R-Fla) introduced the End Banking for Human Traffickers Act of 2017. According to Warren’s press release, the bill would direct federal banking regulators to work with law enforcement and financial institutions to combat the use of the financial system for human trafficking. Human trafficking is pervasive and profitable for its perpetrators, who earn more than $150 billion each year from the exploitation of forced labor around the world, the release stated.
"Human trafficking is an ugly stain on humanity, and we need to use every possible tool to stop it," Warren said. "This bill will give financial institutions and regulators additional weapons to fight this terrible crime by helping them cut off traffickers' access to the banking system."
The bill’s fact sheet stated that it would:
  • add financial intelligence and regulatory officers to the President’s Interagency Task Force to Monitor and Combat Trafficking in Persons to increase collaboration between law enforcement and experts in financial crimes;
  • direct federal banking regulators to work with law enforcement and financial institutions to combat the use of the financial system for human trafficking; and
  • require the Interagency Task Force to review existing anti-money laundering programs and, if necessary, develop recommendations for Congress and regulators that would strengthen such programs to better target human trafficking. The Task Force is to draw on the expertise of the public, private, and non-profit sectors, identifying successful anti-trafficking programs and proposing new measures to ensure that the banking system is not used to facilitate human trafficking.
For more information about preventing criminal abuse of the banking system, subscribe to the Banking and Finance Law Daily.

Tuesday, May 2, 2017

Miami has standing to sue banks over mortgage loan discrimination

By Richard Roth, J.D.

The Fair Housing Act gives the City of Miami standing to sue banks over allegedly discriminatory mortgage lending practices, the Supreme Court has decided by a five-to-three vote. According to the Court, the city meets the requirements for being an “aggrieved person” that can sue under the FHA. However, the Court declined to say that the city’s complaint described injuries that had been proximately caused by the banks’ alleged discrimination. The city’s financial injuries might have been foreseeable results of the banks’ lending practices, but the Court was not prepared to say that the allegations described a connection between the lending practices and the injuries that was sufficiently close to meet proximate cause requirements (Bank of America Corp. v. City of Miami).

Miami sued Bank of America and Wells Fargo, claiming that the banks had engaged both in redlining—refusing to make loans to minority borrowers on the same terms that were available to nonminority borrowers—and reverse redlining—making loans to minority borrowers on exploitative terms. The banks refused to make loans to minority borrowers on terms similar to those available to white borrowers with comparable credit qualifications, offered minority borrowers loans only on predatory terms, and refused to extend refinancing loans to minority borrowers on terms similar to those available to white borrowers, Miami alleged.

The U.S. Court of Appeals for the Eleventh Circuit decided that the city had adequately described injuries subject to the FHA that were proximately caused by the alleged discrimination (see City of Miami v. Bank of America Corp.).

Standing to sue. The Court began by noting that the FHA allows any aggrieved person to sue for a violation and defines “aggrieved person” as “any person . . . who claims to have been injured by a discriminatory housing practice” (42 U.S.C. §3613). Miami claimed generally that the banks’ discriminatory lending practices had interfered with its fair housing policies and caused a disproportionately large number of foreclosures in minority neighborhoods. This brought about reduced property values, which in turn reduced the city’s property tax revenues. More vacant properties also forced the city to increase its spending on city services.

The banks argued that Miami was not an aggrieved person because the harm it claimed was not arguably within the zone of interests the FHA was intended to protect; in other words, the city did not have statutory standing to sue. The five-Justice majority disagreed.

The claimed injuries were at least arguably within the FHA zone of interests, the majority decided, adding emphasis to the word “arguably.” Congress intended that statutory standing under the FHA should be as broad as the Constitution permitted.

The majority rejected the banks’ argument that the act established more limited criteria for standing. Even if the FHA called for more restrictive standing criteria, the city still met those criteria, they said. Miami would have been harmed by a decline in property values that reduced its tax base and threatened its ability to pay for necessary city services.

Proximate cause. On the other hand, the majority was not satisfied that the city’s complaint met proximate cause criteria. In the case of a violation of a statute, such as the FHA, proximate cause requires more than that the injury be a foreseeable result of the challenged action, the majority said. The injury also must have a close connection to conduct prohibited by the statute. Nothing in the FHA suggested that Congress wanted to create a cause of action for any harm simply because that harm could have foreseeably resulted from a violation, the majority said.

More specifically, Miami needed to show that its lost revenue and increased expenses were closely connected to the redlining and reverse redlining, the majority said. The Eleventh Circuit opinion noted that there were several intervening steps, and the majority was concerned that there might have been so many intervening steps that there was no close connection.

Neither the Eleventh Circuit nor any other appellate court has attempted to analyze that aspect of proximate cause, the majority noted. Declining to proceed in the absence of such an analysis, the Court vacated the Eleventh Circuit decision and returned the suit to the appellate court to consider how the “close connection” standard would apply to the city’s claims of reduced property taxes and increased municipal expenses.

Concurring and dissenting. Justices Thomas, Alito, and Kennedy disagreed that the city had statutory standing to sue the banks, and thus they would have dismissed the suit. They agreed that proximate cause requirements had not been met, but saw no reason for a remand.

According to the opinion authored by Thomas, the injuries claimed by the city were not even arguably related to the purposes of the FHA. The act was concerned with lending discrimination, not with property taxes, foreclosures, urban blight, or municipal financial problems.

Had the city based its arguments on claims related to racial balance and stability, the situation might have been different, Thomas observed. However, Miami had asserted only a “budget-related injury,” and that was not within the FHA’s zone of interest.

For more information about fair housing and mortgage lending, subscribe to the Banking and Finance Law Daily.

Sunday, April 30, 2017

CFPB keeps supervisory eye on servicing

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published its latest Supervisory Highlights detailing consumer issues the bureau has found through its supervisory work. The current report (Issue 15) addresses consumer issues with student loan and mortgage servicing. CFPB examiners have discovered that some student loan and mortgage servicers are violating consumer compliance laws by failing to provide struggling borrowers with legal protections, according to the bureau. The CFPB also reported that non-supervisory bureau actions have led to the recovery of approximately $6.1 million for 16,000 consumers harmed by auto loan originators. Finally, the bureau released its monthly complaint snapshot for the April 2017, with the focus again on student loan servicing.
Referring to the Supervisory Highlights report, CFPB Director Richard Cordray said that the "slipshod practices" of some student loan and mortgage servicers "are putting borrowers at risk of financial failure and we will hold them accountable."
Student loan servicers. The CFPB noted that it is "a Bureau priority to end illegal practices in student loan servicing." The bureau reported that examiners found that student loan servicers:
  •  routinely acted on incorrect information about whether the borrower was enrolled in school; and
  • failed to reverse certain charges, including improper late fees, even after they knew they had wrongly ended a deferment.
Mortgage servicers. CFPB supervision continues to see serious issues for consumers seeking alternatives to foreclosure, or loss mitigation, at certain servicers, according to the report. CFPB examiners found problems with foreclosure protections, premature foreclosure filings, mishandling of escrow accounts, and incomplete periodic statements. Further, examiners found that one or more mortgage servicers:
  • failed to identify the additional documents and information borrowers needed to submit to complete a loss mitigation application to avoid foreclosure, then denied the applications for not including those documents.
  • launched the foreclosure process prematurely after receiving loss mitigation applications from borrowers;
  • used funds from escrow accounts to pay insurance premiums on unrelated loans, creating shortages in the escrow accounts and higher monthly payments for consumers; and
  • issued incomplete periodic statements that used vague language such as "miscellaneous expenses" or just "service charge."

 Additional highlights. Key highlights of the report also include:
  • how CFPB examiners assess compliance with the Ability-to-Repay rule, including requirements on how a lender verifies a consumer’s ability to repay a mortgage loan;
  • alerts sent by examiners to one or more companies that consumer complaints have spiked, prompting remedies;
  • the bureau’s development and implementation of a program to examine key service providers to help reduce risks to consumers when a company outsources activities to those providers;
  • recent enforcement actions resulting from supervisory actions; and
  • information the industry can use to comply with federal consumer compliance laws.
The CFPB noted in the report that when examiners find problems, they alert the company and outline necessary remedial measures, such as paying refunds or restitution or taking actions to stop illegal practices, such as new policies or improved training or monitoring. If appropriate, the CFPB will open investigations for potential enforcement actions.
Complaint snapshot. Both private and federal student loan borrowers continue to report servicing breakdowns hindering repayment, according to the monthly complaint snapshot. The April 2017 snapshot also highlights trends seen in complaints coming from Nevada and the Las Vegas metro area.
"Student loan servicers play an important role in helping millions of people manage the loans they take out to pursue an education," said CFPB Director Richard Cordray. "Unfortunately, borrowers continue to report difficulties and setbacks as they try to work with their servicers to manage their loan debt."
Currently at $1.4 trillion, student loan debt represents the second largest U.S. debt market after mortgages, the bureau reported. As of April 1, 2017, the CFPB had handled approximately 1,163,200 consumer complaints across all products. Approximately 44,400 of those complaints were about student loans. Specifically, consumers complain about:
  • poor information from and "sloppy" practices by loan servicers;
  • difficulty enrolling and staying in income-driven repayment plans; and
  • confusion over the Public Service Loan Forgiveness and other loan forgiveness programs.
The three companies that the CFPB has received the most average monthly student loan complaints about are Navient Solutions, LLC, Fedloan Servicing/AES, and Nelnet.
National overview. The snapshot includes statistics about complaints submitted to the CFPB from across the United States. These statistics include the following:
  • Student loan complaints showed the greatest increase of any product or service in a year-to-year comparison examining the three-month time period of January to March.
  • Debt collection was the most-complained-about financial product or service.
  • The second and third most-complained-about products or services were credit reporting and mortgages.
  • Montana, Georgia, and Wyoming experienced the greatest year-to-year complaint volume increases from January to March 2017, versus the same time period 12 months before.
  • The top three companies that received the most complaints from November 2016 through January 2017 were Navient Solutions, LLC, Equifax, and Experian.

Nevada spotlight. As of April 1, 2017, consumers in Nevada have submitted 14,600 of the 1,163,200 complaints the CFPB has handled. Of those complaints, 10,800 came from consumers in the Las Vegas metro area. Findings from the Nevada complaints submitted to the CFPB include:
  • Complaints related to debt collection accounted for 29 percent of all complaints submitted by consumers from Nevada, slightly higher than the national rate.
  • Complaints related to mortgages accounted for 23 percent of all complaints from Nevada, a rate that is identical to the national rate of mortgage complaints.
  • Wells Fargo, Experian, and Equifax were the most-complained-about companies from consumers in Nevada.
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