Tuesday, August 22, 2017

Failure to ensure accurate consumer information created standing to sue

By Richard Roth

Failure to ensure accurate consumer information created standing to sue

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

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

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

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

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

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

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

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

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

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

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

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

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

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Monday, August 21, 2017

CFPB sues lending conduit for aiding Corinthian Colleges' predatory lending


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

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

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

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

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

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

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

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


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

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Tuesday, August 15, 2017

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

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

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

By Andrew A. Turner, J.D.

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

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

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

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

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

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

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Wednesday, August 9, 2017

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

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

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

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

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

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

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

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

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

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Tuesday, August 8, 2017

CFPB enforcement action survives multiple attacks by student loan servicer

By Richard Roth

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Monday, August 7, 2017

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

By Stephanie K. Mann, J.D.

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

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

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

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

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

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

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

Blog post. In a related blog post, the CFPB is seeking comments on the new prototypes. Specifically, the Bureau is asking consumers to answer the following questions:
  • Do these form designs do a better job of giving you the information you need before making your decision about overdraft service? 
  • Do you understand the fees for each option and what transactions might cause an overdraft fee? 
  • How do you think the updated forms compare to the current form? Do you think they are easier to use and understand?
  • Which of the layouts do you prefer? 
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Thursday, August 3, 2017

CFPB compliance bulletin targets phone pay fees


By Katalina M. Bianco, J.D.
 
The Consumer Financial Protection Bureau has identified conduct that the Bureau believes may violate the Consumer Financial Protection Act's prohibition against unfair, deceptive, or abusive acts or practices, commonly known as UDAAP. Compliance Bulletin 2017-01 provides guidance for companies on practices the Bureau considers UDAAP violations. Guidance also is provided for debt collectors about compliance with the Fair Debt Collection Practices Act when assessing phone pay fees. 
 
"The Bureau is warning companies about tricking consumers into more expensive fees when they pay bills by phone," said CFPB Director Richard Cordray. "We are concerned that companies are misleading consumers about pay-by-phone fees or keeping them in the dark about much cheaper or no-cost payment options."
 
In the course of its supervision and enforcement activities, the CFPB identified conduct that may risk violating federal consumer financial laws. The Bureau listed phone pay fee practices that will draw its close attention:
 
  • failing to disclose the prices of all available phone pay fees when different phone pay options carry materially different fees;
  • misrepresenting the available payments options or that a fee is required to pay by phone;
  • failing to disclose that a phone pay fee would be added to a consumer’s payment, which could create the misimpression that there was no service fee; and
  • lack of employee monitoring or service provider oversight that may lead to misrepresentations or failure to disclose available options and fees.
 
Bureau concerns. The CFPB is concerned about companies misrepresenting the purpose and amount of pay-by-phone fees, which can result in consumers incurring charges for services they don’t need. In addition, some companies do not disclose their fees in writing upfront to consumers. If phone representatives fail to disclose charges, consumers may wind up paying expensive fees because they are not informed that significantly cheaper options are available.
 
Debt collection. The CFPB has identified instances of FDCPA violations by mortgage servicers when they charged fees for taking mortgage payments over the phone to borrowers whose mortgage instruments did not expressly authorize collecting such fees and who reside in states where applicable law does not expressly permit collecting such fees.
 
CFPB expectations. While the CFPB does not mandate any particular method for informing consumers about the available phone pay options and fees, entities should consider potential risks of committing UDAAPs or violating the FDCPA. Among other things, the CFPB suggests a review of:
 
  • internal and service providers’ policies and procedures on phone pay fees, including call scripts and employee training materials, revising policies and procedures to address any concerns identified during the review, as appropriate;
  • whether information on phone pay fees is shared in account disclosures, loan agreements, periodic statements, payment coupon books, on the company’s website, over the phone, or through other mechanisms; and
  • service provider practices.
The CFPB also suggests giving consideration to employee and service provider production incentive programs to see if there are incentives to steer borrowers to certain payment types or to avoid disclosures. In the context of phone pay fees, the CFPB warns, production incentives may enhance the potential risk of entities engaging in UDAAPs.
 
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Tuesday, August 1, 2017

Fed guides banks seeking to conform ‘seeding’ investments to Volcker Rule

By Thomas G. Wolfe, J.D.
 
The Federal Reserve Board has adopted guidelines for banks seeking an extension to conform certain “seeding” investments in hedge funds or private equity funds (covered funds) to the requirements of the Volcker Rule. The Fed’s guidelines provide that firms seeking a seeding period extension should submit information “including the reasons for the extension and an explanation of the entity’s plan to conform the investment ... to the requirements of the Dodd-Frank Act.”
 
As observed by the Fed, a “seeding” refers to the period during which a banking entity provides a new fund with initial equity to permit the fund to attract investors. While there are some exemptions and limitations, the Volcker Rule generally prohibits insured depository institutions and their affiliates from engaging in proprietary trading and from owning, sponsoring, or having certain relationships with a covered fund. Accordingly, the Dodd-Frank Act permits the Fed to review an application from a bank to provide additional time—up to two additional years—for the bank to conform its seeding investments in covered funds to the Volcker Rule if the Fed finds that the extension “would be consistent with safety and soundness and in the public interest.”
 
Fed guidelines. In its letter to all banking entities holding $10 billion or less in consolidated assets and subject to section 13 of the Bank Holding Company Act—the Volcker Rule—the Fed sets forth the guidelines for submitting requests for an extension of the seeding period.
 
Under the guidelines, titled “Procedures for a Banking Entity to Request an Extension of the One-Year Seeding Period for a Covered Fund (SR 17-5),” a bank must explain its plan for reducing the permitted investment in each covered fund through redemption, sale, dilution, or other methods, to the per-fund limitation by the end of the extended seeding period. Further, the bank is to submit, in writing, its request for an extension of the seeding period to the “Applications Unit of the Federal Reserve Bank in the district where the top-tier banking entity is headquartered.” Notably, the bank’s request should be submitted “at least 90 days prior to the expiration of the applicable time period.”
 
In reviewing whether a bank’s application meets all of the pertinent requirements under the laws and regulations covering the Volcker Rule, the Fed will consider the “facts and circumstances related to the permitted investment in a covered fund,” including, among other things:

  • whether the investment would result, directly or indirectly, in a material exposure by the bank to high-risk assets or high-risk trading strategies;
  • the contractual terms governing the bank’s interest in the covered fund;
  • the date on which the covered fund is expected to have attracted sufficient investments from investors unaffiliated with the bank to enable the bank to comply with the limitations in the rule;
  • the total exposure of the covered bank to the investment and the risks that disposing of, or maintaining, the investment in the covered fund may pose to the bank and to the financial stability of the nation;
  • the cost to the bank of divesting or disposing of the investment within the applicable period;
  • whether the investment, divestiture, or conformance of the investment would involve, or result in, a material conflict of interest between the bank and unaffiliated parties—including clients, customers, or counterparties to whom the bank owes a duty;
  • the bank’s prior efforts to reduce through redemption, sale, dilution, or other methods its ownership interests in the covered fund—including the marketing of interests in the fund;
  • the conditions of the market; and
  • any other factor the Fed deems appropriate. 
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Thursday, July 27, 2017

When can the OCC charter a fintech as a national bank?

By Richard A. Roth, J.D.

The Office of the Comptroller of the Currency’s plan to create some form of national bank charter for financial technology companies has stirred up a hornets’ nest of responses, and the OCC does not seem inclined to let things calm down. Despite opposition from state banking regulators, concerns of some banking industry groups, and several lawsuits, the OCC seems intent on moving forward with its plan. Acting Comptroller Keith Noreika continued, as recently as July 19, to defend the idea of special charters against assertions that they would threaten consumer protection and exceed the OCC’s statutory authority.

The dispute over national fintech charters can be analyzed from several points of view. Concerns have been expressed over:
  • consumer protection;
  • safety and soundness;
  • the legality of special purpose national bank fintech charters; and
  • the effect of national bank fintech charters on the dual state-federal charter banking system—perhaps, a state v. federal regulators’ turf war.
OCC’s first steps. The OCC began to move toward granting fintech charters under prior Comptroller Thomas J. Curry, as part of the agency’s “responsible innovation framework.” Whether national bank charters should be granted to fintech companies conducting banking activities was one of the most important financial innovation questions the agency faced, Curry said.

The following month, Curry announced that the OCC intended to create special charters for fintech companies that offer bank products and services. The agency also published “Exploring Special Purpose National BankCharters for Fintech Companies,” which explored related issues.

In a Georgetown University Law Center speech, Curry asserted that a special purpose national bank charter would allow the OCC to enhance both consumer protection and safety and soundness. Fintech companies were providing bank-like services without the need to comply with federal laws like the Community Reinvestment Act and without rigorous financial stability standards, he said, and a chartering process would give his agency the ability to introduce more supervision.

At that time, he promised that any fintech companies chartered by the OCC would be held to the same standards that applied to any other OCC-supervised business. Fintech businesses would receive no competitive advantage over traditional national banks that offered the same products and services, Curry pledged.

Licensing manual proposed. In order to create a path toward special purpose national bank charters, the OCC then proposed a dedicated supplement to its Licensing Manual. The agency again promised that fintech companies receiving national bank charters would be required to meet the same fairness and safety and soundness standards that applied to other national banks. The manual supplement was intended to outline how compliance with those standards would be measured.

The proposed supplement began by describing what fintech companies would be considered to be special purpose national banks that are eligible for charters. A company would have to perform at least one of two bank functions—lending money, or paying checks (or making comparable electronic fund transfers). However, the companies would not be permitted to accept deposits and thus would not be covered by federal deposit insurance. The OCC added that such a company might want to engage in other activities that have not previously been considered to be banking; if so, the company would have to explain why the activity should be considered to be permissible for a chartered institution.

A fintech company that holds a charter would be subject to both leverage and risk-based capital standards, according to the proposed supplement. Since these companies are likely to have comparatively few on-balance sheet assets, higher requirements might be called for. The companies also would be required to comply with the Bank Secrecy Act, related anti-money laundering regulations, and Office of Foreign Assets Control rules.

The OCC sought to assure banks that a special purpose charter will not be an avenue to improperly mixing business and commerce. Products with predatory features, and unfair or deceptive acts or practices, will not be permitted, the agency also said.

Response to OCC plans. Banking industry associations and consumer advocacy groups are, for once, fairly united in their skepticism about the OCC’s plans. The American Bankers Association is the most opened minded about the idea of a special purpose charter as long as the fintech companies are held to the same rules and subject to the same oversight as traditional national banks.

However, the Independent Community Bankers of America said a year ago that fintech companies would immediately have a competitive advantage over community banks, especially if the fintech companies were not adequately supervised In April, the ICBA urged the OCC not to act on special purpose charters without clear congressional authorization.

Litigation. Of perhaps greater significance is the resistance of the Conference of State Bank Supervisors, which has filed suit in an effort to block the OCC from issuing the planned charters. In is suit, filed in the U.S. District Court of the District of Columbia, CSBS describes the OCC’s plan as “an unprecedented, unlawful expansion of the chartering authority given to it by Congress for national banks.” According to CSBS, a bank must, at a minimum, accept deposits; however, the OCC says that fintech companies with special purpose charters will not accept deposits. That means they will not be engaged in the business of banking, CSBS charges, and therefore they cannot be given national bank charters.

The complaint in CSBS v. OCC raises several specific charges against the OCC. According to the complaint:
  • The OCC claims the authority to create charters for a broad variety of nonbank financial services providers, regardless of whether they might be thought of as fintech companies. This exceeds the agency’s authority under the National Bank Act.
  • The OCC should have proposed a regulation on special purpose fintech charters. Instead, it published a white paper and then proposed changes to the Licensing Manual. The agency has never asked for comments on whether the National Bank Act gives it the authority to charter fintech companies.
  • The OCC intends, as part of the chartering process, to negotiate a secret agreement with each company about which federal banking laws will be applied to it. Also, by virtue of their federal special purpose charters, the companies will be exempt from state banking laws and regulations, which will create significant preemption issues.
Previous OCC efforts to charter companies that do not take deposits have been rejected by the courts, according to CSBS’s complaint. There are only three exceptions—trust banks, banker’s banks, and credit card banks. The special purpose fintech companies contemplated by the OCC would not fit into any of those categories, and Congress has rejected efforts to create other special purpose charters, CSBS asserts.

The CSBS suit is not the only court effort to block the OCC. The New York State Department of Financial Services, a CSBS member, has filed a separate suit in the U.S. District Court for the Southern District of New York. In Vullo v. OCC, DFS characterizes the OCC’s plan as “lawless, ill-conceived, and destabilizing of financial markets that are properly and most effectively regulated by New York State.” According to the complaint, “The OCC’s reckless folly should be stopped.”

In addition to challenging the OCC’s authority under the National Bank Act, the DFS alleges that:
  • special purpose bank charters for fintech companies would preempt state payday loan, usury, and predatory lending consumer protections;
  • multiple non-depository business lines would be consolidated under a single federal charter, resulting in more institutions that are “too big to fail”; and
  • a competitive advantage would be given to large, well-capitalized fintech companies that then could overwhelm smaller companies (presumably including community banks, although they were not mentioned specifically).
The DFS also repeats CSBS’s claim that judicial precedent has twice rejected OCC efforts to grant charters to companies that do not accept deposits.

OCC response. In remarks prepared for a July 19 appearance at the Exchequer Club, Noreika laid out the OCC’s replies to the various objections that have been raised. Disclaiming any intent to comment on the two pending suits, Noreika said he could share his views on “the idea of granting national bank charters to fintech companies that are engaged in the business of banking and requiring them to meet the high standards for receiving a charter.”

Noreika warned against defining the business of banking too narrowly. The banking system must be allowed to evolve and take advantage of technological advances. A national bank charter should be one option for a company that provides banking products and services, while state bank charters, other state financial service provider licenses, and partnerships with existing banks all should be available as well.

One reason for the OCC’s plan is the belief that a company which provides banking products and services while acting like a bank should be regulated and supervised like a bank, Noreika said. However, that currently is not the situation, as “Hundreds of fintechs presently compete against banks without the rigorous oversight and requirements facing national banks and federal savings associations.” People who fear that national bank charters for fintechs will put banks at a disadvantage “have it backwards,” he asserted; banks may be at a disadvantage now, and OCC regulation and supervision could be a remedy.

The OCC has repeatedly pledged that fintech companies given charters would be subject to regular examinations and capital and liquidity standards. They also would be subject to financial inclusion expectations “where appropriate,” he said.

Consumer protection concerns are equally misplaced, Noreika claimed. The Dodd-Frank Act clarified the preemption rules, so that state anti-discrimination, fair lending, and other laws apply to national banks. The OCC agrees that many state laws that ban unfair or deceptive acts and practices apply to national banks, he added, and the same ban is imposed by the Federal Trade Commission Act.

Specifically, Noreika attempted to refute claims that charters for fintech companies would “somehow let unfair and deceptive lending practices creep into the federal banking system.” He claimed that the OCC has fought against those practices for many years. State-licensed companies, not national banks, are responsible for abuses by payday lenders and similar companies, he charged.

Worries about abuses arising from fintech companies’ ability to export interest rates also are “unfounded,” according to Noreika. Banks with federal charters have been able to export interest rates for years “without such feared practices taking root,” he asserted. Besides, state banks have had the same ability to export interest rates since 1980, he noted.

No deposits. Responding to the litigation claims that the OCC does not have the legal authority to grant national banks charters to companies that do not accept deposits, Noreika made clear the OCC believes it does. A regulation adopted in 2003 made that authority clear he said. (CSBS, in its suit, claims that the OCC can point to no statute that authorized the OCC to adopt that regulation.)

In his speech, Noreika said the OCC had discussed charter applications with fintech companies. The agency intended to continue those discussions, but no applications have been submitted, he told the Exchequer Club. However, less than two weeks later, mobile banking startup Varo Money Inc. applied for a national bank charter for Varo Bank N.A., which would be a full-service bank, not a special purpose bank.

Noreika added that there is no question about the OCC’s ability to charter full-service national banks that offer fintech products and services, or about the agency’s authority to charter trust banks, banker’s banks, and credit card banks. “Many fintech business models may fit well into these long-established categories of special purpose national bank charters that do not rely on the contested provision of regulation . . .,” Noreika said. The OCC may decide simply to grant charters under that undisputed authority.

The Acting Comptroller did remind the audience that considering special purpose national bank charters for fintechs is an initiative that was started by his predecessor, Comptroller Curry. That makes it a rare example of a financial services initiative begun by the Obama administration and whole-heartedly continued by the Trump administration.

Choice of charters. Noreika made clear his desire to cast special purpose charters as simply one of several options that fintech companies can choose among. In his view, having more options would strengthen the dual-charter system. Granting special purpose charters also would allow the OCC to create a more level playing field between national banks and federal savings associations on the one hand and fintech companies on the other, because all would be subject to the same regulatory standards.

What is a bank? The outcome of the two pending suits likely will turn on the answer to one question: What is a bank? Or, put differently, what is the business of banking? Oddly, federal law offers no succinct definition.
  • The National Bank Act—which created the OCC—unhelpfully fails to define either term.
  • The Bank Holding Company Act refers in part to the Federal Deposit Insurance Act definition of “insured bank” for its definition, but adds that a bank also can be an institution organized under federal or state law that either accepts demand deposits or offers checking accounts and that makes commercial loans.
  • The FDIA says that a bank is a national bank, federal branch, insured branch, or state bank. Interestingly, the FDIA definition of state bank requires the institution to accept deposits, but no comparable definition of national bank is offered.
The NBA describes, in 12 U.S.C. §24, all of the things that a national bank may do. However, it does not describe what a financial institution must do in order to be a bank. In 12 CFR §5.20(e), the OCC claims the authority to charter a special purpose bank that engages in at least one of three “core banking functions”: accepting deposits, paying checks, or making loans. That regulation is the source of the OCC’s assertion that fintechs can be given special purpose charters even if they do not accept deposits.

Precedents. As noted, CSBS and New York’s DFS claim that two previous OCC efforts to expand its special purpose charter authority have been rejected. They cite Independent Bankers Association of Americav. Conover, 1985 U.S. Dist. LEXIS 22529, Fed. Banking L. Rep. ¶86,178, and National State Bank v. Smith 1977 U.S. Dist. LEXIS 18184.

Conover offered an in-depth discussion of the issue, reaching the conclusion that a bank must both accept demand deposits and make commercial loans. Smith, on the other hand, is a less convincing, not-for-publication opinion that the OCC could not charter a national bank solely as a fiduciary institution with no other banking powers, based on OCC regulations then in effect. As both of these are only district court opinions, they have no binding effect.

Chevron effects. In the end, there is a chance that both suits could be determined by the Supreme Court’s far-reaching decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842 (1984). Under Chevron, a regulatory agency’s interpretation of an ambiguous statute is entitled to deference if Congress gave the agency the authority to interpret and implement the statute, the agency’s interpretation is reasonable, and the regulation was adopted pursuant to a notice-and-comment process.

The lack of any statutory definition of “bank” in the NBA implies that the word is ambiguous, and the OCC clearly has the authority to interpret and adopt regulations under the NBA. Also, the regulation in question would have been subject to a notice and public comment period.

Therefore, it could be seen as likely that a judge would feel bound to defer to the OCC’s conclusion as to what constitutes a bank. In that case, a fintech that carried out any of the three identified core banking functions specified by the OCC regulations could satisfy the criteria to be given a national bank charter.
 
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Wednesday, July 26, 2017

Volker Rule enforcement halted for one year for qualifying foreign excluded funds

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

Five federal financial regulatory agencies announced that they will not take action under the Volcker Rule for qualifying foreign excluded funds for a period of one year while they review Volcker Rule regulations to ensure that excluded funds do not become subject to the rule. The agencies include the Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Securities and Exchange Commission, and Commodity Futures Trading Commission.

In their joint press release, the agencies explain that complexities in section 619 of the Dodd-Frank Act and its implementing regulations may result in certain foreign excluded funds becoming subject to regulation because of governance arrangements with or investments by a foreign bank. As a result, a number of foreign banking entities, foreign government officials, and other market participants have expressed concern about possible unintended consequences and extraterritorial impact.

A statement released by the Fed, FDIC, and OCC, noted that their staffs are considering ways in which the implementing regulation may be amended, or other appropriate action may be taken, to address any unintended consequences of the Volcker Rule for foreign excluded funds in foreign jurisdictions. The agencies also clarified that their current announcement does not otherwise modify the rules implementing section 619 and is limited to certain foreign excluded funds that may be subject to the Volcker Rule and implementing regulations due to their relationships with or investments by foreign banking entities.

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

Tuesday, July 25, 2017

Regulators propose higher CRE loan appraisal threshold

By Richard A. Roth

The Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation are proposing to make it easier for banks to originate commercial real estate loans by raising the threshold for loans that require appraisals. Under the proposal, the current $250,000 threshold would be increased to $400,000. Loans for lower amounts could be made based on less-detailed evaluations that could be completed by individuals who are not licensed or certified appraisers.

The current $250,000 threshold has been in effect since 1994. According to the proposal, a commercial property that sold for $250,000 in 1994 could have a market value of up to $830,000 today. However, CRE property values are volatile, and $400,000 is the approximate low point of the current cycle, which was set in 2010.

The proposal would have no effect on residential mortgage loans.

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Monday, July 24, 2017

Republicans introduce resolutions to nullify CFPB’s ban on arbitration clauses

By Stephanie K. Mann, J.D.

Republicans on the Senate Committee on Banking, Housing and Urban Affairs and House Financial Services Committee have introduced resolutions of disapproval to nullify the controversial rule published by the Consumer Financial Protection Bureau which bans mandatory predispute arbitration clauses in consumer financial product contracts if those clauses prevent class actions (see Banking and Finance Law Daily, July 10, 2017).

Senate action. “Members of Congress previously expressed concerns with the proposed version of the rulemaking—concerns that were not addressed in the final rule,” said Banking Committee Chairman Mike Crapo (R-Idaho). “The rule is based on a flawed study that leading scholars have criticized as biased and inadequate, noting that it could leave consumers worse off by removing access to an important dispute resolution tool. By ignoring requests from Congress to reexamine the rule and develop alternatives between the status quo and effectively eliminating arbitration, the CFPB has once again proven a lack of accountability. Given the problems with the study and the Bureau’s failure to address significant concerns, it is not only appropriate but incumbent on Congress to vote to overturn this rule.”

Original co-sponsors of the measure include Sens. John Barrasso (R-Wyo), Roy Blunt (R-Mo), Shelley Moore Capito (R-WV), Thad Cochran (R-Miss), Bob Corker (R-Tenn), Tom Cotton (R-Ark), Ted Cruz (R-Texas), Mike Enzi (R-Wyo), Orrin Hatch (R-Utah), Dean Heller (R-Nev), Johnny Isakson (R-Ga), James Lankford (R-Okla), Jerry Moran (R-Kansas), David Perdue (R-Ga), Mike Rounds (R-SD), Marco Rubio (R-Fla), Ben Sasse (R-Neb), Tim Scott (R-SC), Richard Shelby (R-Ala), Luther Strange (R-Ala), Thom Tillis (R-NC), Patrick Toomey (R-Pa), and Roger Wicker (R-Miss).

Rounds joined in the resolution, calling the arbitration rule “yet another example of the CFPB overstepping its authority to impose burdensome, unnecessary regulations that do more harm than good.” Rounds stated that the rule “would actually cost consumers more in the long run by pushing consumers into class action lawsuits as opposed to arbitration.”

H.J. Res 111. Introduced by Rep. Keith Rothfus (R-Pa), H.J. Res 111 was cosponsored by all 34 Republican members of the Financial Services Committee. According to the Committee’s press release, the bureau conducted a study which shows that consumers who use arbitration actually gain more favorable outcomes than those who hire trial lawyers for class action lawsuits. The average payout for consumers in a class action is $32, while the average trial lawyer receives nearly $1 million.

“The CFPB’s anti-arbitration rule hurts consumers and it’s another example of the problems caused by this rogue and unaccountable agency. We know that consumers get better results through arbitration than through class action lawsuits. Despite the fact that the agency acknowledged this fact in one of its own reports, the bureaucrats at the CFPB have decided they know better. The CFPB's rule eliminates this effective process for consumers, and will punish consumers with decreased access to financial products, increased costs for such products, or both,” said Rothfus.

Democratic response.
In response to the resolutions, Rep. Maxine Waters (D-Calif), Ranking Member of the Financial Services Committee, blasted Republicans for trying to take away consumers’ rights to be heard in a court of law. According to Waters, the “forced arbitration rule ensures that consumers are not required to sign away their legal rights in order to open a bank account, obtain a credit card, finance a car, or obtain a private student loan.” In addition, Waters emphasized that the development of the rule was a methodical and well-thought-out process, done in consultation with other federal financial regulators.

Senate Banking Committee Ranking member Sherrod Brown (D-Ohio) stated that “overturning the arbitration rule will help banks and payday lenders continue getting away with cheating customers, and I intend to put up one hell of a fight.” According to Brown, “[a]lmost a year after millions of fake accounts were uncovered, Wells Fargo is still using fine print arbitration clauses to cheat those customers out of the justice they deserve.”

Industry applause. The American Bankers Association has applauded the congressional resolutions for putting consumers first and taking the first steps to overturn the CFPB’s “misguided” arbitration rule. “In reality, the vast majority of disputes get resolved quickly and amicably without the need for arbitration or legal action,” said Rob Nichols, ABA president and CEO. “If arbitration disappears, the Bureau will force consumers to navigate an already overcrowded legal system where the only winners will be trial lawyers. We think our customers deserve better, and we urge lawmakers in both chambers of Congress to overturn this anti-consumer rule as soon as possible.”

Richard Hunt, President and CEO of the Consumer Bankers Association (CBA), released a statement in favor of the resolutions. “Arbitration has long provided a faster, more cost-effective, and higher recovery means of addressing consumer disputes than class action lawsuits. The CFPB’s own study shows the average consumer receives $5,400 in cash relief when using arbitration and just $32 through a class action suit. The real benefactors of the CFPB’s arbitration rule are not consumers, but trial lawyers who pocket over $1 million on average per class action lawsuit.”

Industry associations oppose rollback. In a statement, the National Consumer Law Center stated that barring forced arbitration clauses in contracts with class action bans allows individuals to join together with other victims of fraud and wrongdoing to hold violators accountable. Lauren Saunders, the center’s associate director, stated that “Wells Fargo used a forced arbitration clause in their contracts to hide widespread wrongdoing for years from the public by sidestepping our justice system,” said Saunders.

Center for Responsible Lending Senior Policy Counsel Melissa Stegman released a statement praising the bureau’s rule to restore the ability of consumers to “join together and have their day in court.” Stegman stated that forced arbitration clauses “block consumers’ access to the courts and force consumers into an arbitration process rigged in favor of the company.” She stated that “the Wells Fargo scandal highlights the real harm of forced arbitration clauses, as customers who attempted to bring class action lawsuits against the bank over phony accounts were blocked from the court.”

Allied Progress executive director Karl Frisch called the bureau’s arbitration rule a “major victory for all Americans,” and said the companion bills “puts the power back in the hands of Wall Street and the big banks—essentially establishing secret arbitration courts where big business has the advantage and consumers hardly stand a chance.” Americans for Financial Reform also opposes efforts to roll back the bureau’s rule, with its executive director Lisa Donner stating that these efforts would “strip consumers of their constitutional right to hold lawbreakers accountable in court.”

Michael Best, Director of Advocacy Outreach at Consumer Federation of America, issued a statement that the bureau’s rule “would restore to consumers the choice to band together to seek refunds when their bank breaks the law. The financial industry claims that arbitration is superior to pursuing claims in court. If true, then consumers will choose this option—they shouldn’t be forced into it with fine print.”

“Repealing the CFPB’s arbitration rule is payback for the more than $100 million in campaign contributions Republicans have taken from the financial industry,” said Robert Weissman, president of Public Citizen, referring to analysis the group released asserting that the financial industry has given more than $100 million in campaign contributions to Republicans in the U.S. Senate.


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Thursday, July 20, 2017

Cordray: Arbitration clauses 'bad for consumers': Critics beg to differ

By Katalina M. Bianco, J.D.
Consumer Financial Protection Bureau Director Richard Cordray has spoken out on the bureau’s final rule banning mandatory predispute arbitration clauses that prevent class actions. The rule, adopted as final by the CFPB on July 10, 2017, allows arbitration clauses only if applied to individual claims Cordray, in prepared remarks, said that the bureau’s research, mandated by the Dodd-Frank Act, showed that "these little-known clauses are bad for consumers." The rule met with both approval and criticism by legislators, trade groups, and consumer organizations.
 
Consumers "may not be aware that they have been deceived or discriminated against or even when their contractual rights have been violated," Cordray said. He noted that many consumers do not have the time or money to fight on their own and hiring a lawyer for an individual case may not be practicable. Forcing consumers to go it alone means companies are less likely to face legal action. As a result, consumers are hurt in two ways:
  1. Compared to group lawsuits, individual arbitration means consumers are less likely to get relief for the harms they have suffered. 
  2. Consumers are likely to continue facing ongoing harm that does not get corrected
Opposition duly noted. After outlining the provisions of the "common-sense" final, Cordray stated that he is "aware of those parties who have indicated they will seek to have the Congress nullify this new rule." The CFPB director said that this is a "process that I expect will be considered and determined on the merits." His obligation as director of the CFPB "is to act for the protection of consumers and in the public interest. In deciding to issue this rule, that is what I believe I have done."
 
Hensarling voices strong opposition. House Financial Services Committee Chair Jeb Hensarling (R-Texas) commented on the final rule, stating, "This bureaucratic rule will harm American consumers but thrill class action trial attorneys." Hensarling soundly criticized the "anti-consumer rule" and noted, "In the last election, the American people voted to drain the D.C. swamp of capricious, unaccountable bureaucrats who wish to control their lives." The committee chair called on Congress to work with President Trump to reform the CFPB.
 
Dem lawmakers react favorably. In direct opposition to Hensarling’s disapproval of the CFPB rule, a number of Democrats praised the bureau and the rule. Senator Sherrod Brown (D-Ohio) referred to mandatory arbitration as "a practice used by Wall Street banks and predatory payday lenders to deny consumers access to the justice system when the institution engages in illegal behavior." Brown said that consumers are forced "into secret arbitration proceedings run by private industry."
 
"This CFPB rule will allow working families to hold big banks accountable when they're cheated and help discourage the kinds of surprise fees that consumers hate," stated Sen. Elizabeth Warren (D-Mass). Warren cautioned, "In the upcoming months, the U.S. Chamber of Commerce and other big business lobbying groups will go all out to get Republicans in Congress to reverse this rule." She noted that Republicans need to make a decision "whether to defend the interests of their constituents or shield a handful of wealthy donors from accountability." The U.S. Chamber of Commerce, however, responded by calling the rule "a prime example of an agency gone rogue."
 
On the House side, Rep. Brad Sherman (D-Calif) said, "The CFPB’s arbitration rule is great news for consumers looking to open a bank account in the future." Sherman also referred to Wells Fargo Bank, urging Congress to pass legislation that would ensure Wells Fargo customers would have their day in court.
 
Massachusetts AG support. Like Massachusetts Sen. Warren, the state’s Attorney General, Maura Healey, supports the arbitration rule. "Class action claims are critical to ensuring that consumers are able to pursue their legal rights and deterring businesses from using unlawful, unfair or deceptive business practices," Healey said. "We fought for this rule because it provides a valuable check against corporate misconduct and are pleased that the CFPB has adopted it to protect the public interest."
 
Trade/consumer groups. Consumer advocate groups came out in support of the CFPB’s rule, while banking trade groups, such as the American Bankers Association and Consumer Bankers Association, strongly criticized the rule. According to the ABA, the rule is a win for class action lawyers and a loss for consumers. "Consumers fare better in arbitration," the ABA stated. The association quoted statistics from the CFPB’s arbitration study in support of their position. The CBA also referenced the CFPB study, stating that the CFPB incorrectly interpreted the results. "By only using fuzzy math is the CFPB able to interpret these figures as favorable to consumers."
 
Consumer organizations such as Americans for Financial Reform, however, disputed the notion that arbitration benefits consumers. "Consumers are often blindsided to discover that ‘ripoff clauses’ buried in the fine print of financial contracts block them from challenging illegal behavior in court," the AFR wrote. The Center for Responsible Lending added, "This rule is a pragmatic step forward to ensure there is transparency, fairness, and accountability in consumer finance."

For more information about the CFPB arbitration rule, subscribe to the Banking and Finance Law Daily.

Tuesday, July 18, 2017

Number of debt-collection phone calls, by itself, insufficient evidence of violation

By Thomas G. Wolfe, J.D.

Addressing what it deemed a “matter of first impression,” a majority of justices on the West Virginia Supreme Court of Appeals recently determined that the number of phone calls made to a consumer by a debt collector does not, by itself, constitute sufficient evidence to establish an “intent to annoy, abuse, oppress or threaten” the consumer in violation of the West Virginia Consumer Credit and Protection Act (WVCCPA). Through its programmed auto-dialer system, the third-party debt collector telephoned the consumer 250 times during an eight-month period, and the consumer never answered the phone calls or contacted the collector to contest the debt.

In Valentine & Kebartas, Inc. v. Lenahan, West Virginia’s high court decided that the state trial court erred as a matter of law in ruling in favor of the consumer after a bench trial. While the court’s majority reversed the judge’s verdict, two justices dissented.

Collector’s phone calls. As relayed by the majority’s opinion, the third-party debt collector, Valentine & Kebartas, Inc., purchased a delinquent account from a provider of home security systems to consumers. While the consumer informed the provider that he disputed a $1,350 debt attributed to him, the consumer never notified the collector that he denied owing the debt.

After mailing a collection letter to the consumer, who admitted receiving the letter, the collector made 250 phone calls to him on his cell phone over an eight-month period by use of an auto-dialer system. The system not only was programmed to make calls “according to certain parameters such as time of day and number of calls per day or week in compliance with applicable laws,” it also was programmed to not leave a message. Rather, if a phone call were to be answered, the auto-dialer system would then “connect a collection agent with the person making the call.” The facts showed that the consumer did not answer any of the 250 phone calls.

Trial court’s verdict. Notably, the trial judge found that the debt collector “ramped up its collection campaign” after the initial 22 phone calls, viewing the practice as evidence of the collector’s intent. Consequently, the judge ruled that the volume of the debt collector’s unanswered telephone calls to the consumer constituted “abuse or unreasonable oppression by virtue of ‘causing a telephone to ring … repeatedly or continuously … with intent to annoy, abuse, oppress or threaten” the consumer under the WVCCPA.

Accordingly, the judge rendered a verdict in favor of the consumer and awarded him $75,000—reflecting a statutory penalty of $326.08 per phone call. The debt collector then appealed to the West Virginia Supreme Court of Appeals.

Appellate review. At the outset, the West Virginia Supreme Court framed the legal issue before it as “[w]hether the number of collection calls alone is sufficient to find V&K liable to Mr. Lenahan under West Virginia Code §46A-2-125(d).” In answering that question in the negative, the court stressed that the trial court relied “solely on the volume of telephone calls” placed by the debt collector’s auto-dialer system to find a “lack of legitimate purpose” for the collector’s conduct.

In reviewing the WVCCPA provision and examining state and federal case law on the issue, the court reasoned that: (i) “the weight of federal authority requires some evidence of intent to establish liability under the federal equivalent to West Virginia Code §46A-2-125(d);” (ii) the collector’s calls continued because the consumer never answered them and never informed the collector that he contested the debt; (iii) the trial court made a faulty “inference of intent” derived from the volume of phone calls; (iv) that inference inappropriately relieved the consumer of his burden of proof; and (v) the consumer’s silence about the numerous auto-dialer calls did not trigger “imputed knowledge” to the collector that it should discontinue the calls.

Dissent. In her dissenting opinion, Justice Workman asserted that “the majority reverses the trial court’s verdict in direct contradiction of a universally-accepted rule pertaining to evidence from which intent may be inferred for purposes of unlawful debt collection practices.” Workman indicated that “Justice Davis joins me in this dissent.”

From Workman’s perspective, even though the majority characterized the legal issue in the case as one of first impression, “the majority issues no new syllabus point to this effect, undoubtedly because it flies directly in the face of all written authority and common sense.” Further, she maintained that the majority’s decision represented a “complete departure from the overwhelming consensus of courts addressing this issue.”

For more information about debt collection practices impacting the financial services industry, subscribe to the Banking and Finance Law Daily.

Thursday, July 13, 2017

Single prerecorded call in voicemail can constitute a TCPA violation

By Robert B. Barnett Jr., J.D.

A single unsolicited prerecorded message left in cell phone voicemail can constitute a claim under the Telephone Consumer Protection Act (TCPA), even where the recipient is not charged for the call, the U.S. Court of Appeals for the Third Circuit has ruled. Furthermore, the court said in reversing the lower court’s dismissal of the suit, an intangible injury, such as invasion of privacy, can constitute a concrete injury, thus giving the plaintiff standing to assert her claim, where (1) the alleged injury is the very injury the statute is intended to prevent and (2) the injury has a close relationship to the harm traditionally providing a basis for lawsuits in American courts (Susinno v. Work Out World Inc.).

Noreen Susinno filed suit in New Jersey federal court against Work Out World Inc., alleging that Work Out World violated the TCPA when it left a single unsolicited prerecorded message on her voicemail. Work Out World filed a motion to dismiss for lack of subject matter jurisdiction. 

The district court held that: (1) a single solicitation was not the type of situation that Congress intended to protect people against and (2) Susinno suffered no concrete injury and, thus, lacked standing to assert her claim. As a result, the court granted the motion to dismiss for lack of subject matter jurisdiction. Susinno appealed the decision to the Third Circuit.

The TCPA makes it “unlawful for any person…to make any call…using any automatic telephone dialing system or an artificial or prerecorded device…to any telephone number…or any service for which the called party is charged for the call.” 47 U.S.C. §227(b)(1)). The Eleventh Circuit has stated that the phrase “for the which the called party is charged for the call” applies only to “any service” rather than to every other type of service previously mentioned in the statute (Osorio v. State Farm Bank, F.S.B., 746 F.3d 1242, 1257 (11th Cir. 2014). 

The Third Circuit opined that an even more direct rebuttal existed in another TCPA subsection that gave the FCC discretion to exempt some calls that were not charged (47 U.S.C. §227(b)(2)(C)). If only calls that were charged were subject to the TCPA, the court said, Congress would not have needed to permit the FCC to exempt some that were not. The Third Circuit also rejected Work Out World’s argument that the TCPA applies only to home phone calls, and not to cell phone calls, finding that the TCPA’s emphasis on home phone calls (the law was enacted in 1991) did not preclude application to all types of calls. As a result, the court said, she had a cause of action under the TCPA for a single call even where she was not charged for the call.

Standing. In Spokeo, Inc. v. Robins, 136 S.Ct. 1540 (2016), the U.S. Supreme Court ruled that intangible injuries can satisfy the Article III standing requirement that injuries be concrete. Intangible injuries will be concrete, the Court said, where the alleged intangible harm is the type of harm traditionally regarded as providing a basis for American or English lawsuits. Furthermore, the Court said, Congress can always elevate intangible harms previously unrecognized to the level of a legally cognizable injury. In In re Horizon Healthcare Services Inc. Data Breach Litigation (3d Cir. 2017), the Third Circuit applied Spokeo to a claim for inadequate protection of personal information in violation of the Fair Credit Reporting Act. Even though no proof existed that the information was used to the owner’s detriment, the plaintiff had standing to bring the suit, the court said.

Applying Spokeo and Horizon to these facts, the Third Circuit concluded that her injuries were concrete, and she had standing, for two reasons. First, Congress squarely identified this injury in enacting the TCPA. These calls, Congress said, constituted an invasion of privacy. Even a single call invades her privacy, and, thus, her claim asserts the very harm that Congress sought to prevent. Second, Congress elevated privacy as a harm that, although perhaps previously inadequate in law, was, after the TCPA was enacted, of the same character as existing legally cognizable injuries. As a result, she has alleged a concrete harm and has standing to assert the claim.

The Third Circuit ruled, therefore, that the TCPA provided her with a cause of action and that the concreteness of her claim afforded her standing to assert that cause of action. The appellate court reversed the lower court’s granting of the motion to dismiss, and it remanded for further proceedings.

This article previously appeared in the Banking and Finance Law Daily.