End of year bonus: Fed, FDIC order HigherOne to reimburse students $55M

By Andrew A. Turner, J.D.

 

College students are receiving restitution for deceptive practices involving debit cards used for financial aid disbursements from universities, as a result of coordinated actions by the Federal Reserve Board and Federal Deposit Insurance Corporation. The banking regulators contended that students were misled by omissions in marketing materials about other disbursement methods available to students, a full and complete fee schedule, and the availability of fee-free ATMs. The advertisements also prominently displayed school logos, suggesting that the school endorsed the OneAccount product.

 

The Fed and the FDIC assessed a civil money penalty of $2.3 million against Higher One, Inc. of New Haven, Conn.—an institution-affiliated party of Customers Bank, Phoenixville, Pa., a state-chartered member of the Federal Reserve System—and WEX Bank, Midvale, Utah, a state nonmember bank, for allegedly misleading students who obtained financial aid disbursements through Higher One’s “OneAccount.” Under the Fed’s order, Higher One must also pay $24 million in fees to approximately 570,000 students who opened accounts with Higher One while Higher One's website and marketing materials were deceptive. The FDIC separately ordered Higher One and WEX Bank to pay total restitution of approximately $31 million to an estimated 900,000 harmed consumers.

 

Misleading information. Higher One provides colleges and universities with financial aid disbursement services for students. Specifically, after payment of tuition and other expenses owed directly to the school, the remaining financial aid, such as money for books, supplies, and living expenses, can be disbursed to students through Higher One's OneAccount. The OneAccount is a debit card-based product that is offered in partnership through financial institutions. WEX Bank has offered the OneAccount since May 4, 2012. Customers Bank has offered the OneAccount since August 2013.

 

According to the agencies, Higher One’s website and associated materials omitted material facts about certain fees, features, and limitations of the OneAccount in violation of Section 5 of the Federal Trade Commission Act.

 

“It is important that financial products offered to college students under the sponsorship of their universities are clear, transparent, and trustworthy,” said FDIC Chairman Martin J. Gruenberg. “Today's action holds both the bank and its student card partner accountable for the practices related to the products they offered to college students and provides restitution to those students harmed by these practices.”

 

Fed Governor Lael Brainard added that deceptive marketing practices with respect to student loans “will not be tolerated,” and the action ensures that students who were misled will receive restitution. 

 

Restitution. Under the Fed’s order, students who opened a OneAccount with Higher One at Cole Taylor Bank of Chicago, Ill., or Customers Bank between May 4, 2012, the date the deceptive marketing practices involving the OneAccount began, through Dec. 19, 2013, the date Higher One took corrective measures, will be reimbursed for the fees related to the deceptive practices. 

 

The FDIC’s order requires that Higher One and WebEx reimburse customers for the $31 million in fees and penalties customers incurred between May 4, 2012, and July15, 2014.

 

Corrective measures. In addition to the payment of restitution to harmed consumers and civil money penalties, both orders require Higher One to take affirmative steps to correct the violations, and to ensure compliance in the future with all consumer protection laws, including the FTC Act.

 

Education department action. Controversy over partnerships between banks and colleges to market debit and prepaid cards to students has been under the spotlight in recent years. In October, the U.S. Department of Education issued a Cash Management regulation to address the proliferation of campus debit and prepaid cards offered to students in exchange for monetary benefits to schools. The rule is intended to enable students to:

• freely choose how to receive their federal student aid refunds;
• be given objective and neutral information about their financial aid disbursement options; and
• avoid excessive fees to access their federal student aid, including Pell Grants.

For more information about campus financial product marketing agreements, subscribe to the Banking and Finance Law Daily.

CFPB settlement would throw monkey wrench into lawsuit mill’s gears

By Richard Roth

The Consumer Financial Protection Bureau has reached a settlement of a suit claiming that Frederick J. Hanna & Associates, a Georgia-based law firm, and its three principal partners operated an illegal debt collection lawsuit mill. The suit, filed in July 2014, alleged that the firm violated the Fair Debt Collection Practices Act and engaged in deceptive or abusive acts or practices in violation of the Dodd-Frank Act. The bureau claimed that the firm, its principal owner, and the managing partners operate “like a factory” in processing debt collection suits for its clients, which the bureau says are principally banks, credit card issuers, and debt buyers.

The proposed consent order follows a July 15, 2015, decision rejecting the argument that the bureau was attempting to illegally regulate the practice of law and violating the firm’s constitutional rights.

If approved by the court, the consent order would:

• prohibit the law firm and principal partners from suing or threatening to sue to enforce debts unless they have specific documents and information showing the debt is accurate and enforceable;
• require the firm to create a recordkeeping system documenting that it and the partners reviewed specific documentation related to a consumer’s debt before suing or threatening collection suits;
• prohibit the firm and its partners from using affidavits as evidence to collect debts unless the statements specifically and accurately describe the signer’s knowledge of the facts and the attached documents; and
• require the firm and principal partners jointly to pay a $3.1 million penalty to the CFPB’s Civil Penalty Fund.

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

Public deserves more transparency on Volcker Rule implementation

By John M. Pachkowski, J.D.

Americans for Financial Reform, a coalition of more than 200 national, state and local groups who have come together to reform the financial industry, has sent a letter to the heads of the Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Securities and Exchange Commission, and the Secretary of the Treasury, calling for them to provide “far more extensive transparency into the implementation of the Volcker Rule’s prohibitions on proprietary trading by banking organizations.” Although AFR recognized that enforcing the statutory prohibitions of the Volcker Rule require “some degree of supervisory discretion,” the AFR’s letter continued that without extensive transparency “the public cannot have confidence that the law has been effectively implemented.”

Major uncertainties. To highlight the perceived lack of transparency, AFR noted that since the passage of the agencies’ final rule in late 2013, “regulators have failed to clearly inform the public, or even lay out a plan for clearly informing the public, as to the parameters for enforcement of the rule, the standards for compliance, the penalties for non-compliance, and the success or failure of major banking organizations in achieving compliance.” The advocacy group added, “This lack of transparency is especially significant since the Final Rule approved in 2013 left major uncertainties as to the actual, on-the-ground limits on trading and investment activities that would result from the Volcker Rule.”

Regulatory transparency. In order to provide regulatory transparency, AFR provided four specific recommendations that would provide the public and market participants with a solid evidence base for understanding the implementation of the Volcker Rule and its impact on bank trading practices. The recommendations are:

1. Give an annual qualitative progress overview of Volcker Rule enforcement, including progress, violations, penalties, exceptions, escalations, and areas in which compliance must be improved.
2. Release certain summary quantitative metrics governing market-making and underwriting activities at the trading desk level.
3. Provide a more general overview discussion, including quantitative ranges, of trading desk risk limits and how they are determined, as well as the methodologies for estimating near-term customer demand.
4. Report information on exposure to private equity and hedge funds permitted under the Volcker Rule, as well as required divestments under the rule.

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

Consumer groups urge Congress to oppose ‘Consumer Protection and Choice Act’

By Thomas G. Wolfe, J.D.

Recently, in a letter to members of Congress, Americans for Financial Reform and over 200 other consumer and community groups jointly urge opposition to the “Consumer Protection and Choice Act” (H.R. 4018). Characterizing the proposed measure as one that would hamper the Consumer Financial Protection Bureau’s ability to protect consumers against high-cost payday, car title, and installment loans, the groups assert that the bill would delay the CFPB’s rulemaking in the small-dollar loan marketplace “for two years or longer.” Moreover, the groups’ Dec. 15, 2015, letter maintains that H.R. 4018 would allow the payday lending industry to avoid federal regulation altogether by “pushing an industry-backed proposal based on a Florida law that has proven ineffective at stopping the payday loan debt trap.”

By way of background and as previously reported in the Dec. 4, 2015, issue of the Banking and Finance Law Daily, H.R. 4018 was introduced by Republican representatives Dennis A. Ross, Carlos Curbelo, and Bill Posey, together with Democrats Patrick Murphy, Alcee Hastings, and Corrine Brown. The bill would amend the federal Truth in Lending Act by exempting any state that has in effect a “covered deferred presentment law” from any CFPB regulations governing deferred presentment transactions and deferred presentment providers. In addition, the law or regulation must meet other specified requirements governing the use of a transaction database, background checks for licensing, interest rate and fee limitations, and the treatment of past due amounts.

However, from the consumer and community groups’ perspective, the Consumer Protection and Choice Act is a misnomer. In their letter to congressional members about the proposed legislation, the groups maintain that H.R. 4018 “is not an effort to reform the payday loan market—it is an attempt to codify industry-backed practices that do little to protect consumers.” Accentuating this point, the groups contend that H.R. 4018 is largely based on a faulty Florida model that would harm consumers by “putting a stamp of approval” on: (i) triple-digit interest rates; (ii) back-to-back lending arrangements without proper consideration of a consumer’s ability to repay; (iii) actions facilitating a consumer’s long-term cycle of debt; and (iv) the imposition of excessive, burdensome fees on lower-income consumers.


For more varying perspectives on proposed legislation affecting the consumer financial services industry, subscribe to the Banking and Finance Law Daily.

In case you missed it: Fed raises rates

By Lisa M. Goolik, J.D.

Last week, the Federal Open Market Committee raised the target range for the federal funds rate to a range of .25 to .50 percent. The funds rate had remained unchanged for several years at a range of 0 to .25 percent. The FOMC stated that since it last met in late October 2015, the economic activity has been expanding at a moderate pace.

Expanding economy. According to the FOMC, inflation is expected to rise to 2 percent over the medium term “as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.” In addition, it noted that household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further. The Committee also cited a range of recent labor market indicators, including ongoing job gains and declining unemployment.

Chain reaction. In a related action, the Federal Reserve Board voted unanimously to approve an increase in the primary credit discount rate—the interest rate charged for short-term credit extensions to depository institutions. The Fed also unanimously agreed to raise the interest rate paid on required and excess reserve balances to .50 percent, effective Dec. 17, 2015.

To implement the increase, the Fed issued a final rule amending Regulation D—Reserve Requirements of Depository Institutions (12 C.F.R. Part 204), effective Dec. 22, 2015.

Increased awareness. The Fed also updated a number of FAQs on its monetary policy to, among other things, increase the public’s awareness and understanding of recent decisions by the FOMC.

ABA’s reaction. In a Dec. 16, 2015, American Bankers Association release, Rob Nichols, the incoming ABA president and CEO, remarked, “Today’s action shows the Fed is confident that the economy is strong enough to handle a very gradual rise in rates. After years at historically low levels, it’s important to head back in the direction of more normal interest rates.”

For more information about the Fed's monetary policy, subscribe to the Banking and Finance Law Daily.

CFPB puts home, workplace visits to collect debts on naughty list

By Andrew A. Turner, J.D.

EZCORP, Inc., a high-cost, short-term lender has settled charges brought by the Consumer Financial Protection Bureau that it attempted to collect debts with illegal visits to consumers at their homes and workplaces. EZCORP agreed to refund $7.5 million to 93,000 consumers, pay $3 million in penalties, and stop collection of remaining payday and installment loan debts owed by roughly 130,000 consumers.

In a consent order, the CFPB also found that EZCORP risked exposing consumers’ debts to third parties, falsely threatened consumers with litigation for non-payment of debts, and unfairly made multiple electronic withdrawal attempts from consumer accounts, causing mounting bank fees. EZCORP did not admit or deny the CFPB’s findings, saying that it had agreed to the consent order to settle “legacy issues.” 

Prior to the CFPB’s investigation that resulted in the bureau’s enforcement action, EZCORP, and its related entities—EZPAWN, L.P and EZMONEY—provided loans, in 15 states and from more than 500 storefronts. In July 2015, EZCORP announced that it would cease offering payday, installment, and auto-title loans in the United States to concentrate on its core pawn brokering operations. 

Industry warning. In light of its enforcement action, the CFPB also issued Compliance Bulletin 2015-07 warning the financial services industry, and in particular lenders and debt collectors, about potentially unlawful conduct during in-person collections.

The bulletin highlights that in-person collection visits may be harassment and may result in third parties, such as consumers’ co-workers, supervisors, roommates, landlords, or neighbors, learning that the consumer has debts in collection. Revealing such information to third parties could harm the consumer’s reputation and result in negative employment consequences. The bulletin also highlights that it is illegal for those subject to the Fair Debt Collection Practices Act to engage in practices such as contacting consumers to collect on debt at times or places known to be inconvenient to the consumer, except in very limited circumstances.

Common decency. Commenting on the enforcement action and the bulletin, CFPB Director Richard Cordray stated, “People struggling to pay their bills should not also fear harassment, humiliation, or negative employment consequences because of debt collectors. Borrowers should be treated with common decency. This action and this bulletin are a reminder that we will not tolerate illegal debt collection practices.”

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

‘Trojan Horse assault’ on state privacy laws clears committee gates

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

On the eve of a committee vote on the Data Security Act of 2015, U.S. PIRG reiterated its opposition, calling it a “Trojan Horse assault on state privacy laws.” On Dec. 9, 2016, the House Financial Services Committee approved the bill by a vote of 46 – 9.

The measure, H.R. 2205, would establish a national data security and breach notification standard for all businesses and would apply to any individual, partnership, corporation, trust, estate, cooperative, association, or entity that accesses, maintains, communicates, or handles sensitive account information or sensitive personal information. Ed Mierzwinski, U.S. PIRG’s Consumer Program Director, says the bill is a “massive attack on state privacy laws.

State law preemption. A letter signed by U.S. PIRG and 17 other consumer and privacy groups states that H.R. 2205 would supersede all state laws on data security and breach notification, including those protecting personal information not covered in the bill. According to the letter, the bill would “squelch” new and developing laws in states extending protections to online account information including email accounts and cloud photo storage.

Also the bill does not cover information about an individual’s geographic location or electronic communications. Moreover, it is unclear, the letter states, whether “medical information” would include the broad range of data that is collected about individuals’ physical or mental health through websites and wearable devices.

“Preempting state law would make consumers less protected than they are right now,” the letter says. The organizations believe that states should continue to adapt their laws to respond to changes in technology and data collection, as they are “better equipped to quickly adjust to the challenges presented by a data-driven economy.”

Serving banks. The letter states that H.R. 2205 is “designed to serve the banks.” The letter notes that over 100 merchant and retailer associations oppose the bill because it imposes two tiers of rules. Banks would continue to be subject to an “existing weak regime that does not even require breach notices, only modest plans,” while other firms would be subject to the bill's higher requirements.

For more information about data security for financial institutions, subscribe to the Banking and Finance Law Daily.

Supreme Court to decide whether Ohio’s “special counsel” are debt collectors

By Richard A. Roth, J.D.

The Supreme Court has granted a request that it decide whether private attorneys designated by Ohio’s Attorney General as special counsel for debt collection purposes are officers or employees of the state who are exempt from the Fair Debt Collection Practices Act. The attorneys, supported by the AG, are appealing a decision by the U.S. Court of Appeals for the Sixth Circuit that they were not acting as officers of the state when they sent dunning letters to two consumers (Gillie v. Law Office of Eric A. Jones). The petition was filed in Sheriff v. Gillie, No. 15-338.

Under the FDCPA, an officer or employee of a state is not considered to be a debt collector as long as he is collecting debts “in the performance of his official duties,” and Ohio law authorizes the state’s AG to use special counsel to collect debts owed to the state. According to the Sixth Circuit opinion, these special counsel are independent contractors who are compensated on a contingent fee basis and who are required to meet the standards of the FDCPA. They are authorized to use the AG’s official letterhead when they are collecting some unpaid taxes, but not when they are collecting consumer debts such as those at issue in this case.

What is an “officer”? Special counsel are not state officers because their authority to act comes not from state law but rather from contracts with the state AG, according to the Sixth Circuit opinion.

Moreover, the private attorneys are authorized to perform “the duties of the office.” That phrase only made sense if it referred to all duties of some public office, the Sixth Circuit said. Special counsel are not authorized to perform all of the AG’s duties, and they have no association with any other public office.

State authority. The appellate court also observed that subjecting special counsel to the FDCPA would not be a challenge to the structure of the state government. The private attorneys were third parties.

The Sixth Circuit majority opinion made clear a degree of skepticism over the federalism argument, noting that the AG was not defending the private attorneys. According to the majority, “The Attorney General has legally distanced himself and the OAG [Office of the Attorney General] from special counsel so that the State of Ohio does not suffer the negative consequences of special counsel’s actions. Now, he wishes to see that special counsel get treated as if they are officers of the State of Ohio, directly under his supervision. The Attorney General cannot have it both ways . . .” The AG’s contract makes special counsel independent contractors, so they cannot be officers, the opinion said.

Material misrepresentation. The petition raises a second issue—whether the special counsels’ use of the AG’s letterhead on collection letters constituted a material misrepresentation in violation of the FDCPA. The appellate court opinion said that it was possible the letters would have been confusing to the least sophisticated consumers and that the issue should be decided by a jury.

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

Senate votes unanimously to extend foreclosure protections for returning servicemembers

By Stephanie K. Mann, J.D.

The Senate has approved a bill, authored by Sen. Sheldon Whitehouse (D-RI), to keep military servicemembers and veterans out of foreclosure and in their homes after transitioning from active duty. Currently, servicemembers are protected from foreclosure for a full year after leaving active-duty service. That provision is due to expire at the end of 2015, meaning foreclosure protections for transitioning servicemembers would revert to just 90 days. The bill, Foreclosure Relief and Extension for Servicemembers Act of 2015 (S. 2393), which passed unanimously, would extend the 12-month grace period through the end of 2017.

“Some of the men and women who’ve served our country need time to find their financial footing as they leave active service. They should get it,” said Whitehouse. “Our servicemembers keep us safe from all manner of threats around the globe. It’s the least we can do to keep them and their families safe from foreclosure as they transition back to civilian life. I’ll keep fighting to make these protections permanent, but I’m pleased we’ve reached a unanimous, bipartisan agreement on a two-year extension.”

Senator Sherrod Brown (D-Ohio) added that servicemembers and their families “make enough sacrifices for our countries…their homes should not be one of those sacrifices.”

Background. In 2008, Congress first extended the period of foreclosure protection under the Servicemembers Civil Relief Act from 90 days to nine months in response to a report by the Commission on the National Guard and Reserves. The report found that “the threat of foreclosure is a stressor that need not be placed on members of the armed forces during the first months of their return to civilian life.”

In December 2014, Congress extended the foreclosure protection until January 2016. Unless Congress acts by the end of this year, the period of foreclosure protection will revert back to just 90 days starting in 2016.

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

CARD Act: ‘gotcha’ fees/costs down, availability up, says CFPB

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published a report on the Credit Card Accountability Responsibility and Disclosure Act (CARD Act)’s effect on the credit card market since it was signed into law in 2009. The bureau reports that the CARD Act helped to reduce the cost of “gotcha” credit card fees by more than $16 billion. Further, total costs to consumers have fallen with the elimination of certain back-end pricing practices such as over-limit fees, according to the bureau.

 

“When these reforms were being debated, many in the credit card industry reacted as if the sky were falling,” CFPB Director Richard Cordray said in prepared remarks before the Consumer Federation of America on Dec. 3, 2015. “They said that restricting back-end pricing would make it harder for consumers to get credit because companies would be forced to issue fewer credit cards at greater cost.” Despite these “fire and brimstone warnings,” Cordray said, the CARD Act has made the credit card market more predictable for consumers without reducing access to credit or hurting the profitability of the credit card companies.

 

Report. The CARD Act requires the CFPB to regularly review the credit card market and the impact of the law’s rules. The current report is the second one issued by the bureau. In general, the CFPB found that consumers are paying less for their credit cards, costs are easier to predict, and credit availability continues to expand. Specific findings include the following:

 

• Consumers have avoided more than $9 billion in over-limit fees and saved more than $7 billion in late fees.
• The total cost of credit is approximately 2 percent lower.
• Available credit has increased by 10 percent since 2012.
• New account volume is growing. More than 100 million credit card accounts were opened in 2014.

 

Risky business. Despite the positive effects of the CARD Act, the CFPB remains concerned over certain “risky practices” that still remain in the marketplace. The bureau especially is concerned about:

• deferred-interest promotions that hit consumers with back-end pricing if their balances are not paid in full by the end of the interest-free period;
• high charges by subprime credit card companies;
• reward programs that have “obscure and incomplete” terms;
• practices by third-party debt collectors hired by banks; and
• long, complex credit card agreements.

For more information about the CFPB and the CARD Act, subscribe to the Banking and Finance Law Daily.

Hoenig: Small bank relief needs objective criteria; no blanket Volcker Rule exemption

By John M. Pachkowski, J.D.

As Congress begins final consideration of a number of appropriations bills, Thomas M. Hoenig, Vice Chairman of the Federal Deposit Insurance Corporation has written to Sen. Richard Shelby (R-Ala), Chairman of the Senate Banking Committee, and the committee’s Ranking Member Sen. Sherrod Brown (D-Ohio) providing his views on regulatory relief for smaller banks.

A bill introduced by Shelby and approved by the Banking Committee—the Financial Regulatory Improvement Act of 2015—would ease restrictions on mortgage credit, reduce the examination and supervision burdens on smaller institutions, tighten up the Financial Stability Oversight Council’s process for designating systemically important financial institutions, and make technical corrections to the Dodd-Frank Act. It also would initiate an inquiry into reorganizing the Federal Reserve System. A much narrower proposal offered by the Banking Committee Democrats would have focused regulatory relief on small banks, thrifts, and credit unions; and would not provide for any changes to the Financial Stability Oversight Council, systemically important financial institutions, or changes to the Federal Reserve System. 

Although the prospects of Shelby’s bill moving forward in the Senate in the conventional manner seemed challenging, the Banking Committee Chairman was able to add the bill as a rider to an appropriations bill that funds the Treasury Department, the Judiciary, Small Business Administration, Securities and Exchange Commission, Commodity Futures Trading Commission, and several other agencies for Fiscal Year 2016. The FY2016 Financial Services and General Government Appropriations bill was passed by the Senate Appropriations Committee along party lines in a 16-14 vote.

In his letter, Hoenig addressed a blanket exemption from the Volcker Rule for all small banks and provided recommendations on how to provide regulatory relief for traditional banks.

Strongly cautions. At the outset, Hoenig noted, “no question that some classes of banks face significant compliance burdens that are disproportionate to their risk and business model. However, in the effort to cull incommensurate regulations, I strongly caution against easing or repealing rules that are appropriately calibrated to the risk that specific bank practices pose to the financial system and broader economy.”

Volcker Rule. Addressing the compliance burdens experienced by community banks regarding the Volcker Rule, Hoenig pointed out that the “the vast majority of community banks have virtually no compliance burden associated with implementing the Volcker Rule.” He added these banks do not have proprietary trading operations or trading positions of any kind; and they generally do not invest in any private-label securitizations, let alone more complicated hedge funds or private equity funds.

Hoenig further observed that existing bank regulatory agency guidance provides that community banks with less than $10 billion in total assets are already exempt from all of the Volcker Rule compliance requirements if they do not engage in any of the covered activities other than trading in certain government, agency, state, and municipal obligations.

For those banks under $10 billion that do engage in traditional hedging activities, Hoenig noted that “Volcker Rule compliance requirements can be met by simply having clear policies and procedures that place appropriate controls on the activities—and which are required regardless of the Volcker Rule.”

As for the 400 or so, out of approximately 6,400 community banks that engage in less-traditional activities that maybe restricted by the Volcker Rule, Hoenig conceded that there “would be some initial compliance requirements to determine their status,” but added that of these banks “most will find that their trading-like activities are already exempt from the Volcker Rule.

Hoenig concluded, “On balance, therefore, exempting smaller banks from the Volcker Rule should not be considered as regulatory relief or a technical adjustment. Exempting smaller banks from the rule would allow them to engage in risky trading and investment activities financed by taxpayer subsidized funds. And an exemption would not serve any practical or public value, nor would it provide meaningful regulatory relief for the vast majority of traditional community banks because they do not engage in the activities that the Volcker Rule restricts.

Regulatory relief. On the issue of providing regulatory relief for community banks, Hoenig suggested that the focus of that relief should “be directed at bank activity and complexity, and less on bank size.”

Specifically, Hoenig called for statutory relief based on objective set of specific criteria that stresses the importance of strong equity capital and the core commercial banking model. 

Under his plan, a bank would be eligible for regulatory relief if:

• it holds no trading assets or liabilities;
• it holds no derivative positions other than interest rate and foreign exchange derivatives;
• the total notional value of all its derivatives exposures—including cleared and noncleared derivatives—is less than $3 billion; and
• it maintains a ratio of Generally Accepted Accounting Principles equity-to-assets of at least 10 percent.

Hoenig noted these criteria reflect the longstanding business models of traditional commercial banks; and since these are objective, they can be enforced with less of an imposition on the banks through off-site call report monitoring and the regular exam process.

Once well-capitalized banks meet the criteria, regulatory relief can be provided to them, which includes:

• exemption from all Basel capital standards and associated capital amount calculations and risk-weighted asset calculations;
• exemption from several entire schedules on the Call Report, including schedules related to trading assets and liabilities, regulatory capital requirement calculations, and derivatives;
• allowing for greater examiner discretion and eliminating requirements to refer “all possible or apparent fair lending violations to Justice” if judged to be minimal or inadvertent;
• establishing further criteria that would exempt eligible banks from appraisal requirements;
• exempting eligible banks, if applicable, from stress testing requirements;
• allowing for an 18-month examination cycle as opposed to the current required 12-month cycle for traditional banks; and
• allowing mortgages that remain in the banks’ portfolio to be considered qualified mortgage loan for purposes of the Dodd-Frank Act.

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

Trade, consumer groups spar over spending bill rider seeking new CFPB arbitration study

By Thomas G. Wolfe, J.D.


Recently, banking and business trade groups from the financial services industry and consumer advocacy groups have presented very different opinions about the merits of a proposed spending bill rider seeking a new arbitration study by the Consumer Financial Protection Bureau.

In terms of a backdrop, the Dodd-Frank Act required the CFPB to conduct a study of arbitration clauses in consumer financial contracts before the federal bureau drafts any rules on the subject. Having completed its arbitration study, the CFPB has now begun the process of drafting a rule pertaining to arbitration clauses and has communicated that it is inclined to restrict class action waivers in arbitration clauses.

Consequently, in their Dec. 1, 2015, letter to members of the House and Senate committees on appropriations, a number of banking and business associations and other trade groups have expressed their support for a spending bill rider that would require the CFPB to “conduct a fair, comprehensive study before adopting a rule that would restrict arbitration and open the door widely to abusive class actions that benefit lawyers and harm consumers.” Accordingly, the trade groups’ letter urges support for the Womack-Graves amendment to the Fiscal Year 2016 Financial Services and General Government Appropriations bill (H.R. 2995).

The letter to the congressional committees was sent jointly by the American Bankers Association, American Financial Services Association, Consumer Bankers Association, Consumer Data Industry Association, Consumer Mortgage Coalition, Credit Union National Association, CTIA—The Wireless Association, Electronic Transactions Association, Financial Services Roundtable, National Association of Independent Housing Professionals, Real Estate Services Providers Council, Inc., Small Business & Entrepreneurship Council, U.S. Chamber Institute for Legal Reform, and the U.S. Chamber of Commerce.

In contrast, the Americans for Financial Reform, National Association of Consumer Advocates, National Consumer Law Center, and Public Citizen are jointly urging Congress to “resist the temptation to give in to powerful corporate lobbyists that seek to use the budget process” to obstruct or discard the rulemaking efforts of the CFPB in connection with arbitration reforms. Accordingly, in their Dec. 2, 2015, release, the consumer advocacy groups caution legislators that the industry trade groups have been encouraging members of Congress to “add a harmful rider to the contentious spending bills that would disregard the CFPB’s multi-year, data-driven study and analysis on the use of forced arbitration clauses in the fine print of financial contracts.”

What are the core concerns of the respective groups? On one hand, the industry trade groups state in their joint letter that more than 80 members of Congress previously sent a letter to the CFPB contending that the CFPB’s arbitration study process was “opaque, incomplete, and unfair.” According to the trade groups, the CFPB’s arbitration study “failed to address the most important question—how consumers would be able to resolve disputes cheaply and speedily if arbitration is limited and consumers are left to the mercy of the plaintiffs’ class action trial lawyers and the increasingly overcrowded and complex judicial system.”

Consequently, the trade groups assert that the Womack-Graves amendment “would require the CFPB to go back, before enacting any rule, and undertake the kind of study it should have undertaken in the first place.” The letter notes that, upon completion of the proposed new CFPB study, the Womack-Graves amendment would authorize the CFPB to regulate arbitration clauses “as long as it demonstrates, based on empirical evidence, that the benefits to consumers would not be outweighed by the costs to consumers.”

On the other hand, the consumer advocacy groups offer a starkly different perspective. Outlining their concerns in the Dec. 2 release, the consumer groups contend that an “industry-favored rider” would obstruct the CFPB’s efforts, “forcing the CFPB to re-do the [arbitration] study, wasting valuable taxpayer funds, and denying much-needed consumer protections from being implemented.” Further, the groups maintain that an industry-favored rider promoting forced arbitration clauses would harm consumers, shield financial institutions from accountability for their misconduct, and encourage Wall Street to engage in exploitive, unfair practices.

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

Fla. Dist. App.: No free ride after wrongful repossession

By Lisa M. Goolik, J.D.

A Florida appellate court has held that a debtor’s action against a repossession company and its employee was not extinguished under the initial and subsequent tortfeasor doctrine by the release of the debtor’s action against the creditor that hired the repossession company. The court concluded that even if the doctrine applied, there was no earlier injury by the creditor that could have been aggravated by the employee’s subsequent repossession attempt. As a result, the repossession company and its employee may be liable for violating the repossession requirements of Article 9 of the Florida Uniform Commercial Code (Daniel v. Morris, Dec. 4, 2015, Berger, J.).

The debtor owned and operated a limousine company with her business partner. BankFirst held a purchase-money security interest in a bus owned by the company from a loan it made to the debtor’s partner. After her partner’s death, the limousine company defaulted. Thereafter, BankFirst obtained a judgment against her partner’s estate and hired Associated Investigators to repossess the bus. 

After an initial attempt at repossession was unsuccessful, an employee of Associated Investigators made a second attempt on March 6, 2012. When he entered the company’s premises, he allegedly ignored the debtor’s request to leave, forced his way onto the bus, and pushed the debtor from the bus, violating Section 9-609 of the Florida UCC.

The section provides that a secured party may take possession of its collateral with or without judicial process if it can be done without a breach of the peace. Creditors electing peaceful repossession are liable for any negligence during the repossession. 

The debtor filed an action against BankFirst, Associated Investigators, and the employee, alleging negligence and a trespass to land and chattels stemming from the March 6, 2012, repossession attempt.

After the debtor agreed to settle and release her claim against the bank, Associated Investigators and its employee filed a motion for summary judgment, arguing that when the debtor released her claims against BankFirst, she failed to preserve her claims against them. They asserted that Associated Investigators and its employee were subsequent tortfeasors of BankFirst because the repossession aggravated an earlier trespass during the initial repossession attempt. Thus, they contended, under the initial and subsequent tortfeasor doctrine, the release of BankFirst discharged them from liability.

Although the court noted that the initial and subsequent tortfeasor doctrine can apply outside the context of medical malpractice, the court found that the doctrine did not apply to the instant case. Notably, the court determined that BankFirst was not an initial tortfeasor because it had no fault and would have been permitted to seek indemnification against Associated Investigators and its employee. As a result, BankFirst and, collectively, Associated Investigators and its employee, were not initial and subsequent tortfeasors.

Even if the doctrine applied, the court concluded that their theory failed because the facts provided in the complaint did not allege a breach of the peace before March 6, 2012, as the repossession attempt stopped when the debtor refused entrance. Thus, there was no injury to aggravate on the second repossession attempt.

As a result, the debtor’s release of BankFirst did not operate to release the debtor’s action against Associated Investigators and its employee.

The case is No. 5D14-1658.

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CFPB peek into the future includes student loan servicing, credit reporting standards

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau’s latest update to its rulemaking agenda adds credit reporting and student loan servicing as long-term initiatives (beyond Nov. 2016). Upcoming in 2016, rulemaking proposals are expected on arbitration, payday lending, overdraft programs on checking accounts, and debt collection, while final rules are anticipated on prepaid cards and mortgage servicing.

Long-term actions. Intending to provide a framework to improve student loan servicing, the CFPB will be consider proposing rules for specific acts or practices and consumer disclosures. For credit reporting, the CFPB will consider rulemaking on the accuracy of credit reports, including the processes for resolving consumer disputes.

Arbitration. The CFPB is beginning a process to propose rules to prevent companies from using arbitration agreements for credit cards, deposit accounts, and payday loans to bar class actions lawsuits. The CFPB is also considering requirements to monitor the fairness of arbitration proceedings.

Payday lending. Proposed rulemaking is expected in first quarter 2016 to address concerns that payday and auto title lending products are being offered without assessment of the consumer’s ability to repay. Payment collection practices are another area of concern.

Prepaid accounts. A final rule instituting consumer protections for prepaid accounts similar to those that exist for debit and payroll cards is expected in spring 2016.

Overdraft. As part of the process of preparing a proposed rulemaking for overdraft programs on checking accounts, the CFPB is conducting additional research and has begun consumer testing initiatives related to the opt-in process.

Debt collection. While conducting research for a rulemaking proposal on debt collection activities, the CFPB is running consumer testing initiatives to determine what information would be useful for consumers to have about debt collection and their debts and how that information should be provided.

Larger participants and non-depository lender registration. The CFPB expects to begin development of rules to define larger participants in markets for consumer installment loans and vehicle title loans. In addition, consideration will be given to requiring registration of lenders in these markets or other non-depository lenders.

Women owned, minority-owned, and small businesses data collection. Initial steps are planned towards development of rules for requiring financial institutions to report information about lending to women-owned, minority-owned, and small businesses.

Mortgage servicing. A final rule is expected in mid-2016 on mortgage servicing rules for enhanced loss mitigation requirements.

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

FDIC takes multimedia approach to cybersecurity awareness

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

As part of its Community Banking Initiative, the Federal Deposit Insurance Corporation is adding to its cybersecurity awareness resources for financial institutions. The additions include a Cybersecurity Awareness video and three new video vignettes for the Cyber Challenge, which consists of exercises that are intended to encourage discussions of operational risk issues and the potential impact of information technology disruptions on common banking functions.

Operational risks. In a letter to its supervised institutions (FIL-55-2015), the FDIC noted that community financial institutions may be exposed to operational risks through internal or external events ranging from cyber attacks to natural disasters. Operational risks, it said, can threaten an institution's ability to conduct basic business operations, impact its customer service, and tarnish its reputation.

Resource Center. To help community financial institutions assess and prepare for these risks, the FDIC is incorporating new tools in its Directors' Resource Center. This part of the FDIC's website is dedicated to providing useful information and resources for directors and officers of FDIC-insured institutions. The content of this page focuses on guidance and other information that address current issues faced by the banking industry.

Video. The two-part Cybersecurity Awareness Directors’ College video series provides an overview of the threat environment and steps community financial institutions can take to be better prepared should a cyber attack occur. It is designed to assist bank directors with understanding cybersecurity risks and related risk management programs, and to “elevate cybersecurity discussions from the server room to the board room.” The two parts are:

• Evolution of Data Security, Cybersecurity, and Threat Environment; and
• Information Security Programs Refocused, Cybersecurity Assessment Tool, and Additional Resources.

 

Cyber Challenge. Cyber Challenge facilitates discussion between financial institution management and staff about operational risk issues. The exercises are designed to provide valuable information about an institution’s current state of preparedness and identify opportunities to strengthen resilience to operational risk.

Using seven video scenarios, the Cyber Challenge helps start an important dialogue among bank management and staff about ways they address operational risk today and techniques they can use to mitigate this risk in the future. The Cyber Challenge is not a regulatory requirement; it is a technical assistance tool designed to help assess operational readiness.

The first four Cyber Challenge videos and supporting discussion materials were released in early 2014. Now numbering seven, each video vignette depicts a unique scenario. The challenge questions for each vignette are designed to help bank management and staff think about how they would respond to the scenarios. Also included are lists of reference materials participants can turn to for more information. The seven scenarios are:

1. Item Processing Failure: A new item processing service provider cannot process the volume of transactions generated by the bank.
2. Customer Account Takeover: Unauthorized withdrawals are detected in a corporate customer’s account.
3. Phishing and Malware Problem: Phishing email is opened by a bank employee, and the bank’s network is infected with malware.
4. Technology Service Provider Problem: Problems occur after the financial institution’s service provider performs an update.
5. Ransomware: A cyber-attack has taken place. Word processing files are being held for ransom.
6. ATM Malware: An ATM virus reveals deficiencies in a bank’s service provider contract.
7. DDoS as a Smokescreen: While the IT manager investigates a possible DDoS attack, a second attack exfiltrates data from the institution.

For more information about cybersecurity awareness for financial insstitutions, subscribe to the Banking and Finance Law Daily.

Swearing to affidavit without personal knowledge not debt collection act violation

By Richard A. Roth, J.D.

A law firm that supported a rent collection complaint with an affidavit signed by an attorney but based only on information supplied by a client did not violate the Fair Debt Collection Practices Act. Swearing to the truth of the affidavit without personal knowledge of the facts was neither a misrepresentation nor an unfair collection practice, according to the U.S. Court of Appeals for the Eighth Circuit (Janson v. Kathryn B. Davis, LLC).

The underlying suit claimed about $5,000 in unpaid rent and other charges. One of the attorneys at the landlord’s law firm verified the complaint by an affidavit, which Missouri state law requires. The attorney was required to testify at the trial, and he conceded that he had no personal knowledge about the facts included in the affidavit and that filing affidavits based on client information was the firm’s routine practice.

At the conclusion of the trial, the court awarded the landlord a total of $7,000 in damages and attorney fees.

FDCPA suit. Eleven months later, the tenant filed an attempted class action against the law firm in federal court, claiming FDCPA violations based on the affidavit. The district court judge dismissed the case after finding that the affidavit’s claim that the tenant owed unpaid rent was not false, misleading, or unfair.

Jurisdiction. On appeal, the law firm first attacked the appellate court’s jurisdiction, claiming that the Rooker-Feldman doctrine prevented federal courts from considering the consumer’s suit. The court rejected the challenge.

The Rooker-Feldman doctrine essentially prevents a person who loses a suit in state court from using a federal court as a court of review. It did not apply here, the court said. The tenant claimed that the law firm violated the FDCPA by having an attorney swear to an affidavit without knowing whether the contents were true; however, he did not claim that the contents were, in fact, false. As a result, the tenant's FDCPA suit did not challenge the state court judgment that he owed rent, the appellate court reasoned.

No violation. The FDCPA bans debt collectors from making “a false, deceptive or misleading representation” in connection with collecting a debt and from using an “unfair or unconscionable means to collect or attempt to collect any debt.” The tenant claimed that both provisions had been violated by the affidavit. The court disagreed.

First, the tenant did not claim that the attorney swore to statements known to be false or that he did not owe rent, the court pointed out. Even if the rent claims were false, the tenant had not plausibly claimed that anybody had been misled, so there could have been no misrepresentation.

Second, the judgment for unpaid rent was rendered after a trial at which evidence was submitted and considered. In such a case, swearing to an affidavit without personal knowledge would not be unfair or unconscionable, the appellate court decided.
For more information about fair debt collection laws, subscribe to the Banking and Finance Law Daily.

CFPB snapshot tracks complaints from servicemembers

By Stephanie K. Mann, J.D.

The Consumer Financial Protection Bureau reports that it has received more than 2,500 complaints from servicemembers, veterans, and their dependents about high-cost consumer credit as of November 2015. The bureau analyzes these complaints in “A snapshot of servicemember complaints: Products impacted by the new Military Lending Act rule.”

Complaints. Consumers submitted their complaints to the CFPB under two different product categories: under the “payday” loan complaint category, or under the “debt collection” complaint category with the “payday” sub-product. The “payday” loan complaint category currently represents 3 percent of total servicemember complaints, while the “payday” loan sub-product category represents 19 percent of the complaints submitted by military consumers under the “debt collection” complaint category.

“Debt collection” is the largest complaint category for military consumers, as well as for all consumer complaints. Within the “debt collection” category, the number of complaints stemming from the “payday” sub-product is more than auto loans, mortgages, and student loans combined. Recent studies show that military consumers struggle with the repayment of high-cost credit products more than any other type of financial product. However, according to the bureau, recent updates from the Department of Defense to the regulation implementing the Military Lending Act should help servicemembers and their families avoid this type of high-cost debt going forward.

Amendments. The bureau concluded the snapshot by summarizing the changes made under the MLA:

• Lenders will be expected to comply with the new rule on Oct. 3, 2016, for all covered products other than credit cards. The compliance date for credit cards is Oct. 3, 2017.
• For loans covered by the MLA, the all-in cost of credit will be limited to an annual rate of 36 percent (referred to as the Military Annual Percentage Rate or MAPR). Included in the MAPR are costs like finance charges, credit insurance premiums or fees, and additional fees associated with credit such as application or participation fees, with some exceptions.
• The new rule extends the protections of the MLA to a broader range of consumer credit products than previously covered. The MAPR cap and other MLA protections will now apply to all consumer credit subject to disclosure under the Truth in Lending Act, except for certain statutory exceptions. These exceptions include residential mortgages and certain other secured loans for the purchase of personal goods and vehicles.
• For credit cards, there is a limited exclusion for “bona fide fees” when calculating the MAPR. This means that for credit cards some common fees, such as cash advance fees and foreign transaction fees, generally need not be included in the overall price limit.

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

Latest Volcker Rule FAQs discusses residual positions and relationships with covered transactions

By John M. Pachkowski, J.D.

The Federal Reserve Board has updated its Frequently Asked Questions regarding the application of section 13 to the Bank Holding Company Act of 1956 (BHC Act), commonly referred to as the Volcker Rule, and regulations adopted by the Fed, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Securities and Exchange Commission, and Commodity Futures Trading Commission. The Fed noted that while the FAQs apply to banking entities for which the Fed has jurisdiction under section 13 of the BHC Act, they have been developed by staff of all five agencies.

Treatment of residual positions. In FAQ No. 19, the agencies’ staff discussed the situation that may occur if a banking entity exits a permissible market-making business and the banking entity has to sell or unwind its residual market-making positions.

According to the staff, if a banking entity holds residual positions from its prior market-making activity, the banking entity may hold and dispose of these residual market-making positions, provided two conditions are met. First, the banking entity must hedge the risks of its residual positions in accordance with the risk-mitigating hedging exemption found in the implementing regulations. The second condition requires that the banking entity sells or unwinds the residual market-making positions as soon as commercially practicable.

When hedging the risks of the residual market-making positions, the banking entity must comply with the requirements of the risk-mitigating hedging exemption; and the banking entity cannot rely on the market-making exemption to manage the risks of its residual market-making positions. The staff noted that the market-making exemption only permits risk management activity conducted or directed by a trading desk in connection with the desk’s permitted market making-related activities conducted in conformance with all of the requirements of the market-making exemption set forth in the agencies’ regulations.

The staff cautioned that if a banking entity holds residual market-making positions and does not hedge the risks of those residual positions, then the subsequent sales of those residual positions would generally be considered proprietary trading under the regulations implementing the Volcker Rule.

Covered transactions. The second new FAQ examines the application of the Volcker Rule’s conformance period to existing and new “covered transactions” between a banking entity and a covered fund.

Under the Volcker Rule, a banking entity that serves, directly or indirectly, as the investment manager, investment adviser, or sponsor to a hedge fund or private equity fund—a covered fund—or that organizes and offers a covered fund cannot enter into a transaction with the covered fund that would be considered to be a “covered transaction” under section 23A of the Federal Reserve Act. Covered transactions generally are arrangements under which the banking entity would have a credit exposure to the covered fund. They include not only loans, but also other credit exposures such as investments in the covered fund’s securities, guarantying credit extended to the fund by another lender, and securities lending transactions. The restrictions apply equally to affiliates of the banking entity.

The limitation on covered transactions also applies to a banking entity’s affiliates, as well as any covered fund that is controlled by the fund with which the banking entity or its affiliates have a relationship.

The staff noted in FAQ No. 20 that as a general matter, on or after July 21, 2015, a banking entity may not enter into a covered transaction with a covered fund where the banking entity serves as investment manager, investment adviser, or sponsor to the covered fund or relies on the Volcker Rule’s organizing/offering exemption.

The agencies’ staff also believed that restrictions on covered transactions would also apply to any increase in the amount of, extension of the maturity of, or adjustment to the interest-rate or other material term of, an existing extension of credit. The staff noted that a floating-rate loan does not become a new covered transaction whenever the interest rate changes as a result of an increase or decrease in the index rate. If the banking entity and the borrower, however, amend the loan agreement to change the interest rate term, for example, from “LIBOR plus 100 basis points” to “LIBOR plus 150 basis points,” or from reference to the LIBOR index to the banking entity's prime rate, the parties have engaged in a new covered transaction.

Banking entities were also advised, with respect to any existing covered transaction, to evaluate whether the transaction guarantees, assumes or otherwise insures the obligations or performance of the covered fund since these activities are prohibited by the agencies’ implementing regulations.

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Are litigation finance transactions ‘loans’?

By Thomas G. Wolfe, J.D.

Recently, the Supreme Court of Colorado was called upon to review the essential nature of litigation finance transactions in the state. The litigation finance companies in the case argued that the transactions were “asset purchases” or “investments” and were named and structured that way. In contrast, the Colorado Attorney General and the Colorado Uniform Consumer Credit Code Administrator argued that, despite their labels, these transactions were really “loans” that were subject to Colorado’s Uniform Consumer Credit Code (Colo. UCCC). In addition, many friend-of-the-court briefs were presented on the issue by groups representing the respective interests of consumer advocates, trial attorneys, defense attorneys, chambers of commerce, and property casualty insurers, among others.

Ultimately, in the case of Oasis Legal Finance Group, LLC v. Coffman, the Colorado Supreme Court decided that these litigation finance transactions constitute “loans” that are subject to the Colo. UCCC. More particularly, Colorado’s high court ruled that litigation finance companies that agree to advance money to tort plaintiffs in exchange for future litigation proceeds are making loans under Colorado law, even if the plaintiffs do not have an obligation to repay any deficiency should the litigation proceeds prove to be less than the amount due.

The court sketched the business model for litigation finance companies, relating that the companies typically buy interests in the potential proceeds of various personal injury cases—auto accidents, slip and falls, construction site injuries, and medical malpractice incidents, for example—by executing agreements with the tort plaintiffs. The litigation finance companies provide money, usually less than $1,500, to those tort plaintiffs while their cases are pending. In keeping with the agreement, the money is to be used by the tort plaintiffs to pay their personal expenses while they wait for their lawsuits to settle or go to trial. However, the money cannot be used to prosecute their legal claims.

To provide some background, several national litigation finance companies were involved in the case. Oasis Legal Finance Group, LLC, Oasis Legal Finance, LLC, Oasis Legal Finance Operating Company, LLC (collectively, Oasis), and Plaintiff Funding Holding, Inc. (doing business as LawCash) structured the core features of their litigation finance agreements similarly despite some minor differences.

Under the “Oasis Agreement,” the tort plaintiff was characterized as the “Seller” and the litigation finance company was labeled as the “Purchaser.” The Oasis Agreement specified that the seller-plaintiff would not receive any proceeds until the purchaser-company received the “Oasis ownership amount.” At the same time, the Oasis Agreement prominently stated that if the seller-plaintiff ultimately did not recover anything in the lawsuit, then the purchaser-company would receive nothing as well. Notably, the agreement called for the seller-plaintiff to refer to the litigation finance transaction as a “sale,” not a loan, for all purposes—including tax treatment. In addition, the seller-plaintiff was required to describe the purchased interest as an “asset,” not a debt obligation, in any bankruptcy proceedings.

The LawCash Agreement was first titled as a “Lawsuit Investment Agreement” and then later as a “Funding Agreement.” The underlying transaction was depicted as a “grant of a security interest” and as a “lien” in the proceeds. Further, the LawCash Agreement characterized the litigation finance transaction as “an investment and not a loan.”

After the Colo. UCCC Administrator determined that Oasis and LawCash had made loans in violation of the Colo. UCCC and the Colorado Consumer Protection Act, Oasis and Law Cash declined the Administrator’s offer to settle the matter through an “Assurance of Discontinuance and Final Agency Order.” Instead, the litigation finance companies filed a lawsuit against the Colo. UCCC Administrator and the Colo. Attorney General, “seeking a declaratory judgment that funding agreements of this type are not loans.”

Oasis and LawCash contended that they were involved in “asset purchases” and “investments” because, among other things, they took on the “risk of complete loss.” Oasis and LawCash maintained they had purposely structured their agreements “as sales and assignments of assets” and the agreements explicitly stated that the litigation finance transactions were not to be considered loans. Ultimately, however, the companies’ arguments did not prevail.

The Colorado Supreme Court emphasized that whether litigation finance transactions are or are not “good for consumers” was a question “better suited to the legislature.” Turning its attention to the definition of a “loan” under the Colo. UCCC, the court determined that the statutory provision made it clear that the presence of a “debt is a necessary, if not completely sufficient characteristic of the consumer transaction the Code seeks to regulate.” However, the court decided that an “unconditional” obligation to repay is not required.

From the court’s perspective, litigation finance agreements create debt because “they create repayment obligations, notwithstanding the finance companies’ “embrace of risks that, from time to time, require them to adjust or cancel some plaintiffs’ obligations. Most of the time, plaintiffs repay the full amount borrowed—and more.” Moreover, the court found it “significant that the obligation increases with the passage of time, another characteristic of a loan.”


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Green light for banks providing services for payday lenders

By Andrew A. Turner, J.D.

The Federal Deposit Insurance Corporation has updated previous guidance on payday lending by banks to make clear that it does not apply when banks are providing services to payday lenders. Banks that can effectively manage the resulting risks are not discouraged from offering services to any business that operates legally. 

“Financial institutions that can properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of business customers or individual customers operating in compliance with applicable state and federal laws,” the FDIC said (FIL-52-2015, Nov. 16, 2015).

Payday loans are small-dollar, unsecured, short-term advances that have high fees relative to the size of the loan. When used frequently or for long periods, the total costs can rapidly exceed the amount borrowed. The payday loan guidance warned of risks from making high-cost, short-term loans on a recurring basis to customers with long-term credit needs.

The guidance, as clarified, is to be applied to banks with payday lending programs for consumers that the bank administers directly or that are administered by a third party contractor. It does not apply to banks offering products and services, such as deposit accounts and extensions of credit, to non-bank payday lenders.

The FDIC action comes amidst a swirl of controversy and activity regarding payday lending regulation.

CFPB payday loan plan. The Consumer Financial Protection Bureau is considering proposals that would require lenders to make certain that consumers can repay their loans while also restricting lenders from attempting to collect payments from consumers’ bank accounts in ways that tend to rack up excessive fees. The proposals are intended to stop the “debt traps” caused by payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans and open-end loans.

Operation Choke Point. Charging that the federal banking regulatory agencies are “engaged in a concerted campaign to drive them out of business by exerting back-room pressure on banks,” an association representing the payday lending industry and the association’s largest member have joined in a suit that attempts to put an end to what has become known as “Operation Choke Point.” The suit principally targets what it characterizes as efforts by the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation to pressure banks to end banking relationships with payday lenders due to risk to the banks’ reputations.

Most recently, the U.S. District Court for the District of Columbia dismissed the counts of the complaint pertaining to alleged violations of the federal Administrative Procedure Act (APA) but refused to dismiss the counts pertaining solely to the regulators’ alleged violations of the payday lenders’ procedural due process rights under the Fifth Amendment to the U.S. Constitution (Community Financial Services Association of America, Ltd. v. FDIC, Sept. 25, 2015, Kessler, G.).

Meanwhile, the FDIC’s Office of Inspector General found the agency’s involvement in Operation Choke Point “inconsequential to the overall direction and outcome of the initiative.” More specifically, the IG audit report said that the FDIC’s supervisory approach was within its “broad authorities,” and there was no evidence that the FDIC used the high-risk list to target financial institutions. At the same time, however, the manner in which the FDIC’s supervisory approach was executed was not always consistent with written policy and guidance; moreover, in some instances, the FDIC “created the perception” that it discouraged institutions from conducting business with certain merchants, particularly payday lenders, the report found.

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Bitcoin–related businesses’ BSA/AML risks examined in Atlanta Fed paper

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

A working paper examining the Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) risks for Bitcoin-related businesses has been published by the Federal Reserve Bank of Atlanta. The paper states that by making a commitment to BSA/AML compliance, Bitcoin-related businesses can both better position Bitcoin as a mainstream payment system and enhance the ability of financial institutions to successfully bank them.

Growing Bitcoin use and risk. In a Retail Payments Risk Forum Working Paper titled “Banking Bitcoin-Related Businesses: A Primer for ManagingBSA/AML Risks,” Douglas King states that Bitcoin is a fast, low-cost, and secure payment solution that can be used for many legitimate purposes. As investment and interest in the Bitcoin ecosystem have grown since its 2009 start, new businesses have emerged seeking to advance Bitcoin as a mainstream payment solution. However, he notes that the pseudonymous nature of Bitcoin transactions heightens BSA/AML compliance risks, making it especially challenging for these new businesses to establish banking relationships.

Mitigate risks. King examines the current regulatory environment for Bitcoin-related businesses as well as measures these businesses can adopt to mitigate the BSA/AML risks inherent in the use of Bitcoin. He also presents a framework for financial institutions to consider for managing the risks associated with banking these companies.

Because of BSA/AML-related risks and others associated with Bitcoin transactions and its “highly publicized history of facilitating payments for illegal transactions,” getting involved with bitcoins is considered high risk by many regulatory agencies and financial institutions. King states that, with some financial institutions in a risk-reduction mode, many are opting to avoid this industry as a whole.

Legitimate uses. However, within this high-risk category, he finds many legitimate uses for bitcoin and businesses that facilitate these legitimate transactions. King points to reports in early 2015 that approximately 100,000 merchants worldwide accept bitcoins. Also, Bitcoin investors obtain bitcoins for speculative purposes. These users do not intend to spend their bitcoins. Rather, they intend to buy and sell them much like a traditional investor trades in company stocks or commodities.

Banking due diligence. Financial institutions interested in banking Bitcoin-related businesses should have a full understanding of the Bitcoin ecosystem, the role of the different participants, and the unique BSA/AML circumstances involving this ecosystem, King advises. “A robust BSA/AML enhanced due diligence process is necessary when evaluating Bitcoin-based businesses,” he says.

Business practices. Beyond regulatory requirements, King writes, Bitcoin-related businesses can adopt certain processes and practices that have the ability to further legitimize the Bitcoin transactions that they are enabling. By focusing on a commitment to BSA/AML compliance through a robust compliance program, Bitcoin-related businesses can better position themselves for banking relationships with financial institutions. In return, he concludes, this dedication to compliance ultimately places financial institutions in a better position to successfully bank them.

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Debt collector appeals loss of interest rate preemption protection

By Richard Roth

A debt collector is asking the Supreme Court to review whether the National Bank Act’s preemption of state law interest rates continued after a credit card account was charged off and transferred to the debt collector for collection. According to the U.S. Court of Appeals for the Second Circuit, the state law usury limit no longer was preempted because after the transfer the national bank had no interest in the account. The state law would no longer interfere with the national bank’s exercise of powers granted by federal law (Madden v. Midland Funding, LLC). The petition was filed as Midland Funding, LLC, v. Madden, No. 15-610.

According to the Second Circuit, the suit over whether the debt collector could rely on the NBA preemption provision turned on conflict preemption—whether allowing the consumer to sue the debt collector for attempting to collect illegal interest under the Fair Debt Collection Practices Act would interfere with a national bank’s exercise of powers granted by federal law.

Preemption for nonbanks. It was true that NBA preemption extended to nonbanks in some situations, the appellate court said. However, that only happened when preemption of a state law was needed to prevent significant interference with a national bank’s exercise of its federally granted powers. A national bank’s operating subsidiaries could benefit from preemption, as could a bank’s agents, the court agreed. However, Midland, as a third-party debt buyer, was neither an operating subsidiary nor an agent. Midland was acting solely on its own behalf.

Neither of the Midland companies was a national bank, neither was a subsidiary or agent of a national bank, and neither was acting on behalf of a national bank, the appellate court said. That meant the application of New York’s usury law would not interfere with any national bank’s exercise of powers granted by federal law. New York’s usury law only would affect Midland’s activities. There was no reason for the state law to be preempted, the court decided.

Debt collector’s argument. In its petition for certiorari, Midland argues that denying it the protection of the NBA’s interest rate preemption would effectively allow a state to regulate national bank interest rates by “imposing interest rate limitations that are triggered as soon as a loan is sold or otherwise assigned.” The Second Circuit decision also ignored “a cardinal rule of usury, dating back centuries, that a loan which is valid when made cannot become usurious by virtue of a subsequent transaction.”

The petition points out that the Second Circuit decision threatens to have unusually significant effect because the circuit, which includes New York, is the home of much of the nation’s financial services industry. It also notes that the decision conflicts with a decision by the Eighth Circuit, Krispin v. May Department Stores, Inc., 218 F.3d 919 (2000), and a decision of the Fifth Circuit, FDIC v. Lattimore Land Corp., 656 F.2d 139 (1981).

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On Veteran's Day, agencies work to protect servicemembers, veterans

By Stephanie K. Mann, J.D.

As the nation celebrated Veteran’s Day on November 11, multiple government agencies have taken step to protect military servicemembers and veterans.

Increased protection from financial scams. The Department of Justice has announced that it has submitted a legislative package to Congress including amendments to existing laws that are intended to protect military servicemembers and veterans. The proposed amendment package, The Servicemembers and Veterans Initiative is intended to “drive enforcement, outreach and training efforts on behalf of servicemembers, veterans and their families,” according to a blog post by Acting Associate Attorney General Stuart F. Delery. Delery stated that “It is our responsibility to protect these individuals from financial scams, to preserve their right to return to their civilian employment after active duty and to strengthen their ability to cast a ballot when they are overseas.”

Amendments to current laws. The legislative package includes amendments to the following existing laws:

• the Uniformed Services Employment and Reemployment Rights Act (USERRA);
• the Servicemembers Civil Relief Act (SCRA);
• the Military Lending Act (MLA); and
• the Uniformed and Overseas Citizens Absentee Voting Act (UOCAVA).

The changes are intended to make it more difficult for “unscrupulous creditors to take advantage of servicemembers on active duty,” according to Delery. The proposed amendments seek to protect military families by affording dependent family members the same state residency rights as the servicemember, as well as requiring states to recognize a servicemember spouse’s professional licensures from other states.

The amendments would include the following changes.

1. The proposed amendments require parties seeking default judgments against servicemembers to check Department of Defense records to determine duty status.
2. The amendments also increase penalties that employers, as well as lending and rental businesses, will face for violating laws designed to protect servicemembers. 
3. The legislative proposals expand the number and types of cases the United States can bring in defense of servicemembers attempting to return to their civilian employment upon completion of their military service, and the available remedies for violations of the voting rights of servicemembers and their families while they are overseas.

Delery stated that the Justice Department “hopes these changes will enhance the department’s ability to bring enforcement actions, and allow these men and women to assert their rights on their own.”

Memorandum of Agreement. The Federal Trade Commission and the Veterans Administration have signed a Memorandum of Agreement to further their ongoing efforts to stop fraudulent and deceptive practices targeted at service members, veterans, and dependents who use military education benefits. Under the Memorandum of Agreement, the Deputy Undersecretary for Economic Opportunity, Veterans Benefits Administration, Department of Veterans Affairs, and the Director, Bureau of Consumer Protection, Federal Trade Commission, agree to provide mutual assistance in the oversight and enforcement of laws pertaining to the advertising, sales, and enrollment practices of institutions of higher learning and other establishments that offer training for military education benefits recipients.

The agreement is designed to enhance cooperation between the FTC and the VA in investigating and taking action against institutions that target service members with unfair or deceptive advertising or enrollment practices. It outlines terms under which the VA can refer potential violations to the FTC.

The FTC advises service members to watch out for any for-profit schools that may stretch the truth to encourage enrollment by exerting pressure on service members either to sign up for unnecessary courses or to take out loans that might be a challenge to pay off. The FTC encourages students interested in pursuing a higher education to check out its updated guidance, Choosing a College: Questions to Ask.

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Attorney could not secure fees with lien on debtor’s property

By Lisa M. Goolik, J.D.

An attorney was not permitted to take a security interest in a debtor’s property prior to the debtor’s filing for bankruptcy protection to secure both pre- and postpetition professional fees. The U.S. Bankruptcy Court for the Western District of North Carolina determined that because the attorney failed to comply with the applicable state rules of professional conduct, he could not retain a security interest in his debtor’s property to secure fees incurred pre-petition, and as for post-petition fees or fees unearned at the time of filing, the debtor’s legal and equitable interests in the property became property of the bankruptcy estate at filing (In re Pace, Nov. 2, 2015, Whitley, C.).

Background. The debtor met with the attorney to obtain information and to explore whether filing bankruptcy would be beneficial. Sometime after initially consulting with his attorney, but before deciding to file bankruptcy, the debtor experienced several hardships that further strained his financial situation. It became apparent that the debtor did not have the ability to pay the estimated $6,500 to file his case. The attorney then suggested that the debtor grant him a lien on the debtor’s motorcycle and boat to secure the attorney’s fees. The debtor executed a promissory note on June 26, 2015, for $6500 and signed a security agreement granting a security interest in the boat and motorcycle to the attorney. The debtor signed the lien recording application for the motorcycle on June 30, 2015. That same day, the attorney filed the debtor’s Chapter 7 bankruptcy case. The attorney filed a UCC financing statement to perfect his lien on the boat approximately two weeks later.

Ethical issues. While the court did not doubt the attorney’s claims that but for the promissory note and lien, the debtor could not afford to file bankruptcy, it could not agree that such transactions are permissible.

“For obvious ethical and practical reasons, an attorney taking a lien on his debtor’s property is not common. It takes little imagination to hypothesize how the interests of counsel and client could collide. For instance, what would happen if a debtor failed to satisfy the terms of an applicable promissory note? Would the attorney be able to foreclose on the encumbered property? Would the attorney need to move for relief from stay? If so, who would represent the debtor in a defense of the motion?, " questioned the court.

Accordingly, North Carolina’s Rule of Professional Conduct permits an attorney to take such a lien but establishes safeguards to protect against exploitation. The rule provides in relevant part: “(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest directly adverse to a client unless: . . . (2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; . . . "

It was undisputed that the attorney did not comply with the rule—he failed to notify the debtor in writing of the desirability of seeking independent legal counsel on the transaction. As a result, the court ordered the attorney to release his secured interests for pre-petition fees.

Moreover, after filing bankruptcy, a debtor is no longer able to transfer or encumber property of the bankruptcy estate absent court approval. As a result, there was no property interest in the boat and motorcycle outside the bankruptcy estate remaining to secure the attorney’s post-petition fees.


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