Arbitration study eagerly awaited as CFPB announces field hearing

By Andrew A. Turner, J.D.

With the Consumer Financial Protection Bureau announcing that it will hold a field hearing on arbitration in Newark, N.J., on March 10, 2015, speculation is growing that this may be the occasion for release of a completed arbitration study, as the prospect of regulatory action looms on the horizon. The CFPB released preliminary findings in December 2013, and the debate over the pros and cons of mandatory arbitration has accelerated in recent months while waiting for the study to be finished.

Report to Congress. Section 1028 of the Dodd-Frank Act required the CFPB to conduct a study and report its finding to Congress on the use of mandatory pre-dispute arbitration agreements in providing consumer financial products or services. The Dodd-Frank Act authorizes the CFPB to issue regulations restricting the use of these types of agreements to protect consumers in accord with study findings.

Arbitration study preliminary results. Preliminary research found that arbitration clauses are commonly used by large banks in credit card and checking account agreements and that roughly 9 out of 10 clauses allow banks to prevent consumers from participating in class actions. The research also showed that “while tens of millions of consumers are subject to arbitration clauses in the markets the CFPB studied, on average, consumers filed 300 disputes in these markets each year between 2010 and 2012 with the leading arbitration association.” The CFPB said that the second phase of the study would include a look at whether consumers are aware of the terms of arbitration clauses and whether arbitration clauses influence consumers’ decisions about which consumer products to purchase.

Public reaction. In a November 19, 2014, letter, attorneys general from 16 states asked CFPB Director Richard Cordray to prohibit the use of pre-dispute mandatory arbitration clauses in consumer agreements for financial products and services. Noting that a number of consumer protection laws permit a private right of action for violations, the attorneys general expressed particular concern with the class action waiver. They argued that this deterred consumers from pursuing their rights, particularly when the per-consumer cost of redress exceeds the damages alleged by an individual.

In response, the American Financial Services Association, a 350-member consumer credit industry trade group, wrote to Director Cordray on Dec. 4, 2014, to defend mandatory arbitration. The association noted that the U.S. Supreme Court has found that the Federal Arbitration Act was intended to apply to individual consumers. The AFSA further argued arbitration actually benefits consumers because courts already are overburdened. In addition, the AFSA argued the fact that consumers cannot bring class actions in arbitration is of little import, given the CFPB's broad restitution powers which are shared with state attorneys general under the Consumer Financial Protection Act.

There has also been some academic research thrown into the mix, with a study from a group of professors from St. John’s University School of Law finding “a profound lack of understanding about the existence and effect” of pre-dispute consumer arbitration agreements. The study, Whimsy Little Contracts’ with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, indicates that citizens are giving up the right to sue unknowingly, either because they do not realize they have entered into an arbitration agreement or because they do not understand the legal consequences of doing so.



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

Cordray revisits 'obstacles' to justice with AGs

By Katalina M. Bianco, J.D.

Quoting Robert F. Kennedy, Consumer Financial Protection Bureau Director Richard Cordray spoke to the National Association of Attorneys General about “obstacles that interfere with justice and dignity for consumers.” These obstacles are the “four Ds,” he said. He was referring to deceptive marketing, debt traps, dead ends, and discrimination. In his prepared remarks, Cordray recapped the four Ds and addressed the steps the bureau has taken to address them.

Speaking about the first D, deceptive marketing, Cordray made special note of law firms “that purport to be helping people resolve their debts, but really are misusing their law license to defraud consumers. The bureau’s cases against these firms have provided some of our most protracted litigation, none of which has been a credit to the legal profession.”

The bureau director also said that issues surrounding the for-profit college industry are a “larger problem of deception in the marketplace.” He mentioned Corinthian Colleges, Inc., stating that the CFPB believes the company “lured in consumers with lies about their job prospects upon graduation, sold high-cost loans to pay for that false hope, and then harassed students for overdue debts while they were still in school.”

Cordray spoke about debt traps, saying that payday, installment, and auto title loans are examples of short-term, high-cost products that can trap people. He noted that the bureau is in the latter stages of considering how to best formulate rules to reform the market.

Targeting credit reporting and debt collection as industies that can lead to dead ends for consumers, Cordray said the CFPB is taking steps to to help consumers in areas over which they have little or no clout. As for debt collection, the CFPB Director made it clear that currently, the bureau is “hard at work analyzing and preparing the details of proposed policy measures, which could lead to the most significant changes in federal law in this area in almost forty years.”



For more information about Richard Cordray and the CFPB, subscribe to the Banking and Finance Law Daily.

CFPB proposes suspending credit card agreement submission to streamline process

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau is proposing to suspend a requirement that each quarter certain credit card issuers send their agreements to the bureau. The agreements are published in a public database on the CFPB website. The suspension would be temporary, however. The bureau intends to streamline the submission process and will work to do that during the one-year suspension.

CFPB Director Richard Cordray said that streamlining the process for how credit card issuer submit their agreements to the bureau "could help save time and reduce burden for both industry and our agency." Access to the data would be faster and easier for consumers too, he added. While designing the new process, the bureau plans on exploring better reporting formats for posting information.

The CFPB is proposing to suspend credit card agreement submissions that would otherwise be due to the bureau by the first business day on or after April 30, July 31, and Oct. 31 of 2015, and Jan. 31, 2016. Credit card issuers would resume submitting credit card agreements on a quarterly basis to the CFPB starting on April 30, 2016. The proposal would not affect issuers’ obligations to post the agreements on their own websites.

During the temporary suspension period, the CFPB will collect consumer credit card agreements from the largest card issuers’ public websites and post the agreements to its online consumer credit card agreements database to ensure that the database contains agreement terms currently offered to consumers, the bureau said.

Comments are due by March 13, 2015.


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

Reed renews call to oversee New York Fed

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

 

Senator Jack Reed (D-RI) has reintroduced legislation intended to increase Congressional oversight and accountability of the Federal Reserve Bank of New York. The bill was originally introduced last November in the wake of a report that the New York Fed failed to raise a red flag over complex trading of credit derivatives at JPMorgan Chase. Reed also had added similar legislation in the Senate-passed version of the 2010 Dodd–Frank Act, but the language was not included in the final version of the law, a move Reed has called “a crucial mistake.”

 

Reed’s bill would require Senate confirmation of the president of the New York Fed, as well as annual testimony before the Senate Banking Committee and the House Financial Services Committee. According to Reed, the Senate confirmation process “could give the Senate an opportunity to evaluate whether a nominee has the experience, character, judgment, and skills to serve effectively as one of the most powerful banking regulators in the country, if not the world’s.”

Unique responsibilities. The New York Fed differs from the other Reserve Banks in that it is entrusted with unique responsibilities, such as:

• The president of the New York Fed is a permanent member of the Federal Open Market Committee, which sets the Fed’s monetary policy, and acts as the Committee’s vice-chairman.
• The New York Fed is entrusted with protecting the U.S. dollar in foreign exchange markets.
• In terms of assets and volume of activity, the New York Fed is the largest Reserve Bank, and it is charged with supervising some of the largest banks and most active financial institutions in the country. 

“If the Governors of the Federal Reserve System are required to be confirmed by the Senate, then the President of the Federal Reserve Bank of New York, who played a central and perhaps more powerful role in overseeing taxpayer dollars during the financial crisis, should also be subject to public scrutiny,” said Reed. “It is past time that we add meaningful layers of accountability so that we can be better assured of the New York Fed’s ability to address potential financial pitfalls in advance.”



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Review denial might leave open small window for rent suits after bank failures

By Richard A. Roth, J.D.

The Washington Mutual Bank failure, and JPMorgan Chase Bank’s purchase of much of WaMu’s assets, has resulted in a series of suits across the country over whether property owners could recover rent for planned WaMu branches that never opened. The Supreme Court’s Feb. 23, 2015, denial of a landlord’s request that it review the rejection of the landlord’s rent suit could signal that Chase and the Federal Deposit Insurance Corporation, as WaMu’s receiver, will continue to win these suits; however, a contrary decision by the U.S. Court of Appeals for the Fifth Circuit still could offer hope for landlords.

The issue arises from the interplay of the terms of the purchase and assumption agreement used by the FDIC and the agency’s authority as receiver, under the Financial Institutions Reform, Recovery, and Enforcement Act, to repudiate leases. The P&As divided WaMu’s real estate interests into two categories: general real estate and bank premises. The general real estate was assigned outright to Chase, while Chase was given a 90 days to evaluate the bank premises and decide which to accept. Bank premises Chase did not want were rejected and returned to the FDIC for disposition as part of the receivership.

In the litigated cases, the FDIC and Chase decided between themselves that the uncompleted branches constituted bank premises, not general real estate, under the P&A. This permitted Chase to reject the property, and that rejection permitted the FDIC to disaffirm the leases that WaMu had signed. The landlords’ only option appeared to be to file claims in the receivership.

Some of the landlords didn’t agree with that procedure and sued Chase for unpaid rent. They asserted two different theories of recovery: first, that the P&A obligated Chase to pay; second, that they were in privity of estate with Chase, making the bank obligated to pay. The FDIC defended the suits on behalf of Chase. Different U.S. appellate courts considered the issues in Interface Kanner, LLC v. JPMorgan Chase Bank (11th Cir.), Excel Willowbrook, LLC v. JPMorgan Chase Bank (5th Cir.), and Hillside Metro Assoc., LLC v. JPMorgan Chase Bank (2nd Cir.). A fourth related case, GECCMC v. JPMorgan Chase Bank (9th Cir.), presented a somewhat different situation in that the leases apparently were for operational branches. Also, the landlord filed an unsuccessful receivership claim before suing Chase.

Standing v. privity. All four Circuit Courts agreed that landlords do not have standing to raise any claims that would require a court to interpret the P&A. The landlords were not parties to the P&A, and the agreement included a clause that explicitly disclaimed any intent to benefit third parties. However, in the Excel Willowbrook opinion, the Fifth Circuit made clear that it did not like that result; it was only going along with the other circuits in the interest of preserving a uniform national interpretation of the P&A.

The Fifth Circuit then diverged from the other appellate courts by accepting a privity of estate theory of recovery that no other appellate court accepted. When a lease is assigned by a tenant, the question of whether the assignee and the landlord are in privity depends on just what the tenant has conveyed, the court explained. If the tenant assigns only part of his rights under the lease, creating a sublease, the landlord and assignee are not in privity. However, if the tenant conveys his entire interest, the assignee and landlord are in privity and either can enforce the central parts of the lease against the other, the court said.

The P&A clearly was a complete assignment of the lease, the court continued. Regardless of what the FDIC and Chase now said the P&A intended, it was clear that the lease was encompassed in the P&A’s treatment of general real estate, the court said. Since the FDIC had assigned to Chase all of its interest in WaMu’s general real estate, there was privity of estate between the landlord and Chase. Chase was liable for the unpaid rent, the Fifth Circuit decided.

The FDIC’s argument that the landlord had no standing to seek an interpretation of the P&A to establish privity of estate “ignores eight centuries of legal history” and would return property law to its state in twelfth-century England, the court asserted.

Effect of review denial. The Hillside Metro petition for certiorari asked only that the Supreme Court consider the Second Circuit’s rejection of the privity of estate theory. The landlord’s review petition in Interface Kanner also raised the privity of estate theory, which had been rejected by the Eleventh Circuit. Both petitions were rejected. However, as is always said, rejecting a request for review is not the same as affirming the decision, so the Supreme Court has not definitively rejected rent claims under privity of estate.

Since the FDIC decided not to appeal the Fifth Circuit’s decision, it must be assumed that the privity of estate theory retains some viability, at least in that circuit. However, the Fifth Circuit did note that the FDIC had changed its P&A in a way that might clarify the ability to disaffirm leases in future receiverships.

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

Consumers have greater access to credit scores, still remain confused

By Stephanie K. Mann, J.D.

The Consumer Financial Protection Bureau is reporting that more than 50 million consumers now have free and regular access to the credit scores through their monthly credit card statements. In the past, the bureau has received regular complaints from consumers about the challenges they have faced in getting a copy of their credit report or in getting wrong information corrected on the report.

In 2014, the bureau launched an initiative to help consumers receive their credit score by reaching out to credit card companies. “Once consumers see their credit scores, they can be motivated to learn more about their credit history, check their full credit report, and take action to improve their financial lives,” CFPB Director Richard Cordray said.

While consumers have greater access to their credit scores, many still remain confused about credit reports and scores in terms of how to check them, what information they include, and how to improve them, and how to improve their credit histories.

For more information about the CFPB's credit score initiative, subscribe to the Banking and Finance Law Daily.

Mobile banking puts pressure on customer service

By Lisa M. Goolik, J.D.

According to a new study released by the Federal Deposit Insurance Corporation, while consumers may be increasingly reliant on mobile and online banking services, the emergence of electronic banking has had little impact on the number of traditional branch offices. Since 2009, the number of branch offices has declined just 4.8 percent, dropping from 99,500 to 94,725 offices in July 2014.

That's not to say that emerging technologies have not had any impact on brick-and-mortar branch locations. In fact, it is one of the four factors--along with population growth, banking crises, and legislative changes--cited by the FDIC for the modest decline in the total number of branches. But its greatest effect has been a decline in the number and frequency of transactions taking place at physical banking offices.

According to the FDIC's study, the average number of teller transactions per office declined by 45 percent between 1992 and 2013, from 11,700 transactions per month to 6,400. Using a credit or debit card has become more common than writing a check, says the FDIC. Paper checks accounted for only 15 percent of noncash payments in 2012, down from 46 percent in 2003. The total number of noncash transactions grew by 50 percent from 2003 to 2012, as the number of checks written declined.

In addition, the rise of remote deposit capture—scanning checks from a home or business and sending them to the bank electronically for deposit, more sophisticated ATM terminals, and the proliferation of smartphones appear to be reducing the frequency with which bank customers are visiting their local branch to perform simple transactions, says the FDIC.

Despite these changes, consumers continue to value and use physical banking offices. According to the 2013 FDIC National Survey of Unbanked and Underbanked Households, visiting a teller remains the most common way for households to access their accounts. Even among households that preferred online or mobile banking, most also reported visiting tellers to access their accounts.

So what does this mean for banks? It means that, for as long as personal services and relationships remain important, bankers and their customers will likely continue to do business face-to-face. It also means that as the number of transactions and frequency of office visits decline, each interaction between bankers and their customers will become more and more important to retaining customers, placing an even greater emphasis on customer service than ever before.

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

CFPB's Antonakes provides glimpse into bureau supervisory thinking

By Katalina M. Bianco, J.D.

Steven Antonakes, Deputy Director of the Consumer Financial Protection Bureau, offered a peek into the CFPB's thought processes on supervision in prepared remarks before the The Exchequer Club in Washington, D.C. CFPB supervision made simple? Perhaps not, but Antonakes did shed some light on factors the bureau takes into consideration when it comes to supervision.

Antonakes, who leads the Division of Supervision, Enforcement, and Fair Lending, laid out for club members the institutions under CFPB supervision and described how the bureau prioritizes its supervisory responsibilities. The bureau breaks down institutions by product line, he said. Each product line is evaluated on: potential for consumer harm related to a particular market; the size of the product market; the entity's market share; and risks inherent to the institution's operations and the consumer financial products offered.

The bureau considers field and market intelligence, which includes both qualitative and quantitative factors for each institutional product line, such as the strength of compliance management systems, the existence of other regulatory actions, findings from prior exams, metrics gathered from public reports, and the number and severity of consumer complaints, Antonakes explained. Finally, the CFPB supplements general field and market intelligence with fair-lending-focused information to ensure that it appropriately identifies and prioritizes fair lending risks.

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

Obama calls for cybersecurity cooperation; trade groups seek common sense approaches

By John M. Pachkowski, J.D.

Following a year when there were constant reports that a data breach occurred at some retail establishment exposing the financial and personal data of millions of consumers, President Obama convened a cybersecurity summit at Stanford University to announce executive action calling for greater cooperation between the government and the private sector on cyberthreats and make it easier for federal agencies to share relevant, classified information with companies.

 

The Executive Order issued by President Obama builds upon a foundation established two February 2013 executive actions—Executive Order 13636 (Improving Critical Infrastructure Cybersecurity), and Presidential Policy Directive-21 (Critical Infrastructure Security and Resilience).

 

In his remarks, the president said, “There’s only one way to defend America from these cyber threats, and that is through government and industry working together, sharing appropriate information as true partners.” The order calls for a common set of standards, including protections for privacy and civil liberties, so that the government can share threat information with the private sector.”

 

Legislative package. President Obama also noted that he was proposing new legislation to promote greater information sharing between government and the private sector, including liability protections for companies that share information about cyber threats. He added, “Today, I’m once again calling on Congress to come together and get this done.”

 

Cybersecurity. The administration’s cybersecurity information sharing proposal would encourage the private sector to share appropriate cyber threat information with the Department of Homeland Security’s National Cybersecurity and Communications Integration Center, which will then share it in as close to real-time as practicable with relevant federal agencies and with private sector-developed and operated Information Sharing and Analysis Organizations by providing targeted liability protection for companies that share information with these entities.

 

Breach notification. The administration’s proposal would also safeguard Americans’ personal privacy by establishing a national data breach notification standard. The notification proposal would also provide a “safe harbor” exemption in which a business entity is exempt from notice to individuals if a risk assessment conducted by or on behalf of the business entity concludes that there is no reasonable risk that a security breach has resulted in, or will result in, harm to the individuals whose sensitive personally identifiable information was subject to the security breach.

Updating law enforcement tools. The final set of legislative proposals would allow for the prosecution of the sale of botnets, would criminalize the overseas sale of stolen U.S. financial information like credit card and bank account numbers, would expand federal law enforcement authority to deter the sale of spyware used to stalk or commit ID theft, and would give courts the authority to shut down botnets engaged in distributed denial of service attacks and other criminal activity. It also updates the Racketeering Influenced and Corrupt Organizations Act so that it applies to cybercrimes, clarifies the penalties for computer crimes, and makes sure these penalties are in line with other similar non-cyber crimes. Finally, the proposal modernizes the Computer Fraud and Abuse Act by ensuring that insignificant conduct does not fall within the scope of the statute, while making clear that it can be used to prosecute insiders who abuse their ability to access information to use it for their own purposes.

Common-sense principles. Even before the administration’s legislative proposals have been sent to Capitol Hill, a number of financial trade groups called on Congress to help protect their constituents from feeling the impact of identity theft and financial account fraud resulting from data breaches by considering the following three common-sense principles:

1. A National Data Security and Breach Standard: strong national data protection and consumer notification standards with effective enforcement provisions must be part of any comprehensive data security regime.
2. Building on Existing Standards: Congress has already placed robust standards on certain sectors, such as healthcare and banking. These existing standards must be recognized, and can also serve as a model that can be adapted to other sectors where no such standards exist.
3. Shared Responsibility: all parties must share the responsibility, and the costs, for protecting consumers. The costs of a data breach should ultimately be borne by the entity that incurs the breach.

The groups—American Bankers Association, Consumer Bankers Association, Credit Union National Association, Financial Services Roundtable, Independent Community Bankers of America, National Association of Federal Credit Unions, and The Clearing House—wrote to Congress in response to a letter by the National Retail Federation and the National Association of Convenience Stores regarding purported claims about data breaches and fraud.

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

Bank finds out the hard way what its ‘financial institution bond’ covered

By Thomas G. Wolfe, J.D.

There is not an abundance of case law on the nature and scope of a bank’s “financial institution bond.” Indeed, in the recent case of Bank of Brewton v. The Travelers Companies, Inc., the U.S. Court of Appeals for the Eleventh Circuit indicated that there did not appear to be “any precedent precisely on point” when it was called upon to review the extent of coverage of a financial institution bond. More specifically, the Eleventh Circuit addressed the issue of whether, under Alabama law, a bank’s financial institution bond covered a “duly authorized stock certificate” that was procured under false pretenses and was used as collateral for a bank loan. In ruling that the bond did not cover the bank’s monetary loss stemming from the stock certificate, the Eleventh Circuit emphasized that its ruling hinged on the bond’s definition of a “counterfeit” document.

Before looking at the court’s decision in more detail, an essential background question comes to mind. What exactly is a financial institution bond? As characterized by the Eleventh Circuit, a financial institution bond is “a type of fidelity bond that is designed to insure financial institutions against fraudulent or unfaithful dealings by employees and certain outside parties which could damage the institution.”

The case involved Bank of Brewton, a small, privately held bank in Alabama that was covered by a financial institution bond issued by the Travelers Companies, Inc. Among other things, the bond covered Bank of Brewton from a “loss resulting directly from the [bank] having, in good faith, …extended credit…on the faith of [a certificated security], which is a Counterfeit.” In turn, the financial institution bond from Travelers defined “Counterfeit” as “an imitation which is intended to deceive and to be taken as an original.”

Under the facts of the case, the Bank of Brewton made and renewed a number of loans with a “long-time” customer, Jackson Hines. On some occasions, Hines pledged stock certificates as collateral for these loans. In December 2009, in keeping with an agreement between Hines and Bank of Brewton, the bank consolidated all its outstanding loans with Hines into one major loan of approximately $1.5 million. However, in April 2010, Bank of Brewton discovered that one of the underlying stock certificates, representing 180 shares of stock in a company, was “void and of no effect” and had been “procured under false pretenses.”

Although Bank of Brewton initially sought to have Hines replace the stock certificate with another form of collateral, that option quickly evaporated because Hines defaulted on the consolidated loans and filed for bankruptcy. When the bank filed a claim to recover its loss under the financial institution bond with Travelers, Travelers took the stance that the bank’s loss was not covered by the bond but investigated the claim “for the next several years.” Ultimately, Bank of Brewton filed a breach-of-contract lawsuit against Travelers, alleging that Travelers refused to pay under the financial institution bond even though the bank “had sustained a covered loss based on a forged or counterfeit stock certificate.”

The federal trial court determined that Bank of Brewton could not recover its loss under the financial institution bond for either of the two stock certificates (Certificate No. 2 and Certificate No. 11) at issue in the case. On appeal to the Eleventh Circuit, the bank contended that the trial court had erred in finding that Certificate No. 11 was not a counterfeit under the terms of the financial institution bond. As depicted by the Eleventh Circuit, “Boiled down, the Bank’s argument appears to be quite simple: the Bond defines a ‘counterfeit’ as ‘an imitation which is intended to deceive and to be taken as an original’; and Hines, with the requisite intent, gave the Bank a valueless stock certificate that appeared for all intents and purposes to be a valuable stock certificate.”

In reviewing the scant case law from other federal circuits, the Eleventh Circuit distinguished between counterfeit documents that deceive by misrepresenting authenticity and those that deceive by misrepresenting value. The federal appellate court found that although Certificate No. 11 had been fraudulently procured and was valueless, it was authentic. In the court’s view, the financial institution bond did not cover losses “resulting from every document tainted by fraud.” Instead, the bond provided coverage “for a subset of deception-based losses—those stemming from documents that imitate an original.” The real problem, the Eleventh Circuit stressed, resided in the fact that because Certificate No. 11 was “obtained under false pretenses, it had no value.” Consequently, the Eleventh Circuit upheld the trial court’s ruling that Bank of Brewton’s loss was not covered by its financial institution bond.

Suit that looked like a "setup" could be expensive for consumer, attorney

By Richard A. Roth, J.D.

A U.S. district court judge’s conclusion that a consumer tried to trap a debt collector into a Fair Debt Collection Practices Act violation could subject the consumer, his attorney, or both to liability for the debt collector’s defense costs and to sanctions under the Federal Rules of Civil Procedure. Saying “This case has all the earmarks of a setup,” the judge has ordered both the consumer and the attorney to explain why he should not dismiss the suit and enter a costs and sanctions order (Huebner v. Midland Credit Management, Inc., Feb. 11, 2015, Cogan, B.).

The judge’s opinion makes clear his disdain for FDCPA suits that he believes do not respond to meaningful debt collector misconduct. The majority of FDCPA cases he hears are brought by the same handful of lawyers, on behalf of the same consumers, for the purpose of “squeezing a nuisance settlement and a pittance of attorneys’ fees out of a collection company,” the judge said. While this “cottage industry” of FDCPA suits is neither illegal nor unethical, the judge added, this case presented “a deliberate and transparent attempt by a sophisticated debtor to entrap a collection company into a technical violation.”

According to the judge, the consumer claimed that debt collector Midland Credit Management violated the FDCPA by denying the consumer the ability to dispute the debt verbally, requiring him to provide a “valid reason” for his dispute, failing to communicate that the debt was disputed, and making false statements. The consumer even furnished the judge a transcript of a recorded telephone conversation as evidence of the violations. However, “The recording does not support plaintiff’s version of the events and there does not appear to be any good faith basis for this suit,” the judge said.

In fact, recording the conversation might have backfired on the consumer. The very existence of the recording appeared to raise the judge's suspicions, and the transcript convinced the judge that Midland's employee had done nothing wrong.

First, despite the consumer's allegations, the employee had never told him that the debt had to be disputed in writing. In fact, "writing" never was mentioned at all, the judge pointed out.

Second, while the employee did make several efforts to find out why the consumer disputed the debt, the consumer would say no more than “this is a non-existent debt”—a statement the judge characterized as “obviously and intentionally vague.” The employee’s attempt to glean “a smidgen of detail about the dispute” was not a violation of the debt collection law.

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

Hensarling pinpoints cause of the financial crisis, and his name is Walter

By Lisa M. Goolik, J.D.

During a hearing to examine the financial status of the Federal Housing Administration and its Mutual Mortgage Insurance Fund (MMIF), majority members of the House Financial Services Committee had harsh words for Department of Housing and Urban Development (HUD) Secretary Julian Castro, calling the FHA’s lending practices “subprime lending,” “dumb regulation,” and “predatory lending.” At times, the Congressmen seemed to lose sight of the hearing's purpose, straying off topic to take the FHA to task.

In his opening statement, Committee Chairman Rep. Jeb Hensarling (R-Texas) criticized the FHA’s eligibility requirements, categorizing the FHA’s lending practices as subprime lending. Hensarling blamed the financial crisis on “dumb regulation” and “helping to put people into homes they could not afford to keep.” Here's an excerpt from his statement:

"Now with respect to subprime lending, what consenting adults do with their money is their business. But what FHA does with taxpayer money is our business. Do we really want the federal government to be leading the charge into subprime lending? We’ve all heard from our constituents. I heard from a gentleman, Walter, from Mesquite: 'I am one of those that got a house I never should have gotten. I could not afford to buy a home but no one told me that. Now I’m behind and underwater on a house I never should have bought.' Again, the administration should not be leading the way, putting people like Walter into homes they cannot afford to keep."

Representative Scott Tipton (R-Colo) echoed Hensarling’s statements, calling the FHA's $625,500 loan limit "ludicrous." Representative Bill Huizenga (R-Mich) added that “it’s hard to argue that that’s low and moderate income.”

Not to be outdone, Rep. Scott Garrett (R-NJ) accused the FHA of using predatory lending strategies, such as low down payments, low credit scores, inadequate upfront pricing, and high maximum dollar value loan limits. Garrett, however, also stated that the FHA’s allegedly predatory lending practices “would be ok if, at the end of the day, the results were positive.” 

Following the hearing’s announcement, Ranking Committee Member Rep. Maxine Waters (D-Calif) also questioned the intent of the hearing, calling it “merely a smokescreen to allow Republicans to cut or freeze spending that invests in our vulnerable citizens, and turn programs into block grants so that states can engage in a ‘race-to-the-bottom.’”

For more information about the hearing and Castro's response, subscribe to the Banking and Finance Law Daily.

FTC focused on phantom debt collection, protecting limited-English-proficiency consumers

By Andrew A. Turner, J.D.

The Federal Trade Commission is touting results during the past year from its debt collection work addressing “phantom debt collection” and protecting limited-English-proficiency (LEP) consumers. Activity targeted by the FTC also included false threats, harassment or abuse, and the unlawful disclosure of consumers’ sensitive personal information by debt brokers. The FTC 2014 efforts were described in a letter to the Consumer Financial Protection Bureau to help meet requirements for an annual report to Congress about federal government efforts to aid consumers victimized by unlawful debt collection practices.

Phantom debt collection. Phantom debt collectors engage in unfair, deceptive, or abusive conduct by attempting to collect on debts that either do not exist or are not owed to the phantom debt collector. The Commission initiated or resolved three actions against phantom debt collectors in 2014.

In FTC v. Pinnacle Payment Services, LLC, the FTC halted the abusive debt collection practices of an operation that used fictitious names and threatened consumers into paying debts they may not have owed. The Commission charged that the defendants, working out of offices in Cleveland and Columbus, Ohio, and Atlanta, Georgia, collected and processed millions of dollars in payment for phantom debts using robocalls and voice messages that threatened legal action and arrest unless consumers responded within a few days. During phone conversations with consumers, collectors often misrepresented that the consumers would face felony fraud charges, that their bank accounts would be closed or their wages garnished, and that the collectors worked for a law enforcement agency or a law firm.

Collection practices affecting LEP Latinos. The FTC initiated or resolved three cases against abusive debt collection operations that targeted Spanish-speaking consumers, one of which involved phantom debt collection. Along with a Debt Collection and the Latino Community roundtable, this represented an effort to protect limited-English-proficiency consumers from illegal debt collection practices.

In FTC v. Centro Natural Corp., the FTC secured a preliminary injunction against a group of telemarketers that allegedly pressured and harassed consumers to settle “phantom” debts that consumers did not owe. In its complaint, the FTC alleged that the defendants targeted thousands of Spanish-speaking consumers and used deceptive and abusive tactics to collect on debts that these consumers did not owe and to coerce them into purchasing goods that they did not want. The defendants allegedly held themselves out to consumers as court officials, government officials, or lawyers, and threatened dire consequences, such as arrest, if consumers failed to pay amounts demanded.

In October 2014, the FTC and the CFPB co-hosted a roundtable in Long Beach, California, to examine how debt collection and credit reporting issues affect Latino consumers, especially those who have limited English proficiency. Topics included an overview of the Latino community and their finances; pre-litigation collection from Latino consumers; the experience of LEP Latinos in debt collection litigation; credit reporting issues among LEP Latinos; and developing improved strategies for educating and reaching out to LEP Latinos about debt collection.

Security of consumer data in the buying and selling of debts. In two separate cases (FTC v. Bayview Solutions, LLC and FTC v. Cornerstone and Company), the FTC obtained preliminary injunctions against debt sellers that it alleges posted the sensitive personal information of over 70,000 consumers, including bank account and credit card numbers, birth dates, contact information, employers’ names, and information about debts that the consumers allegedly owed, on a public website. The defendants in these cases allegedly exposed this sensitive information while trying to sell portfolios of past-due payday loan, credit card, and other purported debt.

For more information about the FTC's letter to the CFPB on fair debt collection enforcement efforts, subscribe to the Banking and Finance Law Daily.

Governor Powell criticizes bills that would audit, weaken Fed

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

Federal Reserve Board Governor Jerome H. Powell, expressed concern over three congressional proposals that would "place new limits on the Fed's ability to respond to future crises" in remarks he made in the Brendan Brown Lecture at the Catholic University of America, Columbus School of Law, He said the "troubling proposals" would subject monetary policy to undue political pressure. 

Bills criticized. Powell explicitly criticized two bills now pending in Congress, implying that they are based on a misunderstanding of reality and predicting they would subject the Fed’s monetary policy decisions to damaging political pressure. Powell focused his criticism on the Federal Reserve Transparency Act, sponsored in the Senate by Sen. Rand Paul (R-Ky) as S. 264 and in the House by Rep. Thomas Massie (R-Ky) as H.R. 24. However, his remarks constituted a broad, spirited defense of the Fed’s actions during the recent financial crisis and its current accountability, transparency, and independence.

Fed’s crisis response. According to Powell, the Fed’s use of a low federal funds rate, forward guidance on its intent to keep the rate low, and longer-term Treasury debt and agency securities purchases to keep interest rates low and stimulate the economy were necessary responses to an unprecedented financial crisis. The Fed’s strategy worked, he asserts, and the risks some critics warned of have not materialized.

Fed independence. Perhaps more than anything else, though, Powell is concerned over proposals that would reduce the Fed’s independence. He says that one of these proposals, which he termed “Audit the Fed,” would have few benefits but clear and significant risks. The audits being sought would not be financial audits, as these already are performed; rather, according to Powell, they would “examine strategy, judgments and day-to-day decisionmaking.” Since the Government Accountability Office is charged with making recommendations to Congress after its audits, this would risk inserting the GAO into monetary policy.

Independence from political pressure is necessary, Powell says, as experience has shown that elected officials often want easy-money policies that offer short-term benefits regardless of the risk of longer-term harm.

For more information about Powell's remarks, subscribe to the Banking and Finance Law Daily.

Nonbank SIFI designation process to be more open

By Richard A. Roth, J.D.

Last week the Financial Stability Oversight Council adopted supplemental procedures that are intended to improve its ability to decide whether a nonbank financial company should be designated a systemically important financial company that is subject to Federal Reserve Board supervision and enhanced prudential standards. According to the FSOC, the new procedures do not change the established three-stage SIFI analysis; however, they will give companies an earlier notice that they are being considered for designation and offer companies being considered a better opportunity to participate in the process. This, in turn, might help some companies avoid the SIFI designation by changing or eliminating business activities or practices that pose the greatest risk to U.S. financial stability.

The FSOC already has designated several nonbank companies as SIFIs. The most recently designated, MetLife, has filed suit in an effort to overturn the designation.The Council’s current plan to consider asset management companies for SIFI designation also has raised objections, and the Council, along with adopting its new procedures, is extending the public comment on that plan to March 25, 2015.

Designation process. Currently, the nonbank SIFI designation process has three stages:

1. Stage 1, when six quantitative thresholds are applied to a large group of candidate companies to identify any that merit further consideration.
2. Stage 2, when a preliminary analysis of the companies identified in Stage 1 is carried out, based on available information, to decide if any could pose a threat to financial stability.
3. Stage 3, when an additional quantitative and qualitative analysis is performed for those companies that passed the Stage 2 screen. This might result in a proposal to designate a company as a SIFI. If a designation is proposed, the company is notified and given an opportunity to respond.

Changes. Under the new procedures, a company will be told if the Council decides that a Stage 2 analysis is needed, as opposed to being told only when a Stage 2 analysis calls for Stage 3 consideration. Also, the company will be allowed to offer information and consult with FSOC staff during the Stage 2 analysis.

Periodic reviews. The Council is going to make the subsequent review process more open as well. Each nonbank SIFI designation is to be reviewed at least once each year. A SIFI will be able to meet with the Council’s staff to discuss this review and provide relevant information. This will give the company an opportunity to describe changes it has made that reduce the threat it presents, with a view toward demonstrating that the designation no longer is necessary.

For more information about the Financial Stability Oversight Council's activities, subscribe to the Banking and Finance Law Daily.

Need for a federal data security law raised at subcommittee hearing

By Stephanie K. Mann, J.D.

The call for federal action on data security was raised at the Senate Commerce Subcommittee on Consumer Protection, Product Safety, Insurance, and Data Security hearing entitled, “Getting it Right on Data Breach and Notification Legislation in the 114th Congress.” In response to the “Year of the Breach,” multiple states have developed their own standards, leaving businesses subject to a “patchwork of state, district, and territory laws.”

Dr. Ravi Pendse, Chief Information Officer at Brown University, was one of many experts who testified at the hearing, calling for a uniform federal law. According to Pendse, national legislation governing data breaches would have many advantages over existing state laws and reduce the burden that dissimilar state laws place on complying organizations. In addition to laws regarding data breaches, he called on Congress to create incentives for proactive measures to reduce the likelihood of breaches, one of the most important being the development of a trained cybersecurity workforce through education and training.

Cheri F. McGuire, Vice President of Global Government Affairs & Cybersecurity Policy at Symantec Corporation, a Fortune 500 technology company, said that Symantec would support a national standard built on three principles: data security legislation should apply equally to all; implementing pre-breach security measures should be a part of any legislation; and the use of encryption or other security measures that render data unreadable and unusable should be a key element in establishing the threshold for the need for notification.

For more information about the data breach hearing, subscribe to the Banking and Finance Law Daily.

Purchaser of collateral could not use Article 9 to shield iteself from liability

By Lisa M. Goolik, J.D.

In an unpublished opinion, the Superior Court of New Jersey, Appellate Division, held that a purchaser of collateral could not use Revised Article 9 to shield itself from successor liability. Although the acceptance of collateral in satisfaction of a lien terminates all subordinate interests, a judgment against the original debtor was not a subordinate interest that could be discharged by the purchase of the debtor’s collateral at a UCC sale. As a result, the all of assets of the purchaser, including those purchased at the sale, were subject to the judgment.

Background. In June 2003, the debtor, Elegant USA, LLC, a distributor of car seat covers, obtained a $20 million loan from the Bank of New York. The debt was later sold to General Electric Capital Corp. (GECC), and GECC became the priority secured lender.

In 2009, Kabile Ltd. and other individuals, the judgment creditors, obtained a judgment against Elegant in New York for just over $825,000. They later domesticated the judgment to New Jersey in August 2010.

At the same time, Elegant’s presumed president and CEO, Seffi Janowski, began negotiating with GECC and ultimately purchased GECC’s security interest in Elegant’s loan through another business of Janowski’s, Bergen Investments and Holdings, for $350,000. Bergen then foreclosed on the interest sold the assets it had acquired at public auction, where Bergen was the sole bidder. Bergen then sold the assets it acquired at the auction to another company owned by Janowski, Automotive Innovations, for $400,000. Automotive Innovations continued operating the same business as Elegant. 

In August 2010, Automotive Innovations filed an order to restrain the judgment creditors from levying the New York judgment against Elegant’s bank accounts. The judgment creditors counterclaimed, seeking to hold Automotive Innovations liable for the New York judgment as the successor to Elegant. The judgment creditors essentially claimed that Janowski had attempted to shield himself and others from liability while continuing to profit from Elegant’s former business.

The trial judge determined that Automotive Innovations was the successor in liability to Elegant and responsible for the amount due on the New York judgment. However, the trial judge also concluded that the foreclosure of GECC’s lien discharged the judgment creditors’ subordinate interest and they could not levy the judgment on any of the assets Bergen purchased at auction. The judge concluded that, under Section 9-622 of the New York UCC, Bergen’s purchase of the collateral discharged all subordinate interests. On appeal, the judgment creditors argued the section did not apply, because the judgment was not yet a lien.

Judgment lien. The court concluded that, although the trial judge was correct that as purchaser of GECC’s security interest, Bergen’s acceptance of Elegant’s collateral in satisfaction terminated all subordinate interests in the collateral, the judgment was not a subordinate interest in Elegant’s collateral because the judgment was not yet a lien.

Under both New York and New Jersey law, a judgment becomes a lien on personal property only upon levy, which never occurred. Accordingly, because the judgment lien was not a subordinate interest in Elegant's collateral, it was not extinguished by the UCC sale, said the court. Because the trial judge entered a judgment in favor of the judgment creditors on the issue of successor liability, they were entitled to execute their judgment on any of Automotive Innovations’ assets, including those purchased at the sale.

The court's conclusion, although well-reasoned, also seems fair. If the allegations are true, Automotive Innovations purchased the collateral from itself, with full knowledge that a judgment was pending against Elegant. Section 9-622 is not intended to be used by debtors to wipe the slate clean.

The case is Automotive Innovations, Inc. v. J.P. Morgan Chase Bank, N.A. (Docket No. A-1473-12T3).

'Optional' fee costs credit card company almost $3 million

By Lisa M. Goolik, J.D.

A Delaware company that marketed "fee-harvester cards" to subprime borrowers has agreed to refund more than $2.6 million in fees and pay a $250,000 civil penalty to settle charges brought by the Consumer Financial Protection Bureau that it imposed excessive fees in violation of the Credit Card Accountability, Responsibility, and Disclosure Act.

Under the CARD Act, fees are limited to 25 percent of the account credit limit in the first year after an account is opened. According to the CFPB, Continental Finance Company, LLC, generally gave consumers a $300 credit limit and charged a $75 fee—the highest fee permitted. However, Continental ran afoul of the limit when it added a $4.95 monthly fee for paper billing statements. Consumers were sent paper statements automatically and effectively could not opt out. The $4.95 per month, when added to the initial $75 fee, exceeded the 25-percent limit, the CFPB says.

The expected $2.67 million in refunds represents the paper statement fees imposed by Continental.



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

CFPB secures $480 million for Corinthian College borrowers

By Lisa M. Goolik, J.D.

The Consumer Financial Protection Bureau is continuing its fight against predatory student lending. Yesterday, the CFPB and Department of Education announced that they will release Zenith Education Group and its parent, ECMC Group, Inc., from any possible liability for the actions of Corinthian Colleges, Inc., from which they purchased more than 50 schools. In a win for student borrowers, Zenith and ECMC will provide more than $480 million in loan forgiveness to Corinthian’s borrowers as a part of the deal, resulting in an immediate 40-percent reduction in outstanding loan balances, with no action required of the students.

In addition, a number of collection tactics which Corinthian is alleged to use will be off-limits. Students who owe outstanding balances will not be sued or threatened with suits, and they will not be harassed for collection. ECMC also has agreed to tell consumer reporting agencies to delete adverse information from the students’ credit files.

According to the CFPB, ECMC made significant commitments that will also benefit prospective students—ECMC has agreed not to offer its own private student loans for at least seven years, will provide students accurate information about job prospects, and will institute a five business day cooling-off period for new enrollees.

The Department of Education separately reached an agreement with Zenith related to tuition reductions and refunds, among other things.

 

For more details about the release and the CFPB’s action against Corinthian College, subscribe to the Banking and Finance Law Daily.

For account setoff action, timing is everything

By Lisa M. Goolik, J.D.

The U.S. District Court for the Middle District of Florida has concluded that a bank could not exercise its right to setoff of a debtor’s deposit accounts because the bank’s perfected security interest in the deposit account was not superior to a judgment creditor’s writ of garnishment. While the bank in American Home Assurance Co. v. Weaver Aggregate Transport, Inc. (M.D. Fla.) held a perfected security interest in the deposit accounts, the bank failed to establish that default occurred prior to service of the writ of garnishment.

Background. In February 2014, American Home Assurance Company won an action it filed against Weaver Aggregate Trucking, Inc., for breach of contract and other state law claims in the amount of approximately $400,000. At American Home’s request, the court issued a writ of garnishment to Farmers and Mechanics Bank on Oct. 3, 2014. Farmers responded that, at the time the writ was served, Weaver owed the bank money pursuant to six different loans issued on May 23, 2014, and the bank sought to set off the money in Weaver’s general deposit account against Weaver’s obligations to the bank. Because the amount owed exceeded the amount in the account, the bank claimed that none of the money should be subject to garnishment.

The bank also filed a motion, claiming that it had a perfected security interest in the money in Weaver’s account, and it was entitled to a setoff on the grounds that: (1) it had a perfected security interest in the money in Weaver’s general account; and (2) it believed Weaver’s performance of the loan was impaired, the bank was insecure with respect to the loan, and that the loan was “in default upon the writ of garnishment being served” on the bank.

Choice of law. Before considering the merits of the bank’s motion, the court concluded that the Illinois UCC applied to the transaction. A choice-of-law clause in the loan documents required that the court apply federal law and, to the extent not preempted by federal law, Illinois law. Revised Article 9 of the Illinois UCC provides that “the local law of a bank’s jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in a deposit account maintained with that bank.” In addition, Section 9-304 provides that “[i]f an agreement between the bank and the debtor governing the deposit account expressly provides that a particular jurisdiction is the bank’s jurisdiction for purposes of this Part, this Article, or the Uniform Commercial Code, that jurisdiction is the bank’s jurisdiction.”

Right to setoff. Section 9-340 states that “the application of this Article [the U.C.C.] to a security interest in a deposit account does not affect a right of recoupment or set-off of the secured party as to a deposit account maintained with the secured party.” As a result, said the court, a bank may request a right of setoff, provided it can show it has a perfected security interest in the debtor’s deposit account.

Perfected security interest. Under Section 9-314, a security interest in a deposit account may be perfected by control of the collateral, and a secured party has control of a deposit account if it is “the bank with which the deposit account is maintained.”

In the instant case, the court concluded that Farmers had a perfected security interest in Weaver’s deposit accounts. Weaver’s deposit accounts and money served as collateral for the loan. Farmers maintained Weaver’s deposit account, providing the bank with control of the collateral consistent with Illinois law.

However, cautioned the court, a perfected security interest does not necessarily entitle a bank to a setoff under Illinois law. It must also show that it declared the loan in default and took affirmative steps to enforce its rights.

Timing of default. A key question, said the court, was whether the Weaver loan was in default at the time the writ was served. The security agreement between Farmers and Weaver provided that the bank only takes on the rights of a secured creditor under the UCC after a default occurs. “Default, therefore, is the essential prerequisite, and in the absence of such, [Farmers] cannot seize the collateral and apply it against the loan or otherwise prevent another creditor of the debtor—such as American Home—from taking possession of the collateral,” wrote the court.

The bank asserted three grounds for the default of Weaver’s loan: (1) the prospect of performance of the loan was impaired; (2) the bank was insecure with respect to the loan; and (3) the service of the writ of garnishment.

The first and second events allegedly occurred when the original judgment was entered against Weaver in February 2014—months before Farmers loaned Weaver the funds. “[U]nder the [b]ank’s nonsensical analysis, Weaver would have defaulted on the loan the moment it signed the Agreement,” wrote the court.

The third event—the service of the writ of garnishment—was also not as straightforward as Farmers contended, the court stated. Due to a crucial distinction Farmers makes between monetary and non-monetary default, it was unclear that the loan was ever considered in default.

According to the bank’s vice president, a monetary default is a default based on non-payment and requires no affirmative decision by the bank to declare a loan in default. In contrast, non-monetary defaults, which include the events in the instant case, require the bank to take affirmative steps to evaluate and decide whether a loan is in default.

Weaver was current with its monthly interest payments and not in monetary default. In addition, there was no evidence that Farmers took any affirmative steps prior to receiving the writ of garnishment to determine if the loan was in non-monetary default. No notation that the loan was in default was made. Although Farmers has a loan committee, it was not advised that the loan was now in default. Lastly, the loan was never classified as “nonperforming.”

Thus, the court concluded, the garnishment was served prior to the default, and the bank’s perfected security interest was not superior to American Home’s garnishment lien. As a result, Farmers could not exercise a right to setoff.

FHA moves to protect non-borrower surviving spouses

By Lisa M. Goolik, J.D.

Last week, the FHA announced the issuance of new guidance that allows reverse mortgage lenders to assign eligible Home Equity Conversion Mortgages (HECMs) to the Department of Housing and Urban Development upon the death of the last surviving borrowing spouse. The new policy effectively allows eligible surviving spouses the opportunity to remain in the home despite their non-borrowing status, the FHA stated.

The guidance amends regulations for HECMs with an FHA Case Number assigned prior to Aug. 4, 2014, to provide an alternative option for claim payment for an eligible HECM with an Eligible Surviving Non-Borrowing Spouse. In those cases, lenders will be permitted to pursue claim payments by: 

• allowing claim payment following sale of the property by heirs or estate;
• foreclosing in accordance with the terms of the mortgage, and filing an insurance claim under the FHA insurance contract as endorsed; or
• utilizing the Mortgagee Optional Election Assignment by electing to assign the HECM to HUD upon the death of the last surviving borrower, where the HECM would not otherwise be assignable to FHA.

Assignments will be accepted beginning June 1, 2015.

For more details about Mortgagee Letter 2015-03, subscribe to the Banking and Finance Law Daily.