A lease by any other name, may still be a lease

By Lisa M. Goolik, J.D.

A case decided by the Court of Appeals of Iowa this week illustrates that an agreement is not necessarily an security agreement just because it purports to create a security interest. In reaching its conclusion that a lease agreement that contained a security agreement clause was, in fact, a lease, the court noted that whether a contract constitutes a lease or a security agreement does not depend on whether the parties call it a “lease” or a “security agreement,” but on the facts of the case. As a result, the lessor, Hard Hat Industries, Inc. (HHI), was entitled to repossess and sell leased equipment held by the lessee, CD Construction, LLC, in accordance with the lease’s terms (CD Construction, LLC v. Hard Hat Industries, Inc., Oct. 28, 2015, Doyle, P.J.).

Background. In 2010, CD Construction purchased a used excavator from HHI for $136,000 on a “rent-to-purchase” agreement. In 2013, the owner of CD Construction, Chris Doty, asked HHI’s owner, Donnie Baggs to borrow $35,000. Doty believed he asked Baggs for a loan secured by excavator; however, Baggs believed HHI was purchasing the excavator to lease back to CD Construction. HHI issued a check to CD Construction, and Doty provided HHI with a bill of sale for the excavator. The parties then entered into a “lease agreement” for the excavator, signed by HHI as lessor and Doty as lessee.

The agreement specified 17 monthly payments of $2,500 with a $7,500 balloon payment at the end of the term to “buy out” the excavator, which at that time, was valued between $85,000 and $100,000. After six months of the lease, Doty had an option to purchase the excavator for $50,000. The agreement also contained a security agreement clause, which purported to grant HHI a security interest in the excavator. In addition, the agreement provided that HHI keep the excavator in good condition, requiring HHI to complete more than $23,000 in repairs in the first few months of the term. 

After CD Construction missed two monthly payments, HHI’s attorney sent a notice of termination of the lease to CD Construction. HHI subsequently repossessed and sold the excavator for $83,500.

CD Construction filed an action, alleging claims of conversion and breach of contract against HHI. CD Construction argued that the agreement was a security agreement rather than a lease, and as a result, HHI was not entitled to possession of the excavator.

Lease v. security agreement. The court began by noting that whether a contract constitutes a lease or a security agreement does not depend on whether the parties call it a “lease” or a “security agreement.” Rather, the facts of each case determine whether a transaction creates a lease or a sale with a security interest. 

Under Iowa law, the court must apply a two-part analysis that begins with the bright-line test. According to the test, a transaction in the form of a lease creates a security interest if it: (1) prohibits the lessee from terminating the obligation to pay the lessor for the right to possess and use the equipment, and (2) meets one of the four independent criteria listed in section 1-203(d) of the Uniform Commercial Code:

• The original term of the lease is equal to or greater than the remaining economic life of the goods.
• The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods.
• The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.
• The lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.

The court concluded the agreement did not meet the requirements of the bright-line test. As to the first requirement, the agreement provided CD Construction had the right to cancel the agreement 10 days after the first day of the lease term.

In addition, the agreement did not satisfy any of the four additional factors in the second requirement: the original term of the lease was not equal to or greater than the remaining economic life of the goods; there was no requirement or option to renew the lease, nor was there an option to renew the lease for nominal payment; and if CD Construction chose to purchase the excavator at the end of the lease, the $7,500 balloon payment plus the cost to reimburse HHI for the repairs was not “nominal.”

As a result, the transaction was not a sale with a security interest. Accordingly, when CD Construction defaulted on the lease agreement, HHI was entitled to possession of the excavator under the terms of agreement.

For more information about equipment leases and security agreements, subscribe to the Banking and Finance Law Daily.

Senate passes Cybersecurity Information Sharing Act

By J. Preston Carter, J.D.

Cybersecurity legislation that has been years in the making and spanned several Congresses finally got a full Senate vote after months of bickering over whether to let members offer amendments. The Cybersecurity Information Sharing Act of 2015 (CISA) (S. 754), as amended, passed by a vote of 74-21 on Oct. 27, 2015. CISA would permit companies to voluntarily share the personal information of private citizens with the federal government if there is believed to be a cybersecurity threat.

Senate Majority Leader Mitch McConnell (R-Ky) told members that cybersecurity is a “complicated issue” while thanking the bill’s sponsors, Senate Intelligence Committee Chairman Richard Burr (R-NC) and committee Vice Chairman Sen. Dianne Feinstein (D-Cal) for their efforts at reaching a bipartisan deal. Chairman Burr said “now the work begins as we go to conference.” Senator Feinstein acknowledged the role of Sen. Thomas R. Carper (D-Del) in brokering a compromise on the Department of Homeland Security portal, while noting the bill was backed by the Obama administration.

Following passage, a number of senators and industry groups released statements, mostly in support of CISA.

Senators’ approval. Senator Mark Warner (D-Va), a member of the Senate Intelligence Committee, applauded Senate passage of CISA, which, he said, “will strengthen cybersecurity efforts by encouraging private companies to voluntarily share information while ensuring individual privacy and civil liberties.” Warner noted that the bipartisan legislation now needs to be merged with cybersecurity legislation that passed the House of Representatives before it heads to the President for signature.

Senator Lynn Westmoreland (R-Ga), Chairman of the House Permanent Select Committee on Intelligence’s Subcommittee on the NSA and Cybersecurity, said, “By improving the cyber-threat sharing capabilities between government and private companies, we can also improve the flow of timely, actionable information to protect our citizen’s sensitive information and prevent another devastating cyber­attack.

Senator Mike Rounds (R-SD) noted that a companion bill to S. 754 passed the House of Representatives earlier this year and that CISA is supported by President Obama. Rounds said the measure will help protect Americans from cyber attacks while protecting private information from being shared, and he added, it is “100 percent voluntary.”

Tester in opposition. Senator Jon Tester (D-Mont) voted against CISA, stating, "In a world where technology changes faster than our laws, we cannot and must not give corporations and the federal government unbridled authority for generations to come.” He said that CISA provides liability protections for the companies that provide personal information to the federal government but fails to provide adequate protections to the customers whose personal data is being shared.

Tester’s release stated that he supported multiple amendments to the bill that would have strengthened privacy protections and reduced the amount of personal information being shared with the government while identifying and combating cyber threats and potential threats. Unfortunately, he said, these amendments failed.

Industry response. The American Bankers Association applauded the passage of CISA with one reservation. The ABA believes CISA will help the financial industry work more effectively with the federal government and other sectors to better protect their customers from cyber threats. However, “a provision that would change the inherent voluntary nature and structure of CISA by allowing DHS to create cybersecurity standards for critical infrastructure that would have the practical impact of regulation is unnecessary and harmful.” The ABA said it looks forward to working with Congress to address this as the process moves forward.

The Financial Services Roundtable also applauded the passage with one reservation. It urged negotiators to “address problematic language contained in Section 407 of the Senate’s bill which would create duplicative regulatory oversight for financial service firms. The language also adds mandatory requirements that are inconsistent with the voluntary nature of the legislation.”



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

Obama Administration asked to adopt policy of renouncing ‘government service golden parachutes’

By Thomas G. Wolfe, J.D.

In a recent letter to the White House, 28 different civic, public interest, and union groups have jointly urged the Obama Administration to implement a policy requiring new officials coming from the financial industry to relinquish their “government service golden parachute” compensation packages that are offered by their former private employers “in exchange for their decisions to enter into public service.” The groups’ Oct. 22, 2015, letter to the President maintains that these golden parachute arrangements are “corrosive to the public trust” and that the Obama Administration should require any new administration officials to “forego them as a condition of employment.”

As observed in a release by Public Citizen, one of the 28 signatory groups to the joint letter, former Wall Street officials have “taken on a number of high-level roles in the executive branch” in recent times. Public Citizen points out that “[a]lumni from Citigroup” head the U.S. Treasury Department and the Office of the U.S. Trade Representative. Similarly, “other former executives and representatives of major banks serve as senior economic policymakers and federal regulators overseeing their former employers,” Public Citizen notes.

Consequently, according to Public Citizen, the groups’ letter to the White House seeks to “slow the revolving door between Wall Street and the government by ensuring that new federal officials don’t get extra pay from the financial industry just for taking a government job overseeing the financial industry.”

In their joint letter, the groups assert that awarding “outsized bonuses and gifts of equity to Wall Street executives who leave to go into public service is either a breach of a public corporation’s fiduciary duty to its stockholders or a down payment on future services rendered.”

Moreover, the groups contend that, at best, the current practice “creates the appearance of corruption and conflict of interest.” At worst, the practice “results in undue and inappropriate corporate influence at the highest levels of government—in essence, a barely legal, backdoor form of bribery.”

Accordingly, the letter exhorts the Obama Administration to adopt a policy of requiring new officials from the financial industry to relinquish their “government service golden parachutes” to restore the public’s trust in government.

For more information about policymaking considerations for the financial services industry, subscribe to the Banking and Finance Law Daily.

Cordray: Companies use arbitration clauses to ‘rig the game’ against customer

By Katalina M. Bianco, J.D.

Consumer Financial Protection Bureau Director Richard Cordray spoke out on arbitration clauses and the bureau’s arbitration proposal currently under consideration at a meeting of the Consumer Advisory Board on Oct. 22, 2015. Not a fan of mandatory arbitration clauses, Cordray told the board that the clauses “rig the game’ against costumers to avoid class action lawsuits.

“These clauses are often buried deeply in the fine print of many contracts for consumer financial products and services, such as credit cards and bank accounts,” Cordray said. “Companies use them, in particular, to block class action lawsuits, providing themselves with a free pass from being held accountable by their customers in the courts.” The director added that “by inserting the free pass into their consumer financial contracts, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm consumers on a large scale.”

CFPB proposal. Cordray said that the bureau’s proposal would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts. This generally would apply to the consumer financial products and services that the bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services.

The proposal would not impose a complete ban on all pre-dispute arbitration agreements for consumer financial products and services, Cordray explained. Companies could still have an arbitration clause, but they would have to say explicitly that it does not apply to cases brought on behalf of a class unless and until the class certification is denied by the court or the class claims are dismissed in court. The bureau is not proposing “at this time” to limit the use of arbitration clauses as they apply to individual cases, he said.

Cordray did say that although the CFPB is not proposing to prohibit the use of pre-dispute arbitration clauses, the bureau will continue to monitor the effects of such clauses on the resolution of individual disputes.

Specifically, the proposal under consideration would:

 

(1) provide consumers with their day in court, which Cordray called “a core American principle” given that the U.S. Constitution states that all Americans are entitled to seek justice through due process of law;

(2) deter wrongdoing on a broader scale. Although many consumer financial violations impose only small costs on each individual consumer, taken as a whole these unlawful practices can yield millions or even billions of dollars in revenue for financial providers who use arbitration clauses to protect “ill-gotten gains”; and

(3) bring the arbitration of individual disputes “into the sunlight of public scrutiny” by requiring companies to provide the CFPB with arbitration filings and written awards, which might be made public.

Finally, Cordray reiterated that the “central idea” of the proposals under consideration is “to restore to consumers the rights that most do not even know had been taken away from them.”

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

Banks face lawsuits for discriminatory mortgage lending in Chicago area

By Andrew A. Turner, J.D.

Cook County, Ill., which includes Chicago, has standing under the Fair Housing Act to sue HSBC North America Holdings Inc. with claims that HSBC discriminatorily targeted minority homeowners in the county for predatory subprime mortgage loans, according to a decision by a federal district court judge. In previous opinions in lawsuits based on similar claims brought by Cook County against Wells Fargo and Bank of American, one judge reached the same result and another arrived at an opposite conclusion.

In the most recent case, the court found that the county was within the “zone of interests” the FHA was intended to protect based on allegations that discriminatory actions increased the minority borrowers’ risks of default and foreclosure, resulting in a rash of foreclosures in the county, which in turn caused economic and noneconomic injury to Cook County (County of Cook v. HSBC North America Holdings Inc., Sept. 30, 2015, Lee, J).

Earlier in the year, another court in the district found statutory standing under similar circumstances, concluding that counties and municipalities have standing to sue for alleged FHA violations based on asserted injuries to their tax base and revenues (County of Cook v. Bank of America Corp., March 19, 2015, Bucklo, J).

However, another decision in the district has taken a different view, ruling that the county was not within the FHA’s zone of interests. FHA protections extend to “reverse redlining” (the practice of steering minorities into more expensive loans, as opposed to simply denying them loans). While affected minority borrowers can sue under the FHA for their losses, the court said Cook County lacked authorization to sue under the law becuase it could not claim that it was denied a loan nor offered unfavorable terms (County of Cook v. Wells Fargo & Co., July 17, 2015, Feinerman, J).

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Experian data breach prompts questions and calls for investigations

By J. Preston Carter, J.D. LL.M.

Following the data breach of Experian’s computers holding 15 million files of T-Mobile customers and applicants, Congress and consumer privacy groups are urging investigations and pressing Experian CEO Brian Cassin for answers.

Senator Sherrod Brown (D-Ohio), ranking member of the Committee on Banking, Housing, and Urban Affairs, sent a letter to Cassin asking him to explain how the company is addressing vulnerabilities to its data security systems and consumers’ financial information.

“Experian has files on more than 220 million people. Protection of this information is of the utmost importance, especially because the scope of the information is vast and virtually no consumer can apply for credit without entering your system,” Brown wrote. “As we have seen repeatedly over the past few years, large companies are vulnerable to breaches of consumer information and the financial industry is a prime target for such attacks.”

Brown’s letter presents a list of eight questions related to the data breach for Cassin to answer.

A group of national and state consumer privacy organizations also has a list of questions, but these were presented to the Consumer Financial Protection Bureau and the Federal Trade Commission in a letter urging the agencies to investigate the Experian data breach. The organizations’ letter, released by U.S. PIRG, expresses “grave concerns” that Experian’s system may not be adequately protecting consumer records.

Meanwhile, Experian says it is continuing to investigate the theft, closely monitoring its systems, and working with domestic and international law enforcement. “Investigation of the incident is ongoing.”

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Cordray not buying arguments against CID: Denied

By Katalina M. Bianco, J.D.

Consumer Financial Protection Bureau Director Richard Cordray has denied a petition by the Accrediting Council for Independent Colleges and Schools (ACIS) to modify or set aside a civil investigative demand from the bureau’s Office of Enforcement. In his decision, Cordray said that the three arguments made by ACIS do not warrant setting aside or modifying the CID.

Background. ACIS is a company that accredits many for-profit colleges. The CFPB issued the CID to ACIS on Aug. 25, 2015. In its petition, ACIS said that the CID was received by ACIS President and Chief Executive Officer Albert C. Gray on Aug. 28, 2015. The CID seeks sworn oral testimony from a company representative to be designated by ACIS. The investigational hearing would be held in Washington, D.C., where ACIS is located. According to Cordray, the topics of proposed testimony are ACIS’s policies, practices, and procedures for accrediting certain for-profit colleges. The CID includes requests for a list of colleges that ACIS accredits and the individuals who conducted the accreditation of the colleges covered by the oral testimony request.

Following ACIS’s receipt of the CID, CFPB enforcement counsel met via telephone with ACIS counsel on several occasions. These discussions, Cordray said, did not resolve disagreements about ACIS’s obligations. The bureau received the petition to set aside or modify the CID on Sept. 14, 2015.

Reasons for denial. Cordray notes that ACIS raises three objections to the CID. First, ACIS argues that the Department of Education is its sole regulator. ACIS says that it is given tax exempt status as a nonprofit organization operated solely for the educational purposes and that ACIS has been recognized since 1956 by the Secretary of Education as a reliable authority on the quality of education and training offered by the colleges it accredits.

Cordray said that to support its position that the DoE is its sole regulator, ACIS relies on a string of cases that hold that Section 496 of the Higher Education Act does not provide for a private right of action against accrediting companies. These cases are not relevant, the director found, because the CFPB is not a private plaintiff and is not seeking to enforce the HEA. The bureau is conducting an investigation to determine whether a person or entity is in violation of Sections 1031 and 1036 of the Consumer Financial Protection Act or any other consumer financial protection law.

Second, ACIS contends that the CFPB is restricted to enforcing actions by “covered persons” and that ACIS is not a “covered person” under the CFPA. Cordray notes that the implication is that ACIS is not subject to the CFPA’s prohibition against unfair, deceptive, or abusive acts and practices. However, these contentions do not apply to the scope of the bureau’s investigative authority under the CFPA but constitute potential substantive defenses that could be raised to claims the bureau may or may not bring against ACIS.

Finally, ACIS claims that the CID’s Notice of Purpose is insufficiently specific and fails to comply with the CFPA and the bureau’s regulations that the CID must state the nature of the conduct giving rise to the alleged violation. Cordray answers that the requirement does not “demand a detailed narrative” and that it is “well settled” that the boundaries of an investigation may be fairly general.

ACIS is directed to meet and confer with CFPB enforcement counsel within 10 days of service of the order to decide the dates on which the hearing will take place.

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

Fed replaces guidance on pre-merger, pre-conversion exam waivers

By Richard Roth

The Federal Reserve Board has updated its guidance on the circumstances under which a federal reserve bank may, after consulting with the Fed’s staff, waive a consumer compliance or safety and soundness examination of a financial institution that wants to become a Federal Reserve System state member bank. The guidance also applies when a bank that is not a state member bank is merging with a state member bank if a state member bank will be the surviving entity after the merger. Prior guidance from 2011 has been rescinded (SR 15-11/CA 15-9).

In the case of a charter conversion, the bank ordinarily must satisfy nine separate criteria before a federal reserve bank can waive the otherwise-required pre-membership examination. Additional considerations apply in the case of a merger. The guidance adds that a safety and soundness examination can be waived if it would not furnish information that would be useful in the Fed’s consideration of the charter conversion or merger, even if some of the criteria are not met.

Charter conversion waivers. Five of the nine criteria are set by Reg. H—Membership of State Banking Institutions in the Federal Reserve System (12 CFR Part 208). These require the bank to:

• be well-capitalized;
• have a composite CAMELS rating of “1” or “2”;
• have a Community Reinvestment Act rating of “outstanding” or “satisfactory”:
• have a consumer compliance rating of “1” or “2”; and
• have no major unresolved supervisory issues with either its current primary regulator or the Consumer Financial Protection Bureau.

Four additional safety and soundness criteria must be met.

1. The bank’s CAMELS management component must be either “1” or “2.”
2. The “close date” of the most recent full-scope safety-and-soundness examination must be less than nine months from the date of the membership application.
3. There may not have been any material changes to the bank's business model since the most recent report of examination and there may be no material changes planned for the next four quarters.
4. The annual growth in total assets shown by the most recent Call Report must have been less than 25 percent, and planned growth over the next year also must be less than 25 percent.

Merger waivers. In the case of a merger that will leave a state member bank as the surviving entity, a waiver may be granted if the state member bank will meet all of the criteria on both an existing basis and a pro-forma basis after the merger. However, the guidance adds that other factors could require an examination, such as a change in the member bank’s senior leadership or strategy, less-than-satisfactory ratings having been given to the bank with which the member bank is merging, or business lines or products new to the member bank resulting from the merger.

Consumer compliance examinations. Before deciding whether to waive a consumer compliance examination, the federal reserve bank staff members are to look at the bank’s recent consumer compliance examinations, reviews, and risk assessments from the bank’s current regulator as well as information from the CFPB, the guidance says. An examination should not be waived if the bank has a less-than-satisfactory consumer compliance rating.

Moreover, an examination might be called for even if the rating is “1” or “2,” the guidance says. If the information from other agencies reveals significant weaknesses, an examination targeted on the area of concern should be considered.

A low CRA rating also would be relevant even though the CAR does not apply directly to Federal Reserve System membership, the guidance warns. This is because a poor CRA rating “presumably would reflect unfavorably on the abilities of management.” A CRA performance review might then be needed.

Examination scope. A pre-merger or pre-membership examination can be targeted on areas of identified weaknesses, according to the guidance. No report of examination is required, but the examination results should be documented as part of the application process. For larger institutions, the federal reserve bank staff is expected to rely on information generated by the continuous monitoring process to the extent possible.

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CFPB wants more HMDA data from smaller number of lenders; industry responds

By Stephanie K. Mann, J.D.

The Consumer Financial Protection Bureau has amended Reg. C—Home Mortgage Disclosure (12 CFR Part 1003) to reduce the number of lenders that must file reports but require more data to be collected and reported. According to the bureau, the amendments will reduce the number of banks and credit unions that must file Home Mortgage Disclosure Act reports by about 22 percent, but will require those that must report to collect up to 48 data points for each loan or application. The amendments also are intended to make it easier for institutions to file reports by making data collection consistent with established industry standards.

HMDA requires lenders to collect and report information on home loan applications, originations, and purchases. The information is published and can be used for several regulatory purposes, including identifying potential home loan discrimination. According to the bureau, the Dodd-Frank Act expanded the information that is to be collected in an effort to make available information about practices that were seen as having contributed to the mortgage crisis, such as adjustable-rate loans and loans with non-amortization features. A proposal to implement the changes was announced in July 2014.

Covered institutions. The rule amendments retain and expand existing exemptions for smaller financial institutions. The bureau says that a new reporting threshold will exclude small depository institution lenders with low loan volumes. Institutions that originated fewer than 25 closed-end loans or 100 open-end loans during the two previous calendar years will be exempt from reporting obligations.

Covered transactions. The definition of the types of transactions that are covered by the HDMA rule is being changed to what the CFPB calls a “dwelling-secured standard,” as opposed to the current “purpose-based test,” for consumer-purpose loans and applications. For business-purpose loans, the rule will use both a dwelling-secured test and purpose-based test.

The treatment of preapproval requests also is being changed. Covered institutions will be required to report information on home purchase loan preapproval requests that are approved but not accepted. Requests for preapprovals of open-end lines of credit, reverse mortgages, and purchase loans to be secured by multifamily residences will not be reportable covered transactions.

Data points. The summary of reportable data provided by the bureau shows that the amendments require lenders to collect and report 25 new data points and that 12 existing data points are being modified. The CFPB’s notice says that the total 48 data points can be separated into four categories:

• information about applicants, borrowers, and underwriting, including age, credit score, debt-to-income ratio, and automated underwriting system results;
• information about the property securing the loan, such as construction method and property value, as well as additional information about manufactured and multifamily housing;
• information about the loan’s features, such as additional pricing information, loan term, interest rate, introductory rate period, non-amortizing features, and the type of loan; and
• unique identifiers, such as a universal loan identifier, property address, loan originator identifier, and a legal entity identifier for the financial institution.

Additionally, lenders that collect information about applicants’ ethnicity, race, or gender based on visual observation or surname must disclose that they do so. If ethnicity and race information is provided by the applicant or borrower, the financial institution must permit that applicant or borrower to self-identify using disaggregated ethnic and racial categories.

Reporting burden. According to the bureau, it will be easier for covered institutions to file reports because many of the data points to be collected are the same as or similar to data that institutions already collect for processing, underwriting, pricing, or secondary-market sale purposes. The data points also “align with well-established industry data standards.” This consistency will reduce the reporting burden and also provide better quality, more useful data, the CFPB believes.

Reaction. In reaction to the bureau’s release of a final rule regarding modifications to Regulation C, which will implement changes to the Home Mortgage Disclosure Act, leading trade associations have commended the bureau for its action, but continue to urge caution.

NCRC. According to National Community Reinvestment Coalition President and CEO John Taylor, had this expansion of rules been enacted earlier, it would have provided an early warning system that could have prevented the housing crisis. “This expansion of Home Mortgage Disclosure Act data is a very positive thing for consumers everywhere,” said Taylor. “This data will serve to increase the fairness of mortgage markets for all Americans.”

However, said Taylor, the bureau’s work is not done. The CFPB now must ensure that “all of the data elements collected that pose no privacy concerns are released to the public. Detailed public disclosure gives increased transparency to the market, and allows members of the public to detect lending discrimination and abuse.”

ABA. Also commending the bureau for its action is the American Bankers Association. However, Frank Keating, ABA CEO and President, said that the trade association continues to be concerned “about the privacy of bank customers’ data and ensuring that their information is properly protected” and the “appropriate balancing of costs and benefits in order to maintain consumer access to the full variety of mortgage products.”

MBA. The Mortgage Bankers Association applauds the CFPB, but has reiterated its concerns about data security and consumer privacy in light of all the additional detailed information on consumers that the government will be collecting and disclosing under the new guidelines.

ICBA. Opposing the CFPB’s final rule is the Independent Community Bankers of America, which believes that the rule only add to the already excessive regulatory burdens placed on community banks. “While ICBA appreciates the CFPB’s provision of a two-year implementation period and its efforts to exempt some small-volume lenders, the overall costs of the expanded HMDA reporting requirements outweigh the benefits,” ICBA President and CEO Camden R. Fine said.

The trade association noted that the bureau’s final rule requires financial institutions to report 48 data fields for each borrower—greatly exceeding the statutory requirement laid out by Congress. This “extraneous data reporting will require additional costly system upgrades for community banks, but will not necessarily provide a better understanding of lending practices,” said the ICBA.

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HMDA finalized: More data, less lenders

By Katalina M. Bianco, J.D.


The Consumer Financial Protection Bureau has finalized amendments to Reg. C—Home Mortgage Disclosure (12 CFR Part 1003) that will reduce the number of lenders that must file reports but require more data to be collected and reported. The rule is intended to "shed more light on consumers’ access to mortgage credit by updating the reporting requirements of" HMDA, according to the CFPB's notice. The CFPB said that the bureau is working with other agencies to streamline the reporting process for financial institutions.

“The Home Mortgage Disclosure Act helps financial regulators, the public, housing officials, and even the industry itself keep a watchful eye on emerging trends and problem areas in the nation’s mortgage market – the largest consumer financial market in the world,” said CFPB Director Richard Cordray. “With today’s final rule we are shedding more light to foster better understanding of the market, and also ensuring that lenders have sufficient time to come into compliance.”

The amendments will reduce the number of banks and credit unions that must file Home Mortgage Disclosure Act reports by about 22 percent but will require those that must report to collect up to 48 data points for each loan or application. The amendments also are intended to make it easier for institutions to file reports by making data collection consistent with established industry standards.

In an effort to explain the amendments, the bureau has provided a summary of the rule and an implementation timeline for the amendments that shows no changes for 2016. Compliance will be phased in beginning Jan. 1, 2017, and full compliance will be required with reports to be filed in 2020. The CFPB also has put into place an online HMDA tool that provides information about the rule and implementation.

Trade associations react to rule. In reaction to the CFPB's rule, leading trade associations have commended the bureau but continue to urge caution.

 NCRC. According to National Community Reinvestment Coalition President and CEO John Taylor, had this expansion of rules been enacted earlier, it would have provided an early warning system that could have prevented the housing crisis. “This expansion of Home Mortgage Disclosure Act data is a very positive thing for consumers everywhere,” said Taylor. “This data will serve to increase the fairness of mortgage markets for all Americans.” However, said Taylor, the bureau’s work is not done. The CFPB now must ensure that “all of the data elements collected that pose no privacy concerns are released to the public. Detailed public disclosure gives increased transparency to the market, and allows members of the public to detect lending discrimination and abuse.”

ABA. Also commending the bureau for its action is the American Bankers Association. However, Frank Keating, ABA CEO and President, said that the trade association continues to be concerned “about the privacy of bank customers’ data and ensuring that their information is properly protected” and the “appropriate balancing of costs and benefits in order to maintain consumer access to the full variety of mortgage products.”

MBA. The Mortgage Bankers Association applauds the CFPB, but has reiterated its concerns about data security and consumer privacy in light of all the additional detailed information on consumers that the government will be collecting and disclosing under the new guidelines.

ICBA. Opposing the CFPB’s final rule is the Independent Community Bankers of America, which believes that the rule only add to the already excessive regulatory burdens placed on community banks. “While ICBA appreciates the CFPB’s provision of a two-year implementation period and its efforts to exempt some small-volume lenders, the overall costs of the expanded HMDA reporting requirements outweigh the benefits,” ICBA President and CEO Camden R. Fine said.

The trade association noted that the bureau’s final rule requires financial institutions to report 48 data fields for each borrower—greatly exceeding the statutory requirement laid out by Congress. This “extraneous data reporting will require additional costly system upgrades for community banks, but will not necessarily provide a better understanding of lending practices,” said the ICBA.

For more information about the HMDA final rule, subscribe to the Banking and Finance Law Daily.

Will CFPB ban ‘free pass’ no-class action clauses?

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau is considering whether to ban mandatory arbitration clauses. To that end, the bureau has outlined proposals that would not ban arbitration clauses in their entirety, but would ban clauses that block class action lawsuits in consumer contracts. The proposed ban would apply to most consumer financial products, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.

Speaking at an Arbitration Field Hearing in Denver, CFPB Director Richard Cordray said,  “Companies use this clause, in particular, to block class action lawsuits. They thus provide themselves with a free pass from being held accountable by their customers. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

In March, the bureau released the results of its arbitration study, in which it concluded that arbitration clauses restrict consumers’ relief for disputes with financial service providers by limiting class actions. The bureau found that very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements. 

In his remarks, Cordray noted that violations of consumer protection laws may result in relatively little harm per individual victim, and as a result, class actions “often are the only effective way consumers can pursue meaningful relief for harms that can add up to large amounts of money for financial providers.”

In a post to its blog, the bureau noted that class action lawsuits allow consumers to “band together” to seek relief for harms that are too small to be practical to sue over as an individual. According to the CFPB’s study, from 2008 to 2012, approximately 6.8 million consumers received $220 million in payments from class action settlements per year.

However, the bureau’s study also found that most arbitration agreements can be used to move class lawsuits from court to arbitration, where class proceedings are typically prohibited under the arbitration agreement. Companies often successfully use arbitration agreements in consumer financial class litigation cases filed in court to block access to any form of class proceeding for those claims.

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

Are TRID ‘good faith efforts’ good enough for private actors?

By John M. Pachkowski, J.D.

Although the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation assured mortgage lending participants that regarding the agencies’ compliance expectations for the Know Before You Owe mortgage disclosure rule (or TRID rule), Steven J. Kubik of the law firm Kane Russell Coleman & Logan PC indicated that lenders may still face liability.

In an Oct. 2, 2015, statement, the CFPB noted, “During initial examinations for compliance with the rule, the Bureau’s examiners will evaluate an institution’s compliance management system and overall efforts to come into compliance, recognizing the scope and scale of changes necessary for each supervised institution to achieve effective compliance.” The FDIC, in FIL-43-2015, stated the same expectations; and the OCC sent a letter to the American Bankers Association that outlined the agency's initial compliance expectations that are similar to the expectations highlighted in the CFPB’s statement.

In a blog post, Kubik noted, “One of the changes that creditors and assignees face under TRID is liability from private lawsuits, such as from home buyers and investors who question accuracy of the mortgage disclosure forms.” He added, “As such, while the Feds may be giving lenders a break, they should beware that private actors have not promised to do the same.” Kubik concluded, “Unfortunately, this is an evolving area of the law and the scope of lender liability will remain unclear until the courts adopt a uniform approach. In the meantime, lenders should be vigilant in implementing policies, procedures, and controls to ensure compliance.”

For more information about the Know Before You Owe mortgage disclosure rule, subscribe to the Banking and Finance Law Daily.

North Carolina allows loan guarantors to raise debt-reduction defense after foreclosure

By Thomas G. Wolfe, J.D.

Notably, the North Carolina Supreme Court recently ruled that, after foreclosure, non-mortgagor guarantors are permitted to “stand in the shoes of the principal borrower” and raise an anti-deficiency defense under North Carolina law to reduce their outstanding indebtedness to the principal borrower’s lender—regardless of whether the principal borrower-mortgagor is a party in the action. Moreover, in reaching its decision in High Point Bank and Trust Company v. Highmark Properties, LLC, the state’s high court further determined that, despite certain waiver-related provisions contained in the underlying guaranty agreement that was executed by the loan guarantors, the North Carolina law “provides an equitable calculation method that is not subject to waiver.”

By way of background, North Carolina’s anti-deficiency statute (N.C. Gen. Stat. §45-21.36) provides that: “When any sale of real estate has been made by a mortgagee, trustee, or other person authorized to make the same, at which the mortgagee, payee or other holder of the obligation thereby secured becomes the purchaser and takes title … and thereafter such mortgagee, payee or other holder of the secured obligation, as aforesaid, shall sue for and undertake to recover a deficiency judgment against the mortgagor, trustor or other maker of any such obligation whose property has been so purchased, it shall be competent and lawful for the defendant against whom such deficiency judgment is sought to allege and show as a matter of defense and offset, but not by way of counterclaim, that the property sold was fairly worth the amount of the debt secured by it at the time and place of sale or that the amount bid was substantially less than its true value, and, upon such showing, to defeat or offset any deficiency judgment against him.”

The plaintiff lending bank in the case, High Point Bank and Trust Company, argued that loan guarantors were not included among the “class of obligors” contemplated by the North Carolina statute. In addition, the bank maintained that even if the guarantors could be considered as obligors covered by the law, the guarantors still were not entitled to the statutory defense of debt reduction or offset because the guarantors had waived their right to the statutory defense by executing the guaranty agreement containing waiver provisions. The North Carolina Supreme Court disagreed.

In reviewing the North Carolina anti-deficiency statute and accompanying case law, the court noted that the statute protects a debtor by calculating the applicable debt based on the fair market value of the real property—the pertinent collateral for the loan—instead of the amount bid by a purchasing creditor at a sale of the real property. Viewing the statute as an equitable method of calculating indebtedness, the court asserted that it is not subject to waiver, despite language in a guaranty agreement to the contrary.

As previously reported (see WK Banking & Finance Law Blog, March 3, 2015), in the earlier, separate case of Branch Banking and Trust Company v. Smith, the intermediate appellate court in North Carolina decided the issue in a similar fashion. That prior blog post raised the query about how the North Carolina Supreme Court might rule on the issue. That question has now been answered via the court’s High Point Bank decision.

For more information about state banking laws on mortgage loans, subscribe to the Banking and Finance Law Daily.

No joke, account number on envelope can violate debt collection law

By Andrew A. Turner, J.D.

Cases in the U.S. District Court for the Northern District of Illinois asking whether the display of a debtor’s account number through the glassine window of an envelope violates the Fair Debt Collection Practices Act have met with differing results.

On March 17, 2015, Judge Shadur said that such a complaint could only be viewed as a “bad joke,” given that it’s “claims are so patently absurd”(Sampson v. MRS BPO, LLC). But in a Sept. 30, 2015 opinion, Judge Gottschall refused to dismiss such a complaint, saying that the disclosure of an account number is a disclosure of a debtor’s private information that cannot be ignored (Adkins v. Financial Recovery Services, Inc.).

In the earlier case, Judge Shadur said that a string of incomprehensible numbers and symbols on the outside of the envelope could not be viewed as an unfair and abusive debt collection practice that the statute could be invoked to protect against.

On the other hand, Judge Gottschall concluded that disclosure of a collection account number on the outside of an envelope runs afoul of statutory requirements prohibiting the display of language or symbols on a debt collection letter envelope except the debt collector’s address and, in limited cases, business name. Saying that the disclosure was not clearly benign, the district judge refused to ignore the “unequivocal language of the statute” in the latter case.

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Ex-Im Bank: "Expired" but not dead

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

Representative Stephen Fincher (R-Tenn) has introduced a bill to “reform and reauthorize” the Export-Import Bank. Fincher’s press release states that his measure—Export-Import Bank Reform and Reauthorization Act of 2015—is identical to the Senate’s Ex-Im bill (S. 819) and includes a majority of the “meaningful reforms” outlined in House bill H.R. 597—Reform Exports and Expand the American Economy Act.

Background. The Ex-Im Bank’s authorization expired on June 30, 2015. It continues to service existing loans, guarantees, and insurance policies, as it is funded through FY2015. However, it will be unable to offer new financing unless Congress reauthorizes the charter. Prior to the expiration, Democrats had been trying to force a vote on reauthorization, while Republicans refused, citing waste and fraud in the Bank’s operations .

Fincher’s bill. The Congressman’s measure includes a five-year reauthorization that will “keep American jobs here at home, make the Bank’s practices more accountable, and enhance taxpayer protections by requiring the Bank to become more solvent and self-sufficient.”

“Americans across the country are demanding jobs,” said Fincher. “Instead of listening to their concerns, Congress decided to put thousands of livelihoods in jeopardy by failing to take action to reform and reauthorize the Ex-Im Bank. The Bank provides thousands of jobs to constituents all over our districts, and it’s disheartening to realize that some Members of Congress believe working for their constituents means putting these jobs on the line.”

Fincher states that his bill’s major reforms include:

• strengthening risk management;
• increasing loss reserves;
• increasing small business lending requirements;
• incentivizing an end to government-supported international export subsidies; and
• providing greater anti-corruption safeguards.

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Identity theft claims distinct from credit reporting duties not preempted

By Richard A. Roth

Claims under a New York law that provides private civil remedies for identity theft victims are not necessarily preempted by the Fair Credit Reporting Act, the U.S. Court of Appeals for the Second Circuit has decided. As long as the claims do not concern FCRA-imposed responsibilities of persons who furnish information to consumer reporting agencies, they survive preemption (Galper v. JP Morgan Chase Bank, N.A.).

The consumer complained that Chase employees had opened new accounts in the names of fictitious companies, using her name as signatory, and also had appropriated her dormant checking account in furtherance of a Medicare fraud scheme. The scheme resulted in frequent overdrafts, closed accounts and, much worse, the eventual arrest and prosecution of the consumer for engaging in a money laundering conspiracy.

Once the consumer was acquitted of money laundering, she sued Chase under a New York anti-identity theft law that allows suits by victims if the identity theft resulted in the transmission to a consumer reporting agency of information that otherwise would not have been provided. She claimed that the overdrafts, closed accounts, arrest, and prosecution generated adverse reports to consumer reporting agencies that passed the information along to various banks, and that JP Morgan was responsible for its employees’ actions.

Trial court dismissal. Chase argued that the state law claims were preempted by the FCRA, and the district court judge agreed. While the act generally seeks not to preempt state laws, it does explicitly preempt state laws in specific areas. One exception to the preservation of state laws preempts laws “with respect to any subject matter regulated under . . . Section 1681s-2 of this title, relating to the responsibilities of persons who furnish information to consumer reporting agencies” (15 U.S.C. §1681t(b)).

The district court judge decided that the consumer’s state law claims fell under that description and thus were preempted. However, the appellate court disagreed, determining that the consumer’s claims could be interpreted in a way that rescued them from preemption.

FCRA provisions. FCRA Section 1681s (15 U.S.C. §1681s-2) imposes specific responsibilities on persons who transmit information to consumer reporting agencies, including not furnishing information known to be false and having procedures to respond to identity theft claims. Looking in detail at the preemption language of 15 U.S.C. §1681t(b), the appellate court decided that the act allowed preemption only of state laws that were “with respect to” information furnisher duties imposed by 15 U.S.C. §1681s-2. Further, “with respect to” meant “concerning”—in other words, only state laws that concern information furnisher duties under 15 U.S.C. §1681s-2 are preempted.

Interpretation of consumer’s claims. When the complaint was interpreted in the light most favorable to the consumer, it raised claims that did not concern Chase’s duties as an information furnisher, the court decided. The complaint most reasonably should be construed as alleging that Chase was liable under a theory of respondeat superior for the identity theft perpetrated by its employees. If the employees’ identity theft resulted in the forbidden transmission of information to consumer reporting agencies, Chase then might be liable under the New York law.

Stated more clearly, the consumer’s complaint could be interpreted as claiming that Chase was liable for the employees’ identity theft, not that the bank was liable for reporting adverse information about the consumer. That claim under the state law would not be preempted by the FCRA.

However, if the consumer attempted to argue that Chase was liable for furnishing false information, that claim would be preempted, the court warned.

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CFPB informs mortgage industry of TRID compliance expectations; legislators urge industry to monitor penalties

By Stephanie K. Mann, J.D.

As the Oct. 3, 2015, effective date for the Know Before You Owe mortgage disclosure rule (or TRID rule) has arrived, the Consumer Financial Protection Bureau has sent a letter to mortgage industry trade groups setting forth the CFPB’s compliance expectations.

In a statement released on Oct. 2, 2015, the CFPB noted, “During initial examinations for compliance with the rule, the Bureau’s examiners will evaluate an institution’s compliance management system and overall efforts to come into compliance, recognizing the scope and scale of changes necessary for each supervised institution to achieve effective compliance.”

The bureau’s statement continued, “Examiners will expect supervised entities to make good faith efforts to comply with the rule’s requirements in a timely manner.”

Specifically, examiners will consider an institution’s:

• implementation plan, including actions taken to update policies, procedures, and processes;
• training of appropriate staff; and
• handling of early technical problems or other implementation challenges.

The CFPB noted that this is similar to the approach it took in initial examinations for compliance with the mortgage rules that became effective at the beginning of January 2014.

Hold harmless. Meanwhile, Reps. Blaine Luetkemeyer (R-Mo) and Randy Neugebauer (R-Texas), chairmen of the two Financial Services subcommittees with jurisdiction over Truth In Lending Act and the Real Estate Settlement Procedures Act, have continued to urge CFPB Director Richard Cordray to implement a formalized hold harmless period. “TRID is one of the most fundamental changes to the real estate settlement process made in decades, and the American people deserve better than Director Cordray’s ‘my way or the highway’ approach,” said the press release.

The legislators also sent letters to 16 key financial services trade associations, urging them to monitor TRID-related penalties assessed to financial institutions and report all enforcement actions to Congress. While the Luetkemyer and Neugebauer expressed the hope that implementation of the rule would go smoothly, but expect “deep issues for consumers, lenders, and the CFPB. We stand ready to closely monitor TRID implementation and will work to ensure that CFPB’s unwillingness to institutionalize a grace period does not come as a detriment to homebuyers or sellers.”

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Auto loans drive CFPB enforcement activity

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau seems to have turned its focus to auto lending recently. In the last week, the CFPB has announced two enforcement actions targeting the industry. The bureau ordered an indirect auto finance company, Westlake Services, LLC, and its auto title lending subsidiary, Wilshire Consumer Credit, LLC, to provide consumers with more than $44 million in cash relief and balance reductions for allegedly using illegal debt collection tactics. According to the consent order, the companies used fake caller ID information, falsely threatened consumers with prosecution, and disclosed information about debts to borrowers’ employers, friends, and family. The companies also were ordered to overhaul their debt collection practices and pay a civil penalty of $4.25 million.

“There’s no excuse for lying to your customers, and today’s action will provide millions of dollars in relief for borrowers caught up in Westlake and Wilshire’s deception,” said CFPB Director Richard Cordray. “Consumers struggling to pay their bills deserve to be treated with respect, not subjected to illegal threats and deceptive phone calls. We will continue to clean up the debt collection market and root out these illegal and inexcusable practices.”

Fifth Third Bank. The CFPB also instituted enforcement actions against Fifth Third Bank over its alleged discriminatory auto loan pricing and illegal credit card practices. In a joint enforcement action, the CFPB and the Department of the Justice are requiring that the bank change its indirect auto lending pricing and compensation system to minimize the risks of discrimination. The auto lending enforcement action is part of a larger joint effort between the CFPB and DOJ to address discrimination in the indirect auto lending market. Most recently, in July 2015, the CFPB and DOJ took an action against American Honda Finance Corporation requiring Honda to pay $24 million in consumer restitution and take the same steps to substantially reduce or eliminate entirely dealer discretion.

The joint enforcement action was the result of a CFPB examination, begun in January 2013, which evaluated Fifth Third’s indirect auto-lending program for compliance with the Equal Credit Opportunity Act and a joint investigation by the bureau and DOJ.

For more information about CFPB enforcement actions and indirect auto lending, subscrbe to the Banking and Finance Law Daily.