Thursday, June 30, 2016

CFPB slams mortgage servicers for technology failures

By: Andrew A. Turner, J.D.

Many mortgage servicers are continuing to fall short of their obligations under the Consumer Financial Protection Bureau’s mortgage servicing rules, often due to their reliance on failed technology, according to the bureau. “Mortgage servicers can’t hide behind their bad computer systems or outdated technology,” said CFPB Director Richard Cordray. “Mortgage servicers and their service providers must step up and make the investments necessary to do their jobs properly and legally.”

In an effort to focus on the duties of mortgage servicers and spur industry compliance with regulatory requirements, the CFPB has published a special edition of its periodic Supervisory Highlights and also updated its mortgage servicing examination procedures. The CFPB said that mortgage servicing industry problems with “bad practices and sloppy recordkeeping” dated back to before the financial crisis.

To address these widespread mortgage servicing problems, the CFPB put in place new rules requiring strong policies and procedures related to systems and technology. The mortgage servicing rules are contained in Subpart C of Reg. X—Real Estate Settlement Procedures (12 CFR Part 1024), and they took effect on Jan. 10, 2014. They govern not only general servicer duties but also handling escrow accounts, error resolution procedures, borrower requests for information, dealing with borrowers in difficulty, force-placed insurance, and transfers of servicing.

Ongoing problems. While some mortgage servicers have made great progress, the industry has not made enough investment across the board, the bureau complains. Bureau examiners have found obsolete technology, inadequately trained servicer employees, and insufficiently tested and audited systems and software. The CFPB noted specifically that:

  • technology problems have resulted in loan modification information being late, inaccurate, or deceptive; and
  • incompatible technology has caused problems when servicing rights are transferred, to the extent that agreed-on loan modifications may be lost.
Best practices. The bureau also noted two practices that some servicers have adopted, in addition to modernizing their technology, to ensure compliance with the rules. These servicers have created the ability to keep track of, review, and search complaint records and established a complaint governance committee to make sure that all borrower complaints are given appropriate attention.
Exam procedures. The mortgage servicing exam procedures are being updated for the third time. The procedures tell servicers that the bureau will be paying special attention to how complaints by borrowers in trouble or facing foreclosure are handled and whether equal credit laws are being complied with, particularly in the context of loan modification decisions.

For more information about the CFPB's rules for mortgage servicers, subscribe to the Banking and Finance Law Daily.

Wednesday, June 29, 2016

Fight against terrorism requires information sharing, says FinCEN Deputy Director

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

Jamal El-Hindi, Deputy Director of the Financial Crimes Enforcement Network, stressed the importance of information sharing in remarks at the Parliamentary Intelligence Security Forum in Vienna, Austria. El-Hindi discussed FinCEN’s work and stressed the importance of overcoming obstacles to information sharing in the fight against terrorism.

FinCEN is the financial intelligence unit (FIU) of the United States, El-Hindi told the audience. He said the agency shares information not only with U.S. law enforcement agencies, intelligence authorities, and border police, but also with foreign FIUs.

Information sharing. El-Hindi said FinCEN “recognizes that no one jurisdiction holds all the information necessary to create the full picture of a network of illicit actors, whether they are facilitating terrorism or other crimes.” According to El-Hindi, “Because we don’t know which agency within a jurisdiction might hold the next piece of information that will connect two dots, we promote broad information sharing between the FIUs, their law enforcement, their intelligence agencies, and their border police.”

FinCEN receives approximately 55,000 new financial institution filings each day, said El-Hindi. The majority of the financial intelligence FinCEN collects comes from two reporting streams: one on large cash transactions exceeding $10,000, and the other on suspicious transactions identified by financial institutions. FinCEN then makes this information available to more than 9,000 law enforcement and regulators who have been authorized to access the data. Usage of the data is subject to auditing to ensure that appropriate data security and safeguarding protocols are followed, he added.

“Importantly,” he said, “we also share information with relevant foreign FIUs and pre-authorize those FIUs to further share it with their domestic law enforcement and intelligence agencies. We do this in recognition of the fact that terrorists and terrorist facilitators move from one jurisdiction to another.”

Obstacles. El-Hamid discussed obstacles to information sharing that must be overcome to improve global efforts to fight terrorist financing:
  • Many FIUs are not sharing enough information with or receiving data from their own law enforcement or other domestic agencies.
  • Many FIUs currently face domestic legal restrictions that prevent FIUs themselves from sharing information with one another as effectively as possible.
  • Private sector institutions have difficulties sharing information with FIUs across borders.
Identifying and working to eliminate roadblocks to information sharing will help enable FIUs become more effective partners, within their own countries and with other governments, and will help FIUs take a more proactive approach to the use of financial intelligence, said El-Hamid. Although he acknowledged that promoting the collection of financial intelligence while also protecting data privacy is a challenge, El-Hamid emphasized that “These two public goods should not be viewed as inconsistent with one another. Indeed, for the sake of protecting the individual liberties which we all hold dear, they must be viewed hand-in-hand as complements to one another.”

For more information about fighting terrorism with financial intelligence, subscribe to the Banking and Finance Law Daily.

Tuesday, June 28, 2016

Paying off fired executive’s contract would be golden parachute

By Richard Roth

A former bank executive who, after being terminated, claimed that his contract entitled him to another year of compensation was demanding a golden parachute payment that could only be made if the Federal Deposit Insurance Corporation approved, according to the U.S. Court of Appeals for the Eighth Circuit. The executive also passed up his chance to seek the FDIC’s approval, the court said (Von Rohr v. Reliance Bank).

The bank told the executive that his contract would not be renewed later in the year, at least in part because he was responsible for the bank’s poor financial condition. The executive, however, claimed he had another year left on his contract and was owed more than $400,000. The bank asked the FDIC for advice, and the agency told the bank that paying the money would amount to a golden parachute.

As a result, the bank refused to make any further payments, and the executive sued the bank for breaching his employment contract. He also sued the FDIC, asking for a finding that a payment by the bank would not violate federal law.

The district court agreed to put the suit on hold while the executive asked the FDIC for a final determination about whether a payment would be a golden parachute. The FDIC said that it would be. The agency added that it did not need to consider whether to approve the payment because the executive had not met “even the basic application requirements.”

What’s a golden parachute? Federal law (12 U.S.C. §1828(k)(4)) and implementing FDIC regulations (12 CFR §359.1(f)(l)(i)) offer essentially the same definition of a golden parachute: a payment in the nature of compensation to an institution-affiliated party that is contingent on that person’s termination and that is made when the institution is in a troubled condition.

Golden parachutes generally are prohibited. However, the FDIC has the authority to grant an exception from that prohibition under the right circumstances.

FDIC determination stands. The appellate court rejected the executive’s challenges to the FDIC’s decision that any payment would be a golden parachute. The agency’s determination was consistent with its previous positions.

First, the court pointed out, the agency always had objected to post-termination payments that were not for services rendered. Second, while the FDIC has interpreted the ban on golden parachutes as not applying to paying damages for a claim of violating a statute, there was no statute involved here. The executive was claiming damages for breach of contract, and separating the two types of damages was a reasonable interpretation of the law.

The FDIC’s decision that the demanded payment was contingent on the executive’s termination was reasonable as well.

No exception. The executive could not ask for a judgment that the payment would not violate the law because he had never asked the FDIC for an exception. The lack of an exception made it legally impossible for the bank to pay him, the court said, and legal impossibility was a defense to the breach of contract claim.

If the executive had submitted a completed application for an exception, which was denied by the FDIC, he could have appealed the denial, the court pointed out. But, he could not ask the court to review whether he should have received an exception he never asked for.

For more information about executive compensation issues, subscribe to the Banking and Finance Law Daily.

Monday, June 27, 2016

Hensarling releases CHOICE Act, industry reacts to repeal of Durbin Amendment

By Stephanie K. Mann, J.D.

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) publicly released a discussion draft of the Financial CHOICE Act, the Republican plan to replace the “failed” Dodd-Frank Act and promote economic growth. CHOICE stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs. The Committee also publicly released an extensive description of each section of the proposal and how its reforms will work.

“We want the American people to see our proposal because it will result in economic growth for all and bank bailouts for none,” said Hensarling. “Dodd-Frank has failed. It has contributed to the slowest, smallest, weakest and worst economic recovery of our lifetimes. We must instead offer all Americans greater opportunities to raise their standards of living and achieve financial independence by replacing Dodd-Frank with real reforms that work.”

In addition to releasing the legislative text, a group of Nobel Prize winning economists, former Treasury secretaries, and former senior economic policy officials also announced their support for the Financial CHOICE Act. “We support the reform principles that underlie the proposed Financial CHOICE Act which promote higher economic growth without bailouts, reduced risk of crises, and simplification of the regulatory process by emphasizing market mechanisms operating through the rule of law,” the group of renowned economic and financial experts said in a statement of support.

CHOICE Act. According to the comprehensive summary, the CHOICE Act would:
  • encourage banks to rely on much more capital by offering them relief from complex, costly and loan-impeding regulations in return;
  • offer increased penalties for financial fraud, and also strengthens due process rights;
  • incorporate a new “bankruptcy not bailout” chapter into the Bankruptcy Code so that a large financial institution that takes on unsustainable risks could fail without disrupting the financial system;
  • require sensible cost-benefit tests of new regulations;
  • help to reverse that trend by requiring that all major financial regulations be approved by Congress before they can take effect;
  • convert financial regulatory agencies now headed by single directors—including the Consumer Financial Protection Bureau, Office of Comptroller of the Currency, and Federal Housing Finance Agency—into bipartisan commissions; and
  • require that the Federal Reserve “describe the strategy or rule of the Federal Open Market Committee for the systematic quantitative adjustment” of its policy instruments. 
Durbin Amendment. As part of the CHOICE Act, the legislation would repeal the cap on debit card swipe fees, otherwise known as the Durbin Amendment. According to the National Retail Federation, who have strongly urged Congress to reject the proposed legislation, this cap has saved consumer billions of dollars over the past five years.

“Repealing this cap would double the fees that banks charge retailers and their customers when they use a debit card to pay for purchases,” NRF Senior Vice President and General Counsel Mallory Duncan said. “Doubling swipe fees and driving up prices paid by consumers seems like a strange platform to ask members of Congress to run on during an election year. A vote to repeal the Durbin Amendment is a vote for higher consumer prices and isn’t likely to win many votes in November.”

Regarding a related piece of legislation that would repeal the Durbin Amendment, H.R. 5465, which was introduced to Rep. Randy Neugebauer (R-Texas), numerous state bankers associations have written to Neugebauer expressing their support for the bill. “The amendment has only rewarded big-box stores with higher profits, while resulting in higher costs to smaller merchants, fewer resources available for banks —including community banks—to serve their communities, and a reduction in low-cost banking services for those most in need,” said the letter.
For more information about the CHOICE Act, subscribe to the Banking and Finance Law Daily.

Friday, June 24, 2016

Annual ABA compliance convention hits regulatory hot spots

By Katalina M. Bianco, J.D.

At the American Bankers Association’s annual regulatory compliance convention last week, the approximately 1,800 attendees were offered a host of topics covering regulatory trouble spots, from Bank Secrecy Act issues to ebanking and technology tools. But a large portion of the convention focused on consumer compliance regulations, and unsurprisingly, the Consumer Financial Protection Bureau: its expectations, examinations, and enforcement actions.
Transitioning to CFPB. The ABA provided a new session this year intended to assist banks transitioning from their current regulators to the CFPB because acquisitions, mergers, or organic growth pushed them to the $10 billion mark that triggers bureau jurisdiction. The panel for this session included Edwin Chow, the CFPB Regional Director for the Western region. Chow noted that the bureau is very much aware of it when an institution is about to cross the jurisdictional line into CFPB territory. The CFPB works with its sister regulators with the intention of smoothing the transition and gaining an understanding of the institution’s business.
The panel stressed that institutions about to enter CFPB jurisdiction must:
  •  understand the unique perspective of the CFPB. The bureau "walks in the shoes" of the consumer, and that perspective affects compliance examinations. Institutions must be aware of the effects their actions have on consumers—from first contact with an institution to marketing and sales documents that must be clear and free of misleading or deceptive statements;
  • recognize the significance of UDAAP in regulatory compliance. It is no longer sufficient to comply with the regulation, UDAAP issues must be a consideration. And unfortunately, there still is no definitive answer to the question of what "abusive" actually means;.
  • develop a strong periodic monitoring of compliance systems coupled with independent audits. The CFPB found that weakness in these areas as the most common deficiency;
  • add complaint management to compliance systems. Customer complaints no longer start and end with a bank’s frontline personnel. They must be documented, tracked, and reported as with every other compliance management components; and
  • learn from studying CFPB enforcement actions. The CFPB often has stated that the bureau intends its consent orders to be used as teaching tools for institutions.
The ABA offered dedicated sessions on building and monitoring a CFPB-sufficient compliance management system, marketing compliance risks, UDAAP issues in lending and deposits, and the use of enforcement actions in compliance, among others, intended to benefit both transitioning institutions and those already ensconced within the CFPB jurisdiction.
Enforcement actions. This year, the ABA presented a dedicated session on CFPB enforcement actions and the lessons learned from recent activity. To emphasize the importance of CFPB consent orders to institutions, various panel members speaking on bureau enforcement actions referred to a March 2016 quote by CFPB Director Richard Cordray on the use of consent orders: "Indeed, it would be ‘compliance malpractice’ for executives not to take careful bearings from the contents of these orders about how to comply with the law and treat consumers fairly."
The panel discussed steps taken by the bureau in a typical enforcement action and examined recent cases, in particular PHH Corporation v. CFPB, considered a critical test case on CFPB authority. Discussion included a review of the substantive issues of the case, and the potential consequences if the CFPB or PHH prevails.
The session provided a list of CFPB guidance for attendees to review with the note that official bureau guidance is indeed supplemented by lessons found in its enforcement actions.
Beyond the dedicated session, discussions on the use of CFPB enforcement actions took place in the individual consumer compliance regulatory sessions on debt collection, fair lending, mortgage servicing, Home Mortgage Disclosure Act, and others.
Fair lending. Fair lending was a hot topic this year, with many panelists predicting increased CFPB focus on the area in late 2016 and 2017, accompanied by possible enforcement activity. The link between UDAAP and fair lending was examined, including issues arising when minorities suffer from unfair lending practices. Experts predict this link will be examined not only in indirect auto loans and mortgages as has been the case but also in the areas of credit cards, student loans, and small businesses. The focus will be applied first in exams, then in enforcement actions.
A central component of fair lending is "redlining." Redlining is the discriminatory practice by which banks or other financial institutions deny or avoid providing credit services to a consumer because of the racial demographics of the neighborhood in which the consumer lives.
The CFPB has begun to work more effectively with the Department of Justice on redlining issues. The session targeted a textbook redlining case: the CFPB/DOJ case against Hudson City Savings Bank for discriminatory redlining practices that denied residents in majority-Black-and-Hispanic neighborhoods fair access to mortgage loans. Interestingly, one of the panelists had a bird’s eye view of the case. He was the chief compliance officer of Hudson City at the time.
Underscoring the CFPB’s focus on fair lending, Peggy Twohig Assistant Director of Supervision, Office of Fair Lending and Equal Opportunity, and Eric Wong, an enforcement officer of the same office, were on the CFPB Town Hall panel. Wong spoke at length about Hudson as a strong redlining case. He also stated that he had heard a few "misconceptions" about the CFPB and fair lending that he wanted to correct, notably a tweet claiming, "The CFPB does not consider Asians to be minorities." Wong responded that this was "news to him."
Additional topics. The convention also presented sessions on a number of relevant compliance areas, including: the new HMDA rule; TRID compliance complications; the intersection of HMDA, Community Reinvestment Act, and fair lending; managing compliance examinations; mortgage servicing trouble spots; debt collection; the Fair Credit Reporting Act; and more.
The future of banking. Finally, the challenges that lie ahead for the banking industry were addressed in the keynote speech by ABA President and CEO Rob Nichols. Two areas of note: the rise of the millennials and the impact of FinTEch.
The largest demographic in the United States at this time is the millennials. These would be future banking customers, but according to research cited by Nichols, "Seven out of 10 would rather go to the dentist than the bank." One of the three see no need for traditional banking. The millennials are at the front end of the greatest wealth transfer in history: $30 trillion will be transferred from the baby boomers to the millennials in this generation. Yet, this generation is one of the least financially literate groups in the country. When polled, the vast majority of respondents indicated that not only will they refrain from entering a branch bank, online banking holds no interest. Their interest lies only with mobile banking, not just for transactions but for any service, including customer service, generally offered in branches and online.
Second is the obvious challenge of financial technology, or FinTech, an economic industry composed of companies that use technology intended to make financial services more efficient. FinTech involves digital payments ("wallets"), investments, financing, and similar services, all in opposition to traditional banking operations. The banking industry will need to answer this technology with financial innovations of its own, Nichols said.
For more information about the ABA and the CFPB, subscribe to the Banking and Finance Law Daily.

Tuesday, June 21, 2016

Debt buyer, law firm subject to federal, state liability for collection action

By Thomas G. Wolfe, J.D.

Recently, the Supreme Court of Ohio was called to address a consumer’s counterclaims against a debt buyer and law firm for alleged violations of the federal Fair Debt Collection Practices Act and the Ohio Consumer Sales Practices Act (OCSPA) in connection with their collection action on her defaulted credit card account. In Taylor v. First Resolution Invest. Corp., the court's majority plowed new ground concerning the liability exposure of debt buyers and of law firms representing debt buyers.

By way of background in the Taylor case, the consumer’s credit card account was declared delinquent and charged off by her credit card issuer. The debt was eventually purchased and owned by a debt buyer, First Resolution Investment Corporation (FRIC). On behalf of FRIC, the Cheek Law Offices, L.L.C., filed a lawsuit in Ohio state court to collect the consumer’s debt, seeking $8,765 of principal, accrued interest of $7,739, and future interest of 24 percent on the debt.

Consumer’s counterclaims. Although the Cheek law firm obtained a default judgment, the consumer successfully vacated it and raised counterclaims against FRIC and the law firm. As described by the court, the consumer’s statutory counterclaims were centered on “two theories—first, that FRIC’s claim against [the consumer] was time-barred by the statute of limitations and second, that FRIC sought interest on [the consumer’s] debt that was unavailable to FRIC by law.”

In particular, the consumer alleged that threatening to file a time-barred claim and actually filing a time-barred claim against her “constituted misleading and deceptive collection practices” as well as “unfair and unconscionable collection practices” under both the FDCPA and the OCSPA.

Statute-of-limitations. The Ohio Supreme Court determined that since FRIC’s underlying cause of action for the consumer’s default on her credit card account accrued in Delaware, the home state of the bank that issued the credit card and the state where the consumer made her payments, Delaware’s three-year statute of limitations—through operation of Ohio’s “borrowing statute”—was the applicable measuring stick, not Ohio’s six-year statute of limitations. This was significant because FRIC’s complaint against the consumer was filed “well outside” the three-year period, the court determined.

As a result, the court concluded that FRIC and the Cheek firm were potentially liable under the FDCPA and the OCSPA for “threatening to file suit and for filing suit on a time-barred debt.” The court remanded the case to the trial court for “further determinations” in that regard.

Interest-usury. As part of her counterclaims, the consumer alleged that FRIC and the Cheek firm “improperly sought 24 percent interest on her debt … purportedly under the terms of the cardholder agreement.” The consumer maintained that since FRIC could not produce the cardholder agreement or any “written contract that set forth a rate of interest higher than the statutory rate,” FRIC was limited to the Ohio statutory interest rate—“4 percent at the time of the filing of the complaint.”

Ohio’s high court determined that FRIC’s claim for 24 percent interest in its complaint was “unavailable by law” and constituted a “demand” made upon the consumer “rather than an aspirational request” made to the state trial court. As such, FRIC’s claim for interest formed the basis of an actionable counterclaim by the consumer under both the FDCPA and the OCSPA. In arriving at its holding, the court noted that: (i) the complaint filed against the consumer by FRIC and the law firm did not include a copy of the underlying credit-card agreement; and (ii) FRIC “quickly sought a default judgment” even though “it never had the necessary documentation to back up its claim."

Since the consumer established a “prima facie case” against FRIC and the law firm under the FDCPA and OCSPA in connection with her interest-usury counterclaim, the court remanded the matter to the trial court for further consideration.

No OCSPA exemption. FRIC and the Cheek firm contended that the OCSPA provided them with an exemption from its coverage. Among other things, they argued that the OCSPA did not apply to “bank assignees and their collection attorneys” because no “consumer transaction” or “supplier” was truly present under the definitional terms of the Ohio statute. The court rejected the debt buyer’s and law firm’s argument.

Noting the similarities between the respective provisions of the FDCPA and the OCSPA and characterizing these federal and state laws as “remedial statutes intended to reach a broad range of conduct,” the court ruled that debt buyers collecting on credit-card debt and their attorneys are subject to the OCSPA.

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

Thursday, June 16, 2016

Republicans launch legislative reform efforts with harsh criticism of CPFB

By: Andrew A. Turner, J.D.

In offering the first look at a comprehensive Republican plan to promote economic growth by replacing the Dodd-Frank Act, House Financial Services Committee Chairman Jeb Hensarling (R-Tex) said that the Consumer Financial Protection Bureau “may arguably be the single most powerful and least accountable Federal agency in the history of our nation.” Similarly, the Republican plan to grow the economy cites the CFPB, which was created by the Dodd-Frank Act, as a notable example of a federal regulator run amok.

In a speech before the Economic Club of New York, Hensarling sketched the contours of the forthcoming Financial CHOICE Act, which he labeled a "new legislative paradigm" for banking and the capital markets that will allow strongly capitalized banks to opt-out of burdensome regulations, end too-big-to-fail, and impose greater accountability on regulatory agencies. He pointed to the creation of the CFPB as an unconstitutional outsourcing of legislative powers to the executive branch, giving the CFPB Director the power to unilaterally declare a mortgage, credit card, or bank account “unfair” or “abusive.”

The proposed legislation would change the name of the Consumer Financial Protection Bureau to the Consumer Financial Opportunity Commission (CFOC) and give it the dual mission of consumer protection and competitive markets, with a cost-benefit analysis of rules performed by an Office of Economic Analysis. The Republican reform plan would repeal the CFPB’s authority to ban bank products or services it deems "abusive" and its authority to prohibit arbitration. Indirect auto lending guidance would also be repealed.

The current single director would be replaced with a bipartisan, five-member commission, subject to congressional oversight and appropriations. In addition, an independent, Senate-confirmed Inspector General would be established. The Commission would be required to obtain permission before collecting personally identifiable information on consumers.

Speaker of the House Paul Ryan (R-Wis) has called for Washington to change the way it writes rules, including a vote by Congress before any major regulation becomes law. Ryan and a group of Republican leaders announced their plans to reduce regulatory burdens in a white paper called "A Better Way to Grow Our Economy."

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

Wednesday, June 15, 2016

Mobile payments users trend younger, urban, banked, and degreed, says Pew

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

A report by The Pew Charitable Trusts on mobile payments users found that they are more likely to be younger, live in urban areas, and have bank accounts and college degrees. Its findings come from a nationally representative telephone survey that examined consumers’ opinions, experiences, and expectations of mobile payments. The survey followed focus groups that Pew previously convened as a first step in understanding consumers’ views on the potential benefits and risks of mobile payments.

Pew’s report defines mobile payments users as consumers who have made an online or point of-sale purchase, paid a bill, or sent or received money using a Web browser, text message, or app on a smartphone.

The key finding are:
  • Mobile payments users are more likely than nonusers to be millennials or Generation Xers, live in metropolitan areas, and have bank accounts and college or postgraduate degrees. Of these demographic categories, age is the most predictive of mobile payments use, particularly as it relates to smartphone ownership.
  • Making a purchase through a smartphone Web browser or downloaded app is the most common mobile payments activity.
  • Consumers see a number of benefits to using mobile payments, particularly receiving alerts, electronic receipts, rewards, discounts, and help with budgeting.
  • Consumers often don’t know how mobile payments compare with other payment methods in terms of convenience, cost, privacy, and security.
  • Barriers to use include concerns about the safety of mobile payments technology, which might result in identity theft or the loss of funds, and poor compatibility with cash-based transactions.
  • Consumers want the data they generate by use of mobile payments to be secure and protected and access to it to be limited across entities, from phone carriers to app developers and advertisers.
For more information about mobile banking, subscribe to theBanking and Finance Law Daily.

Tuesday, June 14, 2016

Discovery rule can set time limit in all FDCPA suits

By Richard Roth, J.D.

The statute of limitations on a consumer’s claim that debt collectors sued her in the wrong judicial district began to run when she learned of the suit, not when the suit was filed, the U.S. Court of Appeals for the Ninth Circuit has decided. In fact, the court went a step farther, deciding that the discovery rule applies to all suits under the Fair Debt Collection Practices Act (Lyons v. Michael & Associates).

The FDCPA says that unless an interest in real estate is at issue, a debt collector may file a collection suit only in the judicial district where the consumer lives or where the consumer signed the agreement being sued on (15 U.S.C. §1692i). The debt collector did not dispute that it had sued the consumer in the wrong county; however, it asserted that the consumer’s FDCPA suit came too late because it was filed more than one year after the collection suit was filed.

The consumer, however, asserted that the statute of limitations did not begin to run until she discovered the violation. Since she filed her FDCPA suit within one year of when she was served with the summons in the collection suit, she met the time limit, she claimed.

The federal district court judge rejected the discovery rule argument based on a 1997 Ninth Circuit decision. The appellate court, however, decided that the judge had relied on the wrong precedent and that the discovery rule does apply in FDCPA suits.

Discovery rule. The FDCPA says that a suit must be filed “within one year from the date on which the violation occurs” (15 U.S.C. §1692k(d)). While there was no question that the violation occurred when the collection suit was filed in the wrong county, the consumer claimed that the discovery rule delayed the start of the one-year limit until she discovered the violation.

The discovery rule generally applies to statutes of limitations under federal law, the court noted. There was no reason not to apply it to FDCPA suits.

Moreover, there was no reason to apply the discovery rule to some claimed FDCPA violations but not others, the court continued. Doing that would be inconsistent with the general applicability of the rule and with the consumer-protection goals of the act.

Wrong precedent. The 1997 opinion, Naas v. Stolman, 130 F.3d 892, was not relevant because it did not consider the discovery rule issue, the court then noted. Naas involved a consumer’s claim that the statute of limitations on an FDCPA suit began to run when a state appellate court affirmed a judgment in a collection suit. There was no consideration of when the asserted FDCPA violation was discovered.

Naas made clear that the filing of an improper collection suit was the injury that gave rise to the consumer’s claim. It had nothing to do with the discovery rule, the court said.

The correct Ninth Circuit precedent, on which the district court judge should have relied, was Mangum v. Action Collection Service, Inc., 575 F.3d 935 (2009), the appellate court added. That case, which involved a debt collector’s alleged improper disclosure of debt information to a third party, specifically considered the discovery rule and found it to be applicable.

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

Monday, June 13, 2016

Appropriations bill that would transform CFPB passes Committee, reactions ensue

By Stephanie K. Mann, J.D.

The House Appropriations Committee approved the fiscal year 2017 Financial Services and General Government Appropriations bill. The bill provides annual funding for the Treasury Department, Judiciary Department, Securities and Exchange Commission, and other related agencies, including the Federal Reserve System and Consumer Financial Protection Bureau.

The bill totals $21.7 billion in funding—$1.5 billion below the fiscal year 2016 enacted level and $2.7 billion below President Obama’s budget request. According to the committee’s press release, the legislation targets resources to programs that will help boost economic growth and opportunity, protect consumers and investors, promote an efficient federal court system, and stop financial crime. However, the legislation reduces funding for lower-priority or underperforming programs and agencies.

“The job of this bill is two-fold: to make wise investments with taxpayer dollars in the programs and agencies that we need to grow our economy and enforce our laws, and to tightly hold the reins on overspending and overreach within federal bureaucracies,” Chairman Hal Rogers (R-Ky) said. “This bill makes great strides on all—carefully investing taxpayer dollars in programs that promote opportunity, while keeping these agencies accountable to the American people.”

CFPB oversight. The appropriations bill includes a provision that would increase oversight over the CFPB by bringing funding for the agency under the annual congressional appropriations process, instead of direct funding from the Fed. This change is intended to allow for increased accountability and transparency of the agency’s activities and use of tax dollars. The legislation would also change the leadership structure of the CFPB from a single Director to a five-member Commission, and require the CFPB to study the use of pre-dispute arbitration prior to issuing regulations.

Amendment added.
An amendment proposed by Reps. Steven Palazzo (R-Miss) and Henry Ceullar (D-Texas) would prohibit funding for the CFPB to finalize or implement a rule that would restrict payday lending until the bureau completes a report, with public comment, on the impact of the rule on populations with limited access to credit, and until it identifies existing credit products available to replace the current sources of short-term, small-dollar credit. The amendment was adopted by a 30-18 vote.

Hobbling the CFPB. In response to the committee passage, Rep. Maxine Waters (D-Calif), Ranking Member of the House Financial Services Committee, reproached Republicans for “using every tool at their disposal to push an agenda that would hurt consumers and threaten the stability of our financial system.” According to Waters, the spending bill would “hobble” the CFPB by changing its structure and funding stream. “The bill would place unnecessary delays on the CFPB’s efforts to rein in predatory payday lenders who trap consumers in a never-ending cycle of debt. And it would remove protections for consumers purchasing manufactured homes from being saddled with exorbitant interest rates and fees.”

Rolling back financial reform. According to Americans for Financial Reform, the funding bill will “roll back financial reform and undermine consumer protection.” In a press release, the trade association continued saying, “These ideological policy provisions have no business being added to such a measure…The riders, which include some that were part of the base bill and others that were added as amendments, would seriously weaken oversight of Wall Street and of predatory lenders. By doing so, they threaten the economic security of American families, communities, and businesses.”

Support for funding bill. Supporting the funding bill is the Consumer Bankers of America, who applauded the committee for taking “steps to make needed improvements to the CFPB on behalf of consumers.”

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

Tuesday, June 7, 2016

Interesting profile of mortgage borrowers sketched from CFPB, FHFA national survey

By Thomas G. Wolfe, J.D.

As part of their Technical Report Series, the Consumer Financial Protection Bureau and the Federal Housing Finance Agency have jointly issued “A Profile of 2013 Mortgage Borrowers: Statistics from the National Survey of Mortgage Originations.” Providing information derived from the first set of responses to the National Survey of Mortgage Originations administered by the CFPB and FHFA, the May 27, 2016, report provides an interesting profile of the U.S. mortgage market and borrowers’ experiences.

According to the report, the CFPB and FHFA reviewed and digested the results of National Survey of Mortgage Originations (NSMO) for its first year, based on responses from over 6,000 mortgage borrowers. In turn, the NSMO is tied to a “sampling frame drawn from the National Mortgage Database.”

In particular, the report presents the overall profile of survey respondents in 2013, including their demographic characteristics; what kind of mortgages they obtained; how the borrowers shopped for their mortgages; how they experienced the application and closing processes; and the borrowers’ opinions and expectations concerning financial responsibility, house prices, and neighborhoods.

Highlights. Among other things, the report notes that:
  • more than 75 percent of the borrowers’ households were comprised of a married couple or partners living together;
  • more than 86 percent of borrowers’ households included at least one full-time worker;
  • approximately 66 percent of survey respondents had a credit score of 720 or higher;
  • approximately 61 percent of survey respondents indicated that they refinanced an existing mortgage while 39 percent indicated they purchased a home;
  • about 66 percent of survey respondents approached a lender directly for a mortgage—as opposed to approaching a mortgage broker;
  • borrowers who either obtained a mortgage loan for an amount greater than $300,000 or were repeat buyers were “relatively more likely than other groups to use a broker”;
  • while, overall, 81 percent of borrowers applied to just one lender, first-time buyers were the least likely group to apply to just one lender;
  • nearly 18 percent of borrowers indicated that they were asked to resolve problems appearing on their credit report;
  • about 20 percent of survey respondents reported having to delay their closing date;
  • of those survey respondents who indicated they were offered an option to “lock in” the interest rate on their mortgage loan, 47 percent locked their rate when they applied for the loan, 43 percent locked their rate between the application process and the closing date, and 10 percent waited for the closing date before locking in the interest rate; and
  • about 80 percent of borrowers reported that their mortgage included an escrow account for taxes or homeowners insurance.
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Friday, June 3, 2016

ABA offers revisions to Basel Committee’s operational risk framework proposal

By J. Preston Carter, J.D., LL.M.
An American Bankers Association comment letter on the Basel Committee’s proposed revisions to the operational risk framework supports a simpler and standardized calculation of operational risk capital, but it urges the Basel Committee to consider its proposed methodological revisions. The Basel Committee released its proposal, “Standardized Measurement Approach for Operational Risk,” in March 2016.
The ABA’s comment letter states that the proposal recommends a Standardized Measurement Approach (SMA) to replace the Advanced Measurement Approach and the three existing standardized methodologies to calculate a capital charge for operational risk. The letter notes that the SMA is intended to balance simplicity, comparability, and risk sensitivity by combining a financial statement-based measure of operational risk—the Business Indicator (BI)—with an individual firm’s operational losses, known as the Loss Component (LC).
Insurance and hedges. The ABA supports replacing the AMA, but says the Committee should consider the inclusion of insurance and hedges when calculating operational risk capital. Under the Committee’s proposal, “[b]anks must not use losses net of insurance recoveries as an input for the SMA loss data set.” Hedges and insurance are key components of operational risk management, the ABA contends, and should be included ex-post when calculating an operational risk capital charge.
“We believe insurance and hedges should affect the overall operational risk capital to be held and agree with their not being a factor in calculating historical loss events via the LC,” says the ABA.

Proposed revisions. The letter includes a number of other revisions proposed by the ABA:
  • exclude discontinued business activities from the LC;
  • exclude “timing losses” from the LC Data Set;
  • maintain the de minimis gross threshold of €20,000;
  • apply the proposed net interest margin cap by discrete business line;
  • permit the use of U.S. Generally Accepted Accounting Principles for BI calculation; and
  • clarify the applicable exchange rate.
Questions. Finally, the ABA presents three questions for the Committee to answer:
  • How frequently will the SMA framework be recalibrated, and will SMA calibration be made public?
  • What is the length of the transition/implementation period, and will there be an opportunity to comment on the updated calibration?
  • How frequently would capital calculations be required?
The final day for comments on the proposal to be submitted to the Basel Committee is June 3, 2016.

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Payday loan ‘debt traps’ target of long-awaited CFPB proposal

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has proposed a rule intended to end payday loan “debt traps” by requiring lenders to ensure that consumers are able to repay their loans. The highly anticipated proposal would ban repeated debit attempts that add to consumer fees and would include not only payday loans but auto title loans, deposit advance products, and certain high-cost installment and open-end loans. The CFPB is seeking public comments on the proposal, due by Sept. 14, 2016.

Proposal overview. The proposed rule would establish a new part 12 CFR Part 1041 that would contain regulations creating consumer protections for certain consumer credit products. The proposal generally would cover two categories of loans: (1) loans with a term of 45 days or less; and (2) loans with a term greater than 45 days, provided that they have an all-in annual percentage rate greater than 36 percent and either are repaid directly from the consumer’s account or income or are secured by the consumer’s vehicle.

Full-payment test. Under the proposal, lenders would be required to determine whether a borrower could afford the full amount of each payment when it’s due and still meet basic living expenses and major financial obligations. For short-term loans and installment loans with a balloon payment, full payment means affording the total loan amount and all the fees and finance charges without having to re-borrow within the next 30 days. For payday and auto title installment loans without a balloon payment, full payment means affording all of the payments when due.

Payoff options. Lenders would have options to make covered loans without satisfying the ability-to-repay requirements if the loans meet certain conditions. Consumers could receive a short-term loan up to $500 without the full-payment test as part of the principal payoff option that is directly structured to keep consumers from being trapped in debt. Lenders would be barred from offering this option to consumers who have outstanding short-term or balloon-payment loans or who have been in debt on short-term loans more than 90 days in a rolling 12-month period. Lenders would also be barred from taking an auto title as collateral. As part of the principal payoff option, a lender could offer a borrower up to two extensions of the loan, but only if the borrower pays off at least one-third of the principal with each extension.

The proposed rule would permit lenders to offer two longer-term loan options with more flexible underwriting, but only if the loans pose less risk by adhering to certain restrictions. The first option would be offering loans that generally meet the parameters of the National Credit Union Administration “payday alternative loans” program, in which interest rates are capped at 28 percent and the application fee is no more than $20. The other option would be offering loans that are payable in roughly equal payments with terms not to exceed two years and with an all-in cost of 36 percent or less, not including a reasonable origination fee, so long as the lender’s projected default rate on these loans is 5 percent or less. The lender would have to refund the origination fees any year that the default rate exceeds 5 percent. Lenders would be limited as to how many of either type of loan they could make per consumer per year.

Debit attempts. Under the proposal, lenders would have to give consumers written notice before attempting to debit the consumer’s account to collect payment for any loan covered by the proposed rule. After two straight unsuccessful attempts, the lender would be prohibited from debiting the account again unless the lender gets a new and specific authorization from the borrower. Notably, a further attempt to withdraw payments without authorization would be identified as an unfair and abusive practice.

Guidance. The CFPB provided model forms that could be used by lenders to provide required notices to consumers. The bureau also provided a factsheet outlining and summarizing the proposal.

Request for information. The CFPB has issued a request for information on: (1) potential consumer protection concerns with loans that fall outside the scope of the proposal but are intended to serve similar populations and needs; and (2) business practices that fall within the scope of the proposal that raise potential concerns not addressed in the proposal. Comments are due by Oct. 14, 2016.

Field hearing. In his prepared remarks for a field hearing on small-dollar lending in Kansas City, Mo., CFPB Director Richard Cordray discussed the CFPB’s research that led to the rulemaking, stating, “Indeed, the very economics of the payday lending business model depend on a substantial percentage of borrowers being unable to repay the loan and borrowing again and again at high interest rates, incurring repeated fees as they go along.” A summary of the CFPB’s research contains highlights of the bureau’s findings, and a supplemental report provides additional information.

For more information about the CFPB's proposed payday lending rule, subscribe to the Banking and Finance Law Daily.

Thursday, June 2, 2016

Prepaid accounts and mortgage servicing next on tap for CFPB rulemaking

By: Andrew A. Turner, J.D.

With the issuance of rulemaking proposals on arbitration and payday lending, the Consumer Financial Protection Bureau’s spring 2016 rulemaking agenda next promises rule amendments on prepaid accounts and mortgage servicing.

The Consumer Financial Protection Bureau expects to issue a final rule in early summer to create a comprehensive set of consumer protections for prepaid financial products, such as general purpose reloadable cards and other similar products, which are increasingly being used by consumers in place of traditional checking accounts. The CFPB is considering requiring prepaid product sellers to give consumers account-opening disclosures and periodic statements. The proposal would establish error-resolution procedures, limit consumer liability for unauthorized charges, and impose rules that would govern prepaid cards offering credit features, such as those that allow overdrafts.

The CFPB also expects to issue a final rule in early summer to amend aspects of mortgage servicing rules. The CFPB has proposed significant amendments to its rules on mortgage servicing and protections for mortgage borrowers who are in financial distress or in danger of losing their homes through foreclosure. The proposal focuses primarily on clarifying, revising, or amending provisions regarding force-placed insurance notices; policies and procedures, early intervention, and loss mitigation requirements under Regulation X's servicing provisions; and periodic statement requirements under Regulation Z's servicing provisions.

In addition, this summer the CFPB expects to release a proposal to clarify mortgage disclosure requirements. The CFPB is seeking to address industry groups’ concerns regarding compliance with the “Know Before You Owe” mortgage disclosure forms.

Four items are listed in the pre-rule stage: overdraft services on checking accounts; debt collection practices; supervision of larger participants in installment loan and vehicle title loan markets; and small business lending data.

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

Wednesday, June 1, 2016

National data security bill promoted by industry ad campaign

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

An ad campaign pushing Congress to pass a data security bill has been announced by the Financial Services Roundtable and several other financial trade associations. The groups are calling on Congress to pass the Data Security Act of 2015 (S. 961, H.R. 2205), a bill with bipartisan support, requiring all entities to protect consumer data as part of a data breach notification law. The measures would replace existing state security and data breach laws.

S. 961, introduced by Sen. Thomas R. Carper (D-Del) in April 2015, is similar to a bill introduced in the previous Congress. H.R. 2205 was introduced in May 2015 by Rep. Randy Neugebauer (R-Texas).

The FSR press release states that “All entities that handle sensitive financial data should be required to protect that data. Financial institutions have had this obligation for 15 years, and it’s long overdue for Congress to pass legislation ensuring that everyone has a similar mandate to keep customer data safe.”

According to the release, the Data Security Act of 2015 would:
  • build on existing federal data protection and consumer notice standards already in place for financial institutions under the Gramm-Leach-Bliley Act by extending similar standards to all businesses that handle sensitive personal and financial data. There are no one-size-fits-all mandates, the bill is scalable taking into consideration a business’s size and operations.
  • create uniform nationwide consumer protections and would replace the current patchwork of inconsistent state security and data breach laws with a clearly defined, uniform set of standards that ensures every U.S. citizen enjoys the same level of protection regardless of where they live.
  • promote innovation in security rather than mandating a specific technology, such as a PIN, giving businesses room to develop cutting-edge security tools that will protect their customers.
The other trade associations supporting the effort are the American Bankers Association, Consumer Bankers Association, Credit Union National Association, Independent Community Bankers of America, National Association of Federal Credit Unions, and The Clearing House.

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