Law firm subject to state’s credit services law for its loan negotiations

By Thomas G. Wolfe, J.D.

Recently, the Maryland Court of Appeals—the state’s highest court—addressed the Maryland Commissioner of Financial Regulation’s claim that a law firm and its managing partner violated the Maryland Credit Services Businesses Act (MCSBA). The court determined that the law firm’s mortgage-loan renegotiation activities on behalf of homeowners facing foreclosure fell within the scope of the MCSBA’s “credit services business” definition. Moreover, the firm and its managing partner were subject to the MCSBA because they did not qualify for an “attorney exemption” under the state law, the court ruled.

According to the court’s opinion in Commissioner of Financial Regulation v. Brown, Brown & Brown, P.C., a small Virginia law firm “consulted with hundreds of Maryland homeowners facing foreclosure, and entered into more than 50 agreements with homeowners over a nine-month period in 2008 and 2009.” The firm’s managing partner oversaw this facet of the firm’s business and signed many of the agreements.

Under the pertinent agreements, in return for the homeowners' advance payments, the firm promised to “attempt to renegotiate” their respective mortgage loans so that the homeowners could avoid foreclosure. However, the firm did not obtain loan modifications for any of the homeowners, the court related.

Commissioner’s action. On behalf of certain homeowners who complained about the Virginia firm’s practice, the Maryland Commissioner of Financial Regulation initiated administrative proceedings. Ultimately, after an evidentiary hearing, the Commissioner accepted the recommendation of an administrative law judge to issue injunctive relief, a civil monetary penalty, and the payment of “treble damages” by the firm and its managing partner to the Maryland homeowners who had agreements with the firm.

Later, the firm and partner obtained judicial review of the agency’s decision. The state trial court ruled in their favor, finding that the agreements with the Maryland homeowners were for “legal services rather than credit services” and that the MCSBA did not apply. When the Maryland intermediate appellate court affirmed that decision, the Commissioner appealed to the Maryland Court of Appeals.

Credit services business. First, the Maryland Court of Appeals determined that there was substantial evidence in the administrative record showing that the law firm’s and partner’s activities in connection with the Maryland homeowner agreements came within the scope of the “credit services business” definition in the MCSBA.

Reviewing the MCSBA's text and legislative history, the court emphasized that a person who offers to renegotiate a mortgage loan for a homeowner facing foreclosure “is offering to assist a consumer in obtaining an extension of credit” under the state law. Further, if the person “does so in return for the payment of money by the consumer,” then that person falls within the MCSBA’s definition of a “credit services business.”

No attorney exemption. Next, the court determined that there was substantial evidence in the administrative record indicating that the law firm and partner did not qualify for an attorney exemption under the MCSBA.

Under the MCSBA provision providing an attorney exemption, the individual: (i) must be admitted to the Maryland Bar; (ii) must render the pertinent services within the course and scope of his or her practice as a lawyer; and (iii) must not engage in the credit services business “on a regular and continuing basis.”

The court acknowledged that a Maryland attorney who counsels an individual client facing foreclosure and attempts to negotiate a mortgage loan modification typically would be exempt from the MCSBA. However, the court agreed with the administrative law judge that “when a small out-of-state law firm has 57 cases with Maryland consumers in nine months, it constitutes offering the particular services on a regular and continuing basis.” Consequently, the firm and managing partner were not entitled to the MCSBA’s attorney exemption.

Final disposition. While the court reversed the respective decisions of the intermediate appellate court and trial court, the matter was remanded to the trial court to address the unresolved issue of whether any of the law firm’s or partner’s alleged MCSBA violations rose to a level of “willfulness.”

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Anti-money laundering standards proposed for banks without federal regulators

By Andrew A. Turner, J.D.

The Financial Crimes Enforcement Network is proposing to require banks that do not have federal functional regulators to institute customer identification and anti-money laundering programs and satisfy account beneficial owners identification duties. The agency estimates that approximately 625 financial institutions that currently are exempt from comparable rules for federally regulated financial institutions would be covered by the proposed rules.

Comments on the proposal are due by Oct. 24, 2016. Banks without a federal functional regulator would be required to implement a written AML program approved by their boards of directors or by equivalent functional units within the banks. If customer due diligence requirements for verifying the identity of beneficial owners of their legal entity customers are imposed on non-federally regulated banks, FinCEN seeks comment on what time periods should be given to these institutions to implement the new standards.

FinCEN says its analysis has revealed five types of financial institutions that are covered by the regulatory definition of “bank” but are not currently subject to all of the Bank Secrecy Act obligations:

1. state-chartered nondepository trust companies;
2. state-chartered credit unions that are not federally insured;
3. private banks;
4. state-chartered banks and savings associations that are not federal insured; and
5. international banking entities.

It is difficult to count precisely the number of institutions that would be covered by the proposal, FinCEN concedes. Also, the numbers of some types are small—there appear to be no more than a dozen covered state-chartered banks and thrifts, while there is “at least one private bank.” However, there may be additional companies that the regulation would consider to be banks that do not have federal regulators, the proposal notes. In fact, the proposal asks for information on covered banks that FinCEN has not identified.

New requirements. According to FinCEN, banks without federal functional regulators are just as vulnerable to being used for money laundering or terrorism financing as banks with federal regulators. Uniform requirements would make it more difficult for criminals to locate banks with less rigorous AML programs.

Most of the banks covered by the proposal are likely already to have some form of AML program, FinCEN believes, so the rule would not be unduly burdensome.

For reasons of system vulnerability and regulatory consistency, all banks should have customer identification and beneficial ownership identification programs, according to FinCEN.

The proposal would take effect chiefly by removing exemptions that currently benefit banks without federal regulators, so it would bring about a consistent regulatory approach for all banks regardless of what agency is responsible for their regulation. Since the expectation that BSA programs would be appropriate for each bank’s specific risk profile is maintained, the specific programs adopted by banks without federal regulators might not be the same as those adopted by other banks.

Currently applicable obligations. Banks without federal functional regulators are not exempt from all BSA duties, the proposal notes. They currently are required to file currency transaction reports and suspicious activity reports. Also, they are prohibited from allowing foreign shell banks to have correspondent accounts and they must obtain information on the ownership of foreign banks.

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Associations support CFPB’s eased privacy notice proposal

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

Trade associations are sending comment letters to the Consumer Financial Protection Bureau in support of the eased privacy notice requirements in the bureau’s proposed amendment to Regulation P. One letter was sent by the American Bankers Association, Consumer Bankers Association, Financial Services Roundtable, Independent Community Bankers of America, and Securities Industry and Financial Markets Association. Another came from the American Bankers Insurance Association.

CFPB proposal. The CFPB’s proposal would implement a December 2015 statutory amendment to the Gramm-Leach-Bliley Act providing an exception to the annual privacy notice requirement for financial institutions that: (1) provide nonpublic personal information about customers to nonaffiliated third parties only in a way that does not require affording customers an opt-out; and (2) have not changed information sharing policies or practices since the last time a customer was provided the privacy notice.

Alternative method delivery. The associations represented in the first letter support the exception to the annual notice requirement, and they also support the bureau’s proposal to eliminate the alternative online delivery method that was adopted in 2014. The proposed exception to the annual privacy notice requirement is simpler than the alternative method, according to the associations, and a bank that satisfies the conditions for the alternative delivery also would meet the conditions of proposed exception.

FCRA requirements. In addition, the associations support the CFPB’s proposed clarifications about the Fair Credit Reporting Act notifications that may be included in the annual privacy notice. The bureau’s proposal does not condition eligibility for elimination of the annual privacy notice on FCRA opt-out requirements. Also under the proposal, the FCRA notification requirement is satisfied if a financial institution includes information about the information sharing with affiliates required by the FCRA in its initial privacy notice, because the FCRA does not require an annual notice as long as the financial institution continues to meet the necessary requirements under FCRA.

Changes to information sharing practices. The letter notes that one of the conditions that a financial institution must meet in order to eliminate the annual privacy notice is that it must not have changed its information sharing practices. The associations agree with the CFPB’s determination that since the statutory changes address information sharing, changes to the categories of information collected or changes to data security practices do not affect whether a bank can eliminate the annual privacy notice. Given the current incidence of cyber security threats, the letter says, the emphasis should be on encouraging institutions to update and enhance information security.

ABIA letter. The ABIA stated that the privacy notice "mandate provides minimal consumer benefit, yet it imposes considerable cost to providers." The presence or absence of "opt out" disclosures in an institution’s privacy notice should not be a factor in the availability of the exemption from the annual notice requirement, according to the ABIA. Its letter also agreed that the exemption should be available to a financial institution that changes its privacy policy as to information sharing with, or use for marketing purposes by, affiliates, pursuant to the FCRA.

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Illinois garnishments not subject to Fair Debt Collection Practices Act

By Richard Roth

Illinois law shows that a wage garnishment being used to collect a consumer debt is an action against the consumer’s employer, not against the consumer, according to the U.S. Court of Appeals for the Seventh Circuit. As a result, garnishment proceedings are not subject to the Fair Debt Collection Practices Act restrictions on where debt collectors can sue consumers (Jackson v. Blitt & Gaines, P.C.).

Other than in foreclosure suits, the FDCPA requires debt collectors to bring legal actions “against any consumer” in the judicial district where either the contract was signed or the consumer lives (15 U.S.C. §1692i). In the two consolidated suits, the debt collecting law firm Blitt & Gaines took default judgments against the consumers in the correct Cook County, Illinois, municipal district, but later filed garnishment actions in a different district. The consumers sued, claiming the FDCPA required the garnishment proceedings also to have been filed in the municipal district where they lived.

Who’s the target? To the court, the significant factor was the focus of a garnishment proceeding, and the focus was on a consumer’s employer. The court pointed out that:

1. The summons was to be served on the employer, while the consumer was entitled only to notice by mail.
2. The garnishment interrogatories were to be served on, and answered under oath by, the employer.
3. Although the consumer could file an objection, the garnishment would proceed based on the employer’s actions—“the judgment debtor is not a necessary participant,” the court noted.
4. The employer could be liable for the amount of the judgment if it did not comply with the process, while there were no penalties imposed on the consumer.
5. Illinois law set garnishment proceeding venue in the county of the employer’s location, not of the consumer’s residence.

These factors made clear the proceeding was against the employer, not the consumer.

FDCPA purposes. The FDCPA’s venue rule was intended to prevent a debt collector from denying a consumer the opportunity to defend against a collection suit by filing the suit in an inconvenient forum, the court said. Even the Federal Trade Commission, in an FDCPA interpretation, said that a judgment could be enforced in a different jurisdiction as long as the consumer had the chance to defend against the suit where it was filed.

“The FDCPA was created to prevent abusive debt-collection practices, not to prevent law-abiding creditors from collecting on legally enforceable debts,” the court concluded.

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CFPB calls on student loan servicers to fix costly ‘breakdowns’

By Katalina M. Bianco, J.D.

Consumers have continued to complain of servicing problems that make it difficult to get lower student loan payments tied to their income, according to a report by the Consumer Financial Protection Bureau’s Student Loan Ombudsman Seth Frotman. The Ombudsman said that student loan borrowers wishing to make use of income-driven repayment (IDR) plans with their federal student loans have experienced servicing “breakdowns” when trying to navigate the system. The report addresses those difficulties, the impact they have on student loan costs, and what servicers can do to improve the process.

Report specifics. The report analyzes complaints submitted to the CFPB between Oct. 1, 2015, and May 31, 2016. The bureau handled approximately 3,500 private student loan complaints and 1,500 debt collection complaints related to private and federal student loans during that time.

Among the issues that consumers have reported:

• Consumer applications “sit under review” for a lengthy period of time, leaving borrowers “to linger in an application abyss.”
• Applications are rejected because of missing information or because the servicer lost paperwork, but applicants are not notified by servicers and given a chance to remedy the problem.
• Borrowers who successfully enroll in an IDR plan may re-encounter the same obstacles each year because they are required to certify their income and family size annually in order to keep an income-driven payment. Servicing requirements can lead to increased costs for borrowers.
• Processing delays may cost more than $2 per day and can last weeks or months. For borrowers with high loan balances or higher interest rates, the bureau estimates these costs to be substantially greater. 

Fix It Form. The CFPB has developed a prototype “Fix It Form” intended to help servicers improve the level of service they provide. The form can be used by servicers to address application problems and help borrowers understand whether their IDR application has been approved, denied, or needs to be corrected. When a borrower needs to make a correction or provide more information, servicers can use the Fix It Form to help consumers understand how to "fix it" and stay on track. Specifically, the form is intended to:

• create more responsive and consistent servicing;
• improve transparency around criteria by documenting problems with an application and communicating with borrowers about fixing those problems; and
• make the process easier for consumers in order to bolster applications and increase the number of borrowers who are able to their right to a federal IDR plan.

Blog post. The CFPB posted information to consumers on its blog detailing how borrowers with federal student loans can make their payments more affordable by changing their repayment plans. Almost all federal student loan borrowers have the right to a repayment plan that can set their monthly student loan payment based on their income. IDR plans can make borrowers’ monthly payment as little as 10 percent of their income. In its post, the bureau advises consumers on how to use the Fix It Form and provides tips for navigating the IDR process.

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Eliminating mortgage lien without notice violated creditor’s due process rights

By Richard A. Roth, J.D.

 

A Nevada state law that allowed a homeowners association to extinguish Wells Fargo’s first mortgage lien by foreclosing on the HOA’s lien for unpaid condominium assessments was unconstitutional because the law did not require the HOA to give prior notice, the U.S. Court of Appeals for the Ninth Circuit has decided. The state legislature’s enactment of the statute denied Wells Fargo due process of law in violation of the Fourteenth Amendment (Bourne Valley Court Trust v. Wells Fargo Bank, N.A., Aug. 12, 2016, Nelson, D.).

 

Nevada state law gives HOA liens a "super priority," making them superior to other liens. This superiority includes making nine months of HOA assessments superior to first mortgage liens. The Nevada Supreme Court has decided that an HOA’s foreclosure of its super priority lien extinguishes all junior liens, including a first mortgage (SFR Investments Pool 1 v. U.S. Bank, 334 P.3d 408 (Nev. 2014)).

 

No notice required. However, prior to a recent amendment, the state law included a scheme the U.S. appellate court termed both "strange" and "peculiar"—a mortgage creditor like Wells Fargo was entitled to notice of the planned foreclosure only if it had previously asked the HOA to notify it. Without this request by the creditor, the HOA could foreclose on its super priority lien and extinguish the mortgage lien without the creditor’s knowledge.

 

This "opt-in" scheme violated due process, the appellate court determined.

 

Impermissible burden shifting. The state law violated the Fourteenth Amendment when it shifted the notice burden to Wells Fargo, the court said. Only the HOA knew that a homeowner had not paid his assessments. Wells Fargo had no relationship with the HOA—in fact, the two might not have known of each other’s existence—so how Wells Fargo should have known to ask to be notified "is anybody’s guess," the court pointed out.

 

The Fourteenth Amendment requires a state to give reasonable notice before taking an action that could affect a person’s interest in life, liberty, or property. An opt-in scheme does not satisfy the reasonable notice requirement, according to the court.

 

The appellate court also rejected the HOA’s attempt to borrow a notice requirement from a different section of Nevada law. Borrowing the notice requirement would have made the opt-in provisions meaningless, the court said, and all provisions of a law should be interpreted to give them meaning when possible.

 

State action. The Fourteenth Amendment only applies when there has been action by the government, the court continued. This requires a deprivation of rights due to a person’s exercise of a right or privilege given by the state, or of a rule of conduct established by the state. It also requires that the person said to have caused the deprivation be a state actor.

 

The foreclosure could not be characterized as a state action, the court conceded. However, that was irrelevant. The state action was the legislature’s enactment of the opt-in scheme and imposition of that scheme on two persons, the HOA and Wells Fargo, who had no preexisting relationship.

 

The enactment of the state law "unconstitutionally degraded" Wells Fargo’s security interest in the condo, the court said. Had the law not been in place, the bank’s lien would have been fully secured while, with the law in place, its lien could be extinguished.

 

The absence of a prior relationship between the HOA and Wells Fargo meant the HOA was not permissibly exercising a contractual right, the court also explained. Rather, the HOA was exercising a right granted to it by state law.

 

Dissenting opinion. A dissenter rejected the entirety of the majority opinion. According to the dissenter:

 

The state law could not have "degraded" Wells Fargo’s security interest when the law was enacted 15 years before Wells Fargo acquired the loan.

1. There was no state action because no government actor was involved in the foreclosure process.
2. The notice requirement should be borrowed, and this would require an HOA to give a mortgage creditor prior notice of foreclosures and cure the opt-in defect.

Amendment. An amendment enacted by the Nevada legislature now requires that mortgage creditors be notified before foreclosures.

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Filing a time-barred claim in bankruptcy not an FDCPA violation

By Richard Roth

Debt collectors that filed accurate proofs of claim on time-barred debts in consumers’ bankruptcy cases did not engage in false, deceptive, misleading, unfair, or unconscionable debt collection practices, the U.S. Court of Appeals for the Seventh Circuit has decided. As a result, the debt collectors did not violate the Fair Debt Collection Practices Act by filing their claims, the court said, even though the Seventh Circuit had previously determined that suing on a stale claim is a violation (Owens v. LVNV Funding, LLC).

As outlined by the court, the significant facts in the three consolidated cases were the same: debt buyers filed proofs of claim in consumers’ bankruptcy cases. All of the filings outlined the claims in a factually accurate manner, all of the consumers were represented by attorneys, all of them objected to the claims under the statutes of limitations, and all of the claims were rejected by the bankruptcy courts. All of the consumers then sued the debt collectors, alleging that filing a time-barred proof of claim violated the FDCPA.

What’s a “claim” in bankruptcy? The court first rejected the consumers’ attempt to narrow the bankruptcy definition of “claim” to only legally enforceable obligations. If that definition were correct, then filing a proof of claim on a stale debt would automatically be an FDCPA violation, the court conceded. However, the bankruptcy definition actually is much broader, encompassing claims that were characterized as unmatured or contingent. This implies that stale claims are permissible.

The Bankruptcy Code expects that claims will be filed for unenforceable debts and that the bankruptcy court will disallow such claims, the court said. It is true that this could result in some unenforceable debts slipping through, the court conceded, but the requirement that a proof of claim include details about the debt would help prevent this, including by demonstrating the timeliness or untimeliness of the claim.

No FDCPA violation. Of course, a creditor’s ability to file a proof of claim on a time-barred debt under the Bankruptcy Code did not mean that doing so would not violate the FDCPA, the court continued. However, in this case, the claims were not false, deceptive, or misleading.

The consumers conceded that the proofs of claim gave complete and accurate information about the debts, the court pointed out. The consumers all had attorneys and, given the information in the filings, “a reasonably competent lawyer would have had no trouble evaluating whether the debt was timely.”

Precedent disregarded. The court was unpersuaded that its opinion in Phillips v. Asset Acceptance, LLC, compelled a decision that the FDCPA had been violated. In Phillips, a different three-judge panel of the Seventh Circuit decided that filing a collection suit on a time-barred debt would violate the FDCPA. However, the factors that led to the Phillips ruling were not present in the context of bankruptcy court proceedings, the court said.

A consumer being sued might not know about the statute of limitations or might not recall the debt at all, the court explained. Alternatively, a consumer might choose to surrender rather than litigate a collection suit. These concerns were not present in bankruptcy proceedings.

Dissenting opinion. Chief Judge Woods disagreed with the other two members of the panel. According to the dissenter, Seventh Circuit precedent makes clear that misleading a consumer about the collectability of a debt is a violation, and a bankruptcy court proof of claim is just as misleading as the collection suit found to be a violation in Phillips.

Contrary to the majority’s belief, an effort to collect a time-barred debt is not a claim permitted by the bankruptcy rules, she continued. Such a debt is neither contingent nor unmatured.

When a creditor knows that a debt is time-barred, it should not be attempting to collect it in bankruptcy, according to the dissenting opinion. Nearly 10 percent of recent bankruptcy cases filed in the Chicago district were filed by consumers without attorneys, she pointed out, and these consumers need to be protected.

Differing interpretations. U.S. appellate courts have reached contrary conclusions on whether filing bankruptcy court proofs of claim on stale debts violates the FDCPA. For example, the Eleventh Circuit recently decided in Johnson v. Midland Funding, LLC that such a filing is a violation. The bankruptcy code does not displace the FDCPA, in the Eleventh Circuit’s opinion. Creditors can file claims on stale debts, but they are liable for the consequences if they do so.

However, the Seventh Circuit agreed with the Second and Eighth Circuits that filing a claim is not necessarily an FDCPA violation. Most recently, the Eighth Circuit decision in Nelson v. Midland Credit Management, Inc., found there is no violation because bankruptcy court procedures adequately protect consumers, making the application of the FDCPA unnecessary.

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Creditors must follow SCRA procedures when collecting from servicemembers

By Lisa M. Goolik, J.D.

A recent settlement between HSBC Finance Corporation, as successor to HSBC Auto Finance Inc., and the Department of Justice may serve as a reminder to creditors that they must make certain that they follow the requirements of the Servicemembers Civil Relief Act when collecting on debts held by servicemembers.

Last week, HSBC agreed to pay $434,500 to resolve DOJ charges that it violated the SCRA by repossessing at least 75 cars owned by protected servicemembers without obtaining the necessary court orders. The DOJ alleged that HSBC repossessed the vehicles even when it had evidence in its own records suggesting that a borrower could be a protected servicemember—in one case, the vehicle was on military property. The consent order requires also that HSBC repair the affected servicemembers’ credit.

SCRA protections. The SCRA requires a court to review and approve any repossession if the servicemember took out the loan and made a payment before entering military service. The DOJ alleged that by allegedly failing to obtain court orders before repossessing the vehicles, HSBC prevented servicemembers from exercising their rights under the SCRA, such as a review of whether their repossessions should be delayed, whether the loan should be adjusted to account for their military service, if bond should be required, or if an attorney should be appointed.

"HSBC repossessed cars without taking into account their owners’ ongoing service to our country," said Principal Deputy Associate Attorney General Bill Baer. "This settlement rights this wrong, compensates the affected servicemembers and honors our commitment to making sure military members are treated fairly at all times." Principal Deputy Assistant Attorney General Vanita Gupta, head of the DOJ’s Civil Rights Division, commended HSBC for "working cooperatively to reach an appropriate resolution."

Prior settlement with Santander. The settlement covers repossessions that occurred between 2008 and 2010. In 2010, HSBC sold its car lending operations and assets to Santander Consumer USA Inc. Included in the sale were the rights to collect debts owed by servicemembers after their cars had been repossessed by HSBC. In February 2015, the DOJ entered a settlement with Santander that provided servicemembers with more than $10.5 million in compensation for repossessions that violated the SCRA.

According to the DOJ, most of the servicemembers compensated through the settlement with HSBC received partial compensation through the settlement with Santander, and the agreement requires HSBC to pay $5,500 to each of these servicemembers. HSBC must pay $11,000 to affected servicemembers who did not receive payments from the Santander settlement.

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Five years of CFPB enforcement actions are having an impact

By Andrew A. Turner, J.D.

July 21, 2016, marked the fifth anniversary of the Consumer Financial Protection Bureau, an independent bureau created by Section 1011 of the Dodd-Frank Act to oversee consumer financial products and champion consumer rights. That provided the CFPB with an opportunity to reflect on its accomplishments in enforcing consumer protections.

Earlier in the year, at a speech before the Consumer Banking Association, CFPB Director Richard Cordray discussed the CFPB’s enforcement approach:

Likewise, our public enforcement actions have been marked by orders, whether entered by our agency or by a court, which specify the facts and the resulting legal conclusions. These orders provide detailed guidance for compliance officers across the marketplace about how they should regard similar practices at their own institutions. If the same problems exist in their day-to-day operations, they should look closely at their processes and clean up whatever is not being handled appropriately. 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.

Some have criticized this approach as regulation by enforcement, but I think that criticism is badly misplaced. Certainly any responsible official or agency charged with enforcing the law is bound to recognize that they should develop a thoughtful strategy for how to deploy their limited resources most efficiently to protect the public. That means working toward a pattern of actions that conveys an intelligible direction to the marketplace, so as to create deterrence that can be readily understood and implemented. The alternative is just a random series of actions that takes a few wild swipes at the bad actors without systematically cleaning up the practices that harm consumers across the marketplace.

Others have framed this criticism as a suggestion that law enforcement officials should think through and explicitly articulate rules for every eventuality before taking any enforcement actions at all. But that aspiration would lead to paralysis because it simply sets the bar too high. Particularly in an area like consumer financial protection, the vast majority of our enforcement actions involve some sort of deception or fraud. And courts have long noted that trying to craft specific rules to root out fraud or untruth is a hopeless endeavor, as they would likely fail to cabin “the ingenuity of the dishonest schemer.” For these reasons, we strive to present specific enforcement orders that meticulously catalogue the facts we have found in our very thorough investigations and set out the legal conclusions that follow from those facts. These specific orders are also intended as guides to all participants in the marketplace to avoid similar violations and make an immediate effort to correct any such improper practices.

Over the past five years, the CFPB has filed enforcement actions against numerous companies for unfair, deceptive, and abusive practices—which the bureau estimates has resulted in $11.7 billion in relief for more than 27 million harmed consumers—including:

Credit card companies, such as JPMorgan Chase and American Express, for engaging in unfair, deceptive, and abusive practices related to marketing, billing, and enrollment for credit add-on products and services. In September 2013, the bureau ordered JPMorgan to refund an estimated $309 million to more than 2.1 million customers for engaging in unfair billing practices for adding credit monitoring products to credit card accounts. Four months later, the bureau ordered AmEx to refund almost $60 million to more than 335,000 consumers for similar practices.

Banks, for charging overdraft fees to consumers who had not agreed to opt-in to overdraft services. Earlier this month, Santander Bank, N.A. agreed to pay a $10 million fine for enrolling customers in its overdraft protection service for ATM and one-time debit card transactions—a service that cost customers $35 per overdraft. The CFPB found that during the bank’s “vigorous” telemarketing campaign,” call representatives did not ask consumers if they wanted to opt in but enrolled them anyway.

Mortgage lenders, such as BancorpSouth Bank, for engaging in discriminatory mortgage practices. The CFPB and Department of Justice in June 2016, announced a joint action against BancorpSouth for discriminatory mortgage lending practices, including illegally redlining in Memphis, Tenn., that the agencies alleged harmed African Americans and other minorities. BancorpSouth agreed to pay $10.6 million order the consent order.

Payday lenders, such as Cash America—one of the largest short-term, small-dollar lenders in the country—for illegal lending and debt collection practices. In its first enforcement action against a payday lender, the bureau ordered Cash America to pay up to $14 million in refunds to consumers in addition to a $5 million fine for robo-signing court documents in debt collection lawsuits and for destroying records in advance of the CFPB’s examination. The lender also was charged with violating the Military Lending Act by illegally overcharging servicemembers and their families.

For-profit colleges, for encouraging students to take out unaffordable loans. In one of the bureau’s most publicized actions, the bureau filed a complaint against Corinthian College, one of the largest for-profit, post-secondary education companies in the United States, for allegedly inducing students to take out predatory loans to pay inflated tuition and using illegal tactics to collect the loans. In October 2015, a federal court entered a default judgment against Corinthian for more than $531 million. Corinthian was also prohibited from engaging in future misconduct.

Debt collectors, for using illegal tactics, such as masquerading as prosecutors, to intimidate consumers into paying debts they may not owe. In March 2015, the bureau brought an action against a debt collector, National Corrective Group, for allegedly threatening consumers with criminal prosecution and jail time by creating a false impression for consumers that its communications were from a state or district attorney’s office.

Indirect auto lenders, for illegally discriminating against minorities. The CFPB and Department of Justice resolved an action in February 2016, with Toyota Motor Credit Corporation for allegedly charging thousands of minority buyers higher rates for auto loans regardless of the borrower’s creditworthiness. Under the agreement, affected borrowers will receive up to $21.9 million. Toyota also agreed to change its pricing and compensation system to substantially reduce dealer discretion and accompanying financial incentives to mark up interest rates.

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

Cyber incident policy issued by White House

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

The White House recently issued a Presidential Policy Directive (PPD) on United States Cyber Incident Coordination, setting out principles governing the federal government’s response to cyber incidents, whether involving government or private sector entities. A White House fact sheet states that the new PPD "marks a major milestone in codifying the policy that governs the Federal government’s response to significant cyber incidents."

The PPD names the Department of Justice, acting through the Federal Bureau of Investigation, as the federal lead agency for threat response activities. The PPD also requires the DOJ and Department of Homeland Security to maintain updated contact information for public use to assist entities affected by cyber incidents in reporting those incidents to the proper authorities.

Cyber incidents. The PPD defines a cyber incident as an event occurring on or conducted through a computer network that actually or imminently jeopardizes the integrity, confidentiality, or availability of computers, information or communications systems or networks, physical or virtual infrastructure controlled by computers or information systems, or the information in those systems. A significant cyber incident is one likely to result in demonstrable harm to the national security interests, foreign relations, or economy of the United States or to the public confidence, civil liberties, or public health and safety of the American people.

Concurrent lines of effort. In responding to any cyber incident, federal agencies must undertake three concurrent lines of effort: threat response; asset response; and intelligence support and related activities.

1.	Threat response activities include conducting appropriate law enforcement and national security investigative activity at the affected entity’s site; collecting evidence and gathering intelligence; providing attribution; linking related incidents; identifying additional affected entities; identifying threat pursuit and disruption opportunities; developing and executing courses of action to mitigate the immediate threat; and facilitating information sharing and operational coordination with asset response.
2.	Asset response activities include providing technical assistance to affected entities; identifying other entities that may be compromised; assessing potential risks to the sector or region; facilitating information sharing and operational coordination with threat response; and providing guidance on how best to utilize federal resources.
3.	Intelligence support and related activities facilitate: the building of situational threat awareness and sharing of related intelligence; the integrated analysis of threat trends and events; the identification of knowledge gaps; and the ability to degrade or mitigate adversary threat capabilities.

In addition, the PPD stated that when a federal agency is an affected entity, it will undertake a fourth concurrent line of effort to manage the effects of the cyber incident on its operations, customers, and workforce.

Response architecture. In order to respond effectively to significant cyber incidents, the federal government will coordinate its activities in three ways: national policy coordination, national operational coordination, and federal lead agencies.

1.	A Cyber Response Group (CRG) will coordinate the development and implementation of the federal government’s policies, strategies, and procedures for responding to significant cyber incidents.
2.	Each agency participating in the CRG will establish and follow enhanced coordination procedures as defined in the annex to this PPD in situations in which the demands of responding to a significant cyber incident exceed its standing capacity. A Cyber Unified Coordination Group will serve as the primary method for coordinating among federal agencies in response to a significant cyber incident as well as for integrating private sector partners into incident response efforts. The FBI will be the federal lead agency for threat response activities. Homeland Security will be the lead agency for asset response activities. The Office of the Director of National Intelligence will be the lead agency for intelligence support and related activities.
3.	Field-level representatives of the lead agencies will ensure that they effectively coordinate their activities.

Within 180 days of the date of the PPD, Homeland Security must submit a national cyber incident response plan to address cybersecurity risks to critical infrastructure to the President. The PPD notes that this policy complements and builds upon PPD-8 on National Preparedness of March 30, 2011. By integrating cyber and traditional preparedness efforts, the PPD states, the nation will be ready to manage incidents that include both cyber and physical effects.

FSR response. A Financial Services Roundtable press release stated that the PPD "has the potential to clarify roles and responsibilities while improving coordination before and during a cyber incident." Chris Feeney, President of BITS, FSR’s Cyber and Technology Policy division, said, "Ensuring the private sector and the government clearly understand roles and responsibilities in advance of a cyber incident is critical in ensuring consumers are protected."

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Failure to notify of trust deed assignment doesn’t permit rescission

By Richard Roth

Homeowners could not rescind their mortgage loan simply because they were never notified that the trust deed that secured the loan had been transferred, according to the U.S. Court of Appeals for the Sixth Circuit. Addressing what it said was “a new question” for appellate courts, the Sixth Circuit decided the lack of notice did not violate the Truth in Lending Act and rescission would not have been the right remedy even if there had been a violation (Robertson v. U.S. Bank, N.A.).

Through several transfers, the homeowners’ loan passed to U.S. Bank as part of the securitization process in 2006. The trust deed securing the loan named MERS as the beneficiary and a law firm as the trustee. When the homeowners stopped making mortgage payments in 2011, MERS transferred the trust deed to U.S. Bank and the trustee scheduled a trustee’s sale. The homeowners responded by attempting to rescind the mortgage loan, based in part on a claim that U.S. Bank had violated TILA by not notifying them of the transfer.

TILA-required notice. Under a provision added in 2009, borrowers are entitled to be notified within 30 days when their loan is transferred, the court said, citing 15 U.S.C. §1641(g). The homeowners claimed U.S. Bank had not sent them a notice when the trust deed was transferred.

The notice requirement applies when a loan is transferred, not when the document that creates the security interest is transferred, the court replied. TILA did not require a notice when the loan was transferred to U.S. Bank in 2006 because the amendment was not made until 2009, and TILA had never required a notice of the transfer of the trust deed.

As a result, the homeowners were not entitled to a notice.

Remedy. Assuming, however, that U.S. Bank had violated TILA, the homeowners still could not rescind their loan, the court said. The only available remedy for failing to send the transfer notice would be a demand for damages.

Rescission is a remedy for failure to give TILA-required disclosures as part of a consumer credit transaction under 15 U.S.C. §1635. A consumer credit transaction requires both the involvement of a consumer and an extension of credit. However, when the trust deed was assigned by MERS to U.S. Bank, no consumer was involved and no credit was extended, the court pointed out. Neither was the transfer notice a material disclosure under TILA.

Thus, rescission was not available to the homeowners.

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CFPB outlines steps to build on compliance with Plain Writing Act

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau’s 2016 Plain Writing Act Compliance Report describes how the bureau has built on prior efforts to speak and write in plain language, as required by the Act. In his message prefacing the report, CFPB Director Richard Cordray stresses that the CFPB is committed to helping the public make better use of the bureau’s tools, resources, and information by using clear language in its communications.

The bureau designated the Executive Secretary, Office of the Executive Secretariat, as the Senior Agency Official responsible for plain writing. The Executive Secretary designated two Associate Executive Secretaries in the Office of the Executive Secretariat to serve as Plain Language Coordinators.

Core principle. The CFPB reports that it has adopted plain language as a core principle for all consumer-facing content and follows plain-language guidelines when creating materials that:

• provide information to help consumers make financial choices to meet their own life goals;
• provide information to consumers about their rights under the federal consumer financial laws; and
• inform consumers about the bureau’s activities.

According to the report, although the CFPB recognizes that the Plain Writing Act does not govern internal writing, the bureau has adopted plain-writing principles for many internal materials, adopting a user-centered approach to writing.

Specific steps. The CFPB outlines the specific steps it has taken to meet its goal to write more clearly, accurately, and logically. Some of these steps include:

• offering training and information to bureau colleagues on using plain language;
• redesigning the CFPB website to make it clearer for consumers; and
• creating plain-language guides intended to help consumers open and manage checking accounts.

Consumer satisfaction. The report concludes by stating that the CFPB has received “minimal” feedback from consumers on its Plain Writing communications through the portal provided on the bureau’s Plain Language webpage.

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CFPB substantially strengthens mortgage borrower consumer protections

By John M. Pachkowski, J.D.

 

The Consumer Financial Protection Bureau has adopted a final rule that provides new measures to ensure that homeowners and struggling borrowers are treated fairly by mortgage servicers.

 

The CFPB’s final rule, which amends Reg. X—Real Estate Settlement Procedures (12 CFR Part 1024) and Reg. Z—Truth in Lending (12 CFR Part 1026), is the result of a November 2014 proposed rulemaking that addressed nine major mortgage-related topics.

 

Stronger protections. Although the final rule adopted many of the proposed provisions, the bureau made a number of changes after considering comments received from the public. The new protections provided to consumers include:

• requiring servicers to provide foreclosure protections for borrowers who have brought their loans current at any time since submitting the prior complete loss mitigation application;
• expanding consumer protections to surviving family members and other homeowners by establishing a broad definition of "successor in interest" that generally includes persons who receive property upon the death of a relative or joint tenant; as a result of a divorce or legal separation; through certain trusts; or from a spouse or parent;
• providing borrowers in bankruptcy periodic statements with specific information tailored for bankruptcy, as well as a modified written early intervention notice to let those borrowers know about loss mitigation options;
• requiring servicers to notify borrowers promptly and in writing that a loss mitigation application is complete, so that borrowers know the status of the application and have more information about their protections; 
• a clarification that, if mortgage servicing is transferred, the new servicer must comply with the loss mitigation requirements within the same timeframes that applied to the transferor servicer, but provides limited extensions to these timeframes under certain circumstances;
• a clarification that, if a servicer has already made the first foreclosure notice or filing and receives a timely complete loss mitigation application, servicers and their foreclosure counsel must not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, even if a third party conducts the sale proceedings, unless the borrower’s loss mitigation application is properly denied, withdrawn, or the borrower fails to perform on a loss mitigation agreement; 
• a clarification that delinquency, for purposes of the servicing rules, begins on the date a borrower’s periodic payment becomes due and unpaid; and 
• allowing servicers the discretion, under certain circumstances, to consider a borrower as having made a timely payment even if the borrower’s payment falls short of a full periodic payment. 

Other protections afforded by the final rule include, among other things, the use of force-placed insurance by a servicer when the borrower has insufficient, rather than expiring or expired, hazard insurance coverage on the property; and the exclusion of certain seller-financed transactions and mortgage loans, voluntarily serviced for a non-affiliate, from being counted toward the 5,000 loan limit in the small servicer exemption.

  

Safe harbor. The CFPB also issued an interpretive rule under the Fair Debt Collection Practices Act relating to servicers’ compliance with certain of the mortgage servicing provisions as amended by the final rule. The interpretive rule provides a safe harbor from liability under the FDCPA for actions done or omitted in good faith in conformity with the interpretive ruling. 

 

Effective dates. Most of the provisions of the final rule will take effect 12 months after publication in the Federal Register. The provisions relating to successors in interest and the provisions relating to periodic statements for borrowers in bankruptcy will take effect 18 months after publication in the Federal Register.

 

Protecting the vulnerable. Commenting on the final rule, CFPB Director Richard Cordray stated, "These updates to the rule will give greater protections to mortgage borrowers, particularly surviving family members and other successors in interest, who often are especially vulnerable."

 

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

CFPB proposes changes to mortgage disclosure rule

By John M. Pachkowski, J.D.


The Consumer Financial Protection Bureau has released proposed updates to its Know Before You Owe mortgage disclosure rule. The proposed amendments are intended to formalize guidance in the rule, and provide greater clarity and certainty. The proposed changes would augment implementation of the Know Before You Owe rule, which took effect in October 2015, and help facilitate compliance within the mortgage industry.

Comments on the proposed rule are due by Oct. 18, 2016.

Industry concerns. The CFPB took this action is response to earlier industry requests regarding compliance with the Know Before You Owe mortgage disclosure forms. In an April 2016 letter, the CFPB recognized that "the implementation of the Know Before You Owe rule poses many operational challenges" and will "continue the collaboration and engagement toward solutions and provide guidance where we have to the ability to do so." The bureau added that its regulatory implementation page is "designed to be responsive to industry concerns." The CFPB’s letter concluded that it hoped to issue the proposal in late July.

 

Proposed rule. Under the proposed rule, the CFPB would:

• include tolerance provisions for the total of payments that parallel existing tolerances for the finance charge and disclosures affected by the finance charge; thereby making the treatment of the total of payments disclosure consistent with what it was prior to the Know Before You Owe mortgage disclosure rule;
• promote housing assistance lending by clarifying that recording fees and transfer taxes may be charged in connection with those transactions without losing eligibility for the partial exemption under the Know Before You Owe mortgage disclosure rule;
• extend the Know Before You Owe mortgage disclosure rule include all cooperative units since the rule only covers transactions secured by real property, as defined under state law and some states treat cooperative units as personal property; and
• clarify how a creditor may provide separate disclosure forms to the consumer and the seller since it is the usual and accepted practice by creditors and settlement agents to provide a closing disclosure to consumers, sellers, and their real estate brokers or other agents.

 

Commenting on the proposed rule, CFPB Director Richard Cordray noted, "Our proposed updates will clarify parts of our mortgage disclosure rule to make for a smoother implementation process."

 

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Bank that initiated foreclosure action not subject to state debt-collection law

By Thomas G. Wolfe, J.D.

Recently, a Florida appellate court was called to review whether a note-holding bank that initiated a foreclosure action against the real property of a pair of homeowners was subject to a provision of the Florida Consumer Collection Practices Act (FCCPA) governing debt-collection assignments. The homeowners asserted an affirmative defense against Deutsche Bank National Trust in the bank’s foreclosure action, contending that Deutsche Bank could not foreclose against their property because the bank was required to provide them with written notice of the assignment of their mortgage debt but did not comply with the FCCPA's requirements.

Ultimately, in the case of Deutsche Bank National Trust Company v. Hagstrom, the Florida District Court of Appeal (Second District) rejected the homeowners’ contention. In reviewing the relationship of the FCCPA provision governing debt-collection assignments with Florida mortgage foreclosure law and Florida’s Uniform Commercial Code provisions governing negotiable instruments, the state appellate court determined that the FCCPA provision did not apply to Deutsche Bank under the facts of the case nor did it limit the bank’s right, as holder of the promissory note, to enforce the note.

Backdrop. Deutsche Bank was not the original lender but eventually was assigned the mortgage in its capacity as a trustee. Further, the bank became the holder of the underlying promissory note on the secured property.

Homeowners’ stance. The homeowners argued that Deutsche Bank failed to comply with the FCCPA’s requirement to provide them with written notice of the assignment of their mortgage debt at least 30 days prior to the bank’s lawsuit to foreclose on their property. The homeowners contended that this failure to comply with Florida’s debt-collection assignment provision prevented the bank from advancing its foreclosure action.

Bank’s stance. In contrast, while Deutsche Bank maintained that it had sent a letter to the homeowners in November 2006—several years before the foreclosure action—informing the homeowners of the transfer of the servicing of the mortgage loan. Deutsche Bank further argued that it was not required to comply with the FCCPA notice requirement in any event because the bank was not a “debt collector” and its filing of the foreclosure lawsuit was not a “debt collection activity.” In addition, even if the bank was required to comply with the FCCPA provision, its noncompliance did not bar the bank from pursuing its foreclosure action, Deutsche Bank argued.

FCCPA provision. The FCCPA (section 559.715) provides that it “does not prohibit the assignment, by a creditor, of the right to bill and collect a consumer debt. However, the assignee must give the debtor written notice of such assignment as soon as practical after the assignment is made, but at least 30 days before any action to collect the debt. The assignee is a real party in interest and may bring an action to collect a debt that has been assigned to the assignee and is in default.”

Court’s analysis. At the outset, the Florida appellate court noted that it had previously and “implicitly” determined that a “promissory note secured by a mortgage is a consumer debt for purposes of the FCCPA.”

Next, the court underscored that Deutsche Bank was entitled to enforce the promissory note “not because it is an assignee of the right to bill and collect but because it meets the statutory definition of the holder of the note” under Article 3 (Negotiable Instruments) of the Florida UCC. The court pointed out that Deutsche Bank had provided the trial court with sufficient evidence showing that the bank was the holder of the note and was assigned the mortgage.

Construing the FCCPA provision, (section 559.715), the court emphasized that the statute applied to “assignees of the right to bill and collect consumer debt” but not to assignees of the debt itself. Consequently, the FCCPA provision did not require any action by the pertinent creditor or the noteholder. The court asserted that the “right of the note holder to enforce the note exists regardless of an assignment to bill and collect the debt.” Moreover, the FCCPA “contains no reference to notes, mortgages, or foreclosure, and there is no express connection” between the FCCPA and Florida mortgage foreclosure law, the court stated.

As a result, the court concluded that the FCCPA provision “simply does not apply to holders of notes secured by mortgages on real property. Neither is it an affirmative defense to foreclosure actions; it does not establish a condition precedent and in no other way avoids the claims to foreclose a mortgage and enforce a note.”

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