By Thomas G. Wolfe, J.D.
The Independent Community Bankers of America (ICBA) has urged President Trump’s Administration to “rein in the overzealous application of fair lending laws.” In a Jan. 27, 2017, release, Camden Fine, ICBA President and CEO, remarked, “Community banks are fully committed to fair lending and strongly oppose discrimination prohibited under laws such as the Fair Housing Act and Equal Credit Opportunity Act. However, community banks are experiencing enforcement overreach that diverts an abundance of resources from serving their local communities to complying with and responding to unwarranted fair lending allegations.”
KleinBank example. As an example of “unwarranted enforcement actions,” the ICBA points to the Justice Department’s “misguided and baseless claim” against KleinBank. According to the ICBA, even though KleinBank, a 110-year-old financial institution, had never been cited for any fair lending violations by the Federal Deposit Insurance Corporation, the Justice Department “penalized” the bank “for not marketing to or having branch offices in nearby Minneapolis or St. Paul, unilaterally determining that KleinBank should broaden its market presence to these distinct communities.”
The ICBA asserts that the KleinBank example and other similar enforcement actions “directly attack the community banking model.” Moreover, requiring community banks to “expand their market presence into neighboring counties” would force these banks to “alter their model and sound business practices,” the ICBA maintains. Accordingly, the ICBA states that it looks forward to working with the Trump Administration on these issues.
For more information about the concerns of community bankers, subscribe to the Banking and Finance Law Daily.
Tuesday, January 31, 2017
Friday, January 27, 2017
Settlement giving absent class members nothing for something wasn’t fair
By Richard A. Roth, J.D.
A settlement of a Fair Debt Collection Practices Act class action was not fair, reasonable, and adequate when it gave class members nothing of value but deprived them of the ability to participate in future class actions over the same conduct, the U.S. Court of Appeals for the Ninth Circuit has decided. While the three named class representatives each received $1,000—the maximum available statutory damages—the settlement gave four million other class members only the benefit of a worthless injunction, while preventing them from being members of any future class and from opting out of the settlement. Approving such a settlement was an abuse of discretion, the court said (Koby v. ARS National Services, Inc., Jan. 25, 2017, Watford, P.).
The class action claimed that debt collector ARS National Services had violated the FDCPA when its employees left voicemails that omitted required information—that they worked for ARS, that ARS was a debt collector, and that the call was an attempt to collect a debt. The proposed class included everyone in the United States who had received such an email, approximately four million consumers.
Settlement terms. ARS and the class representatives reached a settlement under which they would ask for the certification of a nationwide settlement-only class. The named class representatives would receive $1,000 each. The rest of the class members would receive no payment because ARS’s net worth was so small that the maximum award to the class would be $35,000—too little to be divided among four million people. Instead, $35,000 would be donated to a local charity.
No notice of any kind was to be sent to any of the four million class members, and none of them would be permitted to opt out of the class. Additionally, the class members would lose the right to participate in any future class actions that complained about the voicemails, although they could file individual suits.
The only benefit the absent class members would receive from the settlement was an injunction requiring ARS to use a revised voicemail that complied with the FDCPA. The injunction was to last for two years, and the company already had adopted the revised script.
A consumer who was the named representative in a separate class action addressing the same voicemails objected to the settlement, arguing that the lack of benefit to the class made the agreement unfair and unreasonable. The magistrate judge who was handling the case disagreed and approved the settlement.
Erroneous approval. The settlement should not have been approved because it was not fair, reasonable, and adequate, according to the appellate court. When a settlement is negotiated before a class is certified, the increased risk of collusion or conflicts of interest requires the court to look closely to be sure that settlement is fair. This settlement was not fair because “There is no evidence that the relief afforded by the settlement has any value to the class members, yet to obtain it they had to relinquish their right to seek damages in any other class action.”
The injunction was worthless to most of the class members, the court said. There was “an obvious mismatch” between the individuals who might benefit from the injunction and those who were included in the class—the injunction might help those whom ARS would contact in the future, but the class was defined only as those who had been contacted in the past. Even class members who might receive voicemails in the future received no real benefit, the court added, because the injunction merely required ARS to continue using a legal voicemail it already had chosen to use.
The cy pres award that would result in a $35,000 donation to a San Diego veterans’ organization did not convince the court that the settlement was acceptable. There was no evidence that any of the class members would benefit from the donation, no connection between the veterans’ organization and the purposes of the FDCPA, and no relationship between a San Diego charity and a nationwide class of four million consumers.
Since the settlement gave the absent class members nothing of value, those class members could not be expected to give up anything of value, the court continued. However, the right to participate in a different class action had value—the objector’s suit proposed a much smaller class that, she claimed, could allow members to receive as much as $100 each.
“The fact that class members were required to give up anything at all in exchange for worthless injunctive relief precluded approval of the settlement as fair, reasonable, and adequate,” the court concluded.
Magistrate’s jurisdiction. Before considering whether the settlement should have been approved, the appellate court had to analyze whether the magistrate judge had the jurisdiction to make such a decision. Generally, a magistrate judge has the authority to conduct all of the proceedings in a suit and enter a final judgment if the parties agree, and they had agreed in this case. However, was the agreement of the four million absent class members necessary?
The three named class members could consent to the magistrate judge’s jurisdiction and bind the absent class members, the court decided. The relevant statute, 28 U.S.C. §636(c), apparently did not intend that absent class members were to be treated as parties, and the class action process allowed named class members to conduct the suit on behalf of absent class members.
Constitutional concerns remained, though. The National Association of Consumer Advocates, in a friend of the court brief, argued that magistrate judges could have jurisdiction under Article III only if all of the absent class members agreed. The appellate court was willing to accept that named class representatives could agree to a magistrate judge’s jurisdiction because their interests and those of the absent members would be the same and the named representatives could be expected to protect those interests adequately.
There might be a due process issue, the court conceded. However, that would apply only to whether the settlement could be enforced against the absent class members, not whether the magistrate judge could enter the judgment. Enforcement concerns were irrelevant because the approval of the settlement was being reversed, the court added.
The case is No. 13-56964.
This post previously appeared in the Banking and Finance Law Daily.
A settlement of a Fair Debt Collection Practices Act class action was not fair, reasonable, and adequate when it gave class members nothing of value but deprived them of the ability to participate in future class actions over the same conduct, the U.S. Court of Appeals for the Ninth Circuit has decided. While the three named class representatives each received $1,000—the maximum available statutory damages—the settlement gave four million other class members only the benefit of a worthless injunction, while preventing them from being members of any future class and from opting out of the settlement. Approving such a settlement was an abuse of discretion, the court said (Koby v. ARS National Services, Inc., Jan. 25, 2017, Watford, P.).
The class action claimed that debt collector ARS National Services had violated the FDCPA when its employees left voicemails that omitted required information—that they worked for ARS, that ARS was a debt collector, and that the call was an attempt to collect a debt. The proposed class included everyone in the United States who had received such an email, approximately four million consumers.
Settlement terms. ARS and the class representatives reached a settlement under which they would ask for the certification of a nationwide settlement-only class. The named class representatives would receive $1,000 each. The rest of the class members would receive no payment because ARS’s net worth was so small that the maximum award to the class would be $35,000—too little to be divided among four million people. Instead, $35,000 would be donated to a local charity.
No notice of any kind was to be sent to any of the four million class members, and none of them would be permitted to opt out of the class. Additionally, the class members would lose the right to participate in any future class actions that complained about the voicemails, although they could file individual suits.
The only benefit the absent class members would receive from the settlement was an injunction requiring ARS to use a revised voicemail that complied with the FDCPA. The injunction was to last for two years, and the company already had adopted the revised script.
A consumer who was the named representative in a separate class action addressing the same voicemails objected to the settlement, arguing that the lack of benefit to the class made the agreement unfair and unreasonable. The magistrate judge who was handling the case disagreed and approved the settlement.
Erroneous approval. The settlement should not have been approved because it was not fair, reasonable, and adequate, according to the appellate court. When a settlement is negotiated before a class is certified, the increased risk of collusion or conflicts of interest requires the court to look closely to be sure that settlement is fair. This settlement was not fair because “There is no evidence that the relief afforded by the settlement has any value to the class members, yet to obtain it they had to relinquish their right to seek damages in any other class action.”
The injunction was worthless to most of the class members, the court said. There was “an obvious mismatch” between the individuals who might benefit from the injunction and those who were included in the class—the injunction might help those whom ARS would contact in the future, but the class was defined only as those who had been contacted in the past. Even class members who might receive voicemails in the future received no real benefit, the court added, because the injunction merely required ARS to continue using a legal voicemail it already had chosen to use.
The cy pres award that would result in a $35,000 donation to a San Diego veterans’ organization did not convince the court that the settlement was acceptable. There was no evidence that any of the class members would benefit from the donation, no connection between the veterans’ organization and the purposes of the FDCPA, and no relationship between a San Diego charity and a nationwide class of four million consumers.
Since the settlement gave the absent class members nothing of value, those class members could not be expected to give up anything of value, the court continued. However, the right to participate in a different class action had value—the objector’s suit proposed a much smaller class that, she claimed, could allow members to receive as much as $100 each.
“The fact that class members were required to give up anything at all in exchange for worthless injunctive relief precluded approval of the settlement as fair, reasonable, and adequate,” the court concluded.
Magistrate’s jurisdiction. Before considering whether the settlement should have been approved, the appellate court had to analyze whether the magistrate judge had the jurisdiction to make such a decision. Generally, a magistrate judge has the authority to conduct all of the proceedings in a suit and enter a final judgment if the parties agree, and they had agreed in this case. However, was the agreement of the four million absent class members necessary?
The three named class members could consent to the magistrate judge’s jurisdiction and bind the absent class members, the court decided. The relevant statute, 28 U.S.C. §636(c), apparently did not intend that absent class members were to be treated as parties, and the class action process allowed named class members to conduct the suit on behalf of absent class members.
Constitutional concerns remained, though. The National Association of Consumer Advocates, in a friend of the court brief, argued that magistrate judges could have jurisdiction under Article III only if all of the absent class members agreed. The appellate court was willing to accept that named class representatives could agree to a magistrate judge’s jurisdiction because their interests and those of the absent members would be the same and the named representatives could be expected to protect those interests adequately.
There might be a due process issue, the court conceded. However, that would apply only to whether the settlement could be enforced against the absent class members, not whether the magistrate judge could enter the judgment. Enforcement concerns were irrelevant because the approval of the settlement was being reversed, the court added.
The case is No. 13-56964.
This post previously appeared in the Banking and Finance Law Daily.
Thursday, January 26, 2017
‘Runaround’ to homeowners seeking relief costs Citi subsidiaries $28.8 million
By Andrew A. Turner, J.D.
Mortgage servicers CitiFinancial Servicing and CitiMortgage, Inc. kept struggling homeowners in the dark about options to avoid foreclosure or burdened them with excessive paperwork demands in applying for foreclosure relief, according to findings in consent orders settling Consumer Financial Protection Bureau enforcement actions. “Citi’s subsidiaries gave the runaround to borrowers who were already struggling with their mortgage payments and trying to save their homes,” said CFPB Director Richard Cordray.
The CFPB is requiring CitiMortgage to pay an estimated $17 million to compensate wronged consumers, and to pay a civil penalty of $3 million; and is requiring CitiFinancial Services to refund approximately $4.4 million to consumers, and to pay a civil penalty of $4.4 million.
When borrowers applied to have their payments deferred, CitiFinancial Servicing failed to consider it as a request for foreclosure relief options and misled consumers about the impact of deferring payment due dates, according to the CFPB. As a result, borrowers may have missed out on options that may have been more appropriate for them, and more of the borrowers’ payment went to pay interest on the loan instead of principal when they resumed making payments.
The CFPB said borrowers seeking loss mitigation asking for assistance were sent a letter by CitiMortgage “demanding dozens of documents and forms that had no bearing on the application.” Documents were requested that were unrelated to the borrowers’ financial circumstances or that already had been provided.
Consent orders. Under the consent order, CitiFinancial Servicing must disclose the conditions of deferments for loans and stop supplying bad information to credit reporting companies. CitiMortgage agreed to identify documents consumers need when applying for foreclosure relief and to freeze any foreclosures related to the flawed application process. In addition, the company will reach out to these borrowers to determine if they want foreclosure relief options.
For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.
Mortgage servicers CitiFinancial Servicing and CitiMortgage, Inc. kept struggling homeowners in the dark about options to avoid foreclosure or burdened them with excessive paperwork demands in applying for foreclosure relief, according to findings in consent orders settling Consumer Financial Protection Bureau enforcement actions. “Citi’s subsidiaries gave the runaround to borrowers who were already struggling with their mortgage payments and trying to save their homes,” said CFPB Director Richard Cordray.
The CFPB is requiring CitiMortgage to pay an estimated $17 million to compensate wronged consumers, and to pay a civil penalty of $3 million; and is requiring CitiFinancial Services to refund approximately $4.4 million to consumers, and to pay a civil penalty of $4.4 million.
When borrowers applied to have their payments deferred, CitiFinancial Servicing failed to consider it as a request for foreclosure relief options and misled consumers about the impact of deferring payment due dates, according to the CFPB. As a result, borrowers may have missed out on options that may have been more appropriate for them, and more of the borrowers’ payment went to pay interest on the loan instead of principal when they resumed making payments.
The CFPB said borrowers seeking loss mitigation asking for assistance were sent a letter by CitiMortgage “demanding dozens of documents and forms that had no bearing on the application.” Documents were requested that were unrelated to the borrowers’ financial circumstances or that already had been provided.
Consent orders. Under the consent order, CitiFinancial Servicing must disclose the conditions of deferments for loans and stop supplying bad information to credit reporting companies. CitiMortgage agreed to identify documents consumers need when applying for foreclosure relief and to freeze any foreclosures related to the flawed application process. In addition, the company will reach out to these borrowers to determine if they want foreclosure relief options.
For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.
Wednesday, January 25, 2017
Western Union fined over AML violations, fraud charges
By J. Preston Carter, J.D., LL.M.
The Financial Crimes Enforcement Network has assessed a $184 million civil money penalty against Western Union Financial Services, Inc., based on FinCEN’s determination that Western Union willfully violated the Bank Secrecy Act’s anti-money laundering (AML) requirements by failing to implement and maintain an effective, risk-based AML program and by failing to file timely suspicious activity reports. FinCEN’s release adds that Western Union also entered into agreements with the Federal Trade Commission, Justice Department, and several U.S. Attorneys’ Offices. FinCEN will deem its penalty fully satisfied by Western Union’s payment to the Justice Department pursuant to the forfeiture order of $586 million for the victims of fraud.
FinCEN action. FinCEN stated that, as a result of Western Union’s willful AML violations, some of its money transmitter agents, which the company is said to have suspected of being involved in fraud and money laundering, were able to continue to use the company’s money transfer system to facilitate their illicit activity. This activity included the use of remittances to send narcotics proceeds to Mexico.
"This consent agreement with Western Union reflects that company’s recognition of past shortcomings and the damage that can be done when there is a failure of a culture of compliance," said FinCEN Acting Director Jamal El-Hindi. "Money transmitters, large and small, play a critical role in the movement of legitimate funds around that world, and they also are of vital assistance to FinCEN and law enforcement in thwarting illicit activity."
FTC charges. The FTC’s complaint alleges that Western Union violated the FTC Act and the Telemarketing Act. The complaint charges that for many years, "fraudsters around the world" have used Western Union’s money transfer system even though the company has long been aware of the problem, and that some Western Union agents have been complicit in fraud. The company agreed to settle FTC charges that it declined to put in place effective anti-fraud policies and procedures and has failed to act promptly against problem agents.
The U.S. Attorney’s office stated that "Our investigation uncovered hundreds of millions of dollars being sent to China in structured transactions designed to avoid the reporting requirements of the Bank Secrecy Act, and much of the money was sent to China by illegal immigrants to pay their human smugglers."
"Western Union owes a responsibility to American consumers to guard against fraud, but instead the company looked the other way, and its system facilitated scammers and rip-offs," said FTC Chairwoman Edith Ramirez. "The agreements we are announcing today will ensure Western Union changes the way it conducts its business and provides more than a half billion dollars for refunds to consumers who were harmed by the company’s unlawful behavior."
For more information about Bank Secrecy Act enforcement actions, subscribe to the Banking and Finance Law Daily.
Tuesday, January 24, 2017
Sue-and-be-sued clause doesn’t create federal jurisdiction over suits involving Fannie Mae
By Richard Roth
A federal law that says Fannie Mae has the power to sue and be sued “in any court of competent jurisdiction, State or Federal,” does not confer on federal courts subject matter jurisdiction over litigation simply because Fannie Mae is a party, the Supreme Court has unanimously decided. As a result, the government sponsored agency’s claim of federal question subject matter jurisdiction did not allow it to remove to federal court a state-court suit filed by homeowners seeking relief from what they claimed was an improper foreclosure (Lightfoot v. Cendant Mortgage Corp.).
Contesting a foreclosure. According to the Court’s opinion, a homeowner who was unable to keep up with her payments tried to avoid foreclosure, first by attempting to work out a forbearance agreement with the loan servicer and then using a bankruptcy court plan that involved transferring ownership to her daughter. These efforts failed, resulting in a trustee’s sale of the property.
After two failed federal court suits, the homeowners sued in state court on claims that deficiencies in the financing, foreclosure, and sale imposed liability on Fannie Mae, which had purchased the loan from the original creditor. Fannie Mae removed the suit to federal court, and the federal court judge dismissed it due to the two earlier suits.
On appeal, a two-judge majority of a U.S. Court of Appeals for the Ninth Circuit panel affirmed the dismissal. In doing so, the panel considered the federal question jurisdiction issue and decided that the sue-and-be-sued clause conferred jurisdiction. However, the dissenting judge argued that was not the case and there was no federal court jurisdiction (Lightfoot v. Cendant Mortgage Corp.).
Issue on appeal. At the Nov. 8, 2016, oral arguments, the homeowner’s attorney described their position as being that a court of competent jurisdiction is a court that has “an independent source of subject matter jurisdiction.” That independent source would be the law that created the court and described its jurisdiction.
The argument in favor of jurisdiction, offered by the mortgage loan servicer, was that under American Nat. Red Cross v. S.G., 505 U.S. 247 (1992) the explicit reference to federal courts showed that Congress was granting jurisdiction to those courts.
No grant of jurisdiction. According to the Court, the sue-and-be-sued language of 12 U.S.C. §1723a(a) addresses Fannie Mae’s corporate capacity to participate in litigation. Including the phrase “any court of competent jurisdiction, State or Federal,” is not a grant of subject matter jurisdiction; rather, it permits a suit in any court that already has subject matter jurisdiction, as argued by the homeowners and the government, which appeared as amicus curiae.
The Court noted that the effect of sue-and-be-sued clauses in federal charters had been considered on five previous occasions. Three of the clauses were determined to have conferred jurisdiction on the federal courts, while the other two did not. Red Cross was the most recent of the five cases and the decision was in favor of jurisdiction.
The explicit mention of federal courts in the Fannie Mae clause supported the argument in favor of jurisdiction, the opinion said. However, the Fannie Mae clause fell short of the three clauses that were said to confer jurisdiction because it included the restriction “any court of competent jurisdiction.” The three clauses that conferred jurisdiction on federal courts did not include such a qualification.
“Court of competent jurisdiction” refers to a court that has “an existing source of subject-matter jurisdiction,” the opinion said. Fannie Mae’s chartering law, which included the sue-and-be-sued clause, did not provide jurisdiction. Red Cross did not establish a rule that explicit reference to federal courts was enough to confer jurisdiction, the opinion added.
Counter-arguments rejected. The Court also considered and rejected three arguments offered by Fannie Mae in favor of federal court jurisdiction.
First, Fannie Mae asserted that “court of competent jurisdiction” had a special meaning, referring to a court that had personal jurisdiction over the parties, was the proper venue, or was a court of general rather than special jurisdiction. The phrase did not mean that jurisdiction had to arise from some other law.
This amounted to another attempt to rely on the theory that Red Cross said reference to federal courts automatically conferred jurisdiction, the Court said. Moreover, even if “court of competent jurisdiction” did mean something more than a court with an independent jurisdiction source, Fannie Mae’s argument was not advanced. The examples cited always were required for a court to hear a case.
Second, the GSE claimed that at the time its charter was enacted by Congress, “court of competent jurisdiction” already had a settled meaning of conferring jurisdiction. Congress had relied on those previous interpretations. However, the Court rejected the precedents as being insufficiently authoritative or not addressing the issue.
Third, Fannie Mae noted that its sibling GSE, Freddie Mac, clearly could invoke federal question jurisdiction whenever it was involved in litigation. Congress would not have intended the two GSEs to have different levels of access to the federal courts.
The Court was unconvinced. The laws governing Freddie Mac use different language that explicitly gives Freddie Mac the authority to sue in federal courts or remove suits when it is the defendant. There was a plausible reason why Congress would have put the two GSEs in different positions, the opinion added--Freddie Mac was a government-owned company when its jurisdictional provisions were enacted, while Fannie Mae had become a privately-owned company.
In cases where federal court jurisdiction existed due to diversity of citizenship or the existence of a federal question, Fannie Mae had access to the federal courts, the opinion noted. There was no reason to believe that allowing Freddie Mac, but not Fannie Mae, the ability to move state-law cases to federal court gave Freddie Mac a competitive advantage that Congress would have thought to avoid.
For more information about federal housing entities, subscribe to the Banking and Finance Law Daily.
A federal law that says Fannie Mae has the power to sue and be sued “in any court of competent jurisdiction, State or Federal,” does not confer on federal courts subject matter jurisdiction over litigation simply because Fannie Mae is a party, the Supreme Court has unanimously decided. As a result, the government sponsored agency’s claim of federal question subject matter jurisdiction did not allow it to remove to federal court a state-court suit filed by homeowners seeking relief from what they claimed was an improper foreclosure (Lightfoot v. Cendant Mortgage Corp.).
Contesting a foreclosure. According to the Court’s opinion, a homeowner who was unable to keep up with her payments tried to avoid foreclosure, first by attempting to work out a forbearance agreement with the loan servicer and then using a bankruptcy court plan that involved transferring ownership to her daughter. These efforts failed, resulting in a trustee’s sale of the property.
After two failed federal court suits, the homeowners sued in state court on claims that deficiencies in the financing, foreclosure, and sale imposed liability on Fannie Mae, which had purchased the loan from the original creditor. Fannie Mae removed the suit to federal court, and the federal court judge dismissed it due to the two earlier suits.
On appeal, a two-judge majority of a U.S. Court of Appeals for the Ninth Circuit panel affirmed the dismissal. In doing so, the panel considered the federal question jurisdiction issue and decided that the sue-and-be-sued clause conferred jurisdiction. However, the dissenting judge argued that was not the case and there was no federal court jurisdiction (Lightfoot v. Cendant Mortgage Corp.).
Issue on appeal. At the Nov. 8, 2016, oral arguments, the homeowner’s attorney described their position as being that a court of competent jurisdiction is a court that has “an independent source of subject matter jurisdiction.” That independent source would be the law that created the court and described its jurisdiction.
The argument in favor of jurisdiction, offered by the mortgage loan servicer, was that under American Nat. Red Cross v. S.G., 505 U.S. 247 (1992) the explicit reference to federal courts showed that Congress was granting jurisdiction to those courts.
No grant of jurisdiction. According to the Court, the sue-and-be-sued language of 12 U.S.C. §1723a(a) addresses Fannie Mae’s corporate capacity to participate in litigation. Including the phrase “any court of competent jurisdiction, State or Federal,” is not a grant of subject matter jurisdiction; rather, it permits a suit in any court that already has subject matter jurisdiction, as argued by the homeowners and the government, which appeared as amicus curiae.
The Court noted that the effect of sue-and-be-sued clauses in federal charters had been considered on five previous occasions. Three of the clauses were determined to have conferred jurisdiction on the federal courts, while the other two did not. Red Cross was the most recent of the five cases and the decision was in favor of jurisdiction.
The explicit mention of federal courts in the Fannie Mae clause supported the argument in favor of jurisdiction, the opinion said. However, the Fannie Mae clause fell short of the three clauses that were said to confer jurisdiction because it included the restriction “any court of competent jurisdiction.” The three clauses that conferred jurisdiction on federal courts did not include such a qualification.
“Court of competent jurisdiction” refers to a court that has “an existing source of subject-matter jurisdiction,” the opinion said. Fannie Mae’s chartering law, which included the sue-and-be-sued clause, did not provide jurisdiction. Red Cross did not establish a rule that explicit reference to federal courts was enough to confer jurisdiction, the opinion added.
Counter-arguments rejected. The Court also considered and rejected three arguments offered by Fannie Mae in favor of federal court jurisdiction.
First, Fannie Mae asserted that “court of competent jurisdiction” had a special meaning, referring to a court that had personal jurisdiction over the parties, was the proper venue, or was a court of general rather than special jurisdiction. The phrase did not mean that jurisdiction had to arise from some other law.
This amounted to another attempt to rely on the theory that Red Cross said reference to federal courts automatically conferred jurisdiction, the Court said. Moreover, even if “court of competent jurisdiction” did mean something more than a court with an independent jurisdiction source, Fannie Mae’s argument was not advanced. The examples cited always were required for a court to hear a case.
Second, the GSE claimed that at the time its charter was enacted by Congress, “court of competent jurisdiction” already had a settled meaning of conferring jurisdiction. Congress had relied on those previous interpretations. However, the Court rejected the precedents as being insufficiently authoritative or not addressing the issue.
Third, Fannie Mae noted that its sibling GSE, Freddie Mac, clearly could invoke federal question jurisdiction whenever it was involved in litigation. Congress would not have intended the two GSEs to have different levels of access to the federal courts.
The Court was unconvinced. The laws governing Freddie Mac use different language that explicitly gives Freddie Mac the authority to sue in federal courts or remove suits when it is the defendant. There was a plausible reason why Congress would have put the two GSEs in different positions, the opinion added--Freddie Mac was a government-owned company when its jurisdictional provisions were enacted, while Fannie Mae had become a privately-owned company.
In cases where federal court jurisdiction existed due to diversity of citizenship or the existence of a federal question, Fannie Mae had access to the federal courts, the opinion noted. There was no reason to believe that allowing Freddie Mac, but not Fannie Mae, the ability to move state-law cases to federal court gave Freddie Mac a competitive advantage that Congress would have thought to avoid.
For more information about federal housing entities, subscribe to the Banking and Finance Law Daily.
Monday, January 23, 2017
CFPB sues student loan company for failing borrowers at ‘every stage’
By Stephanie K. Mann, J.D.
The Consumer Financial Protection Bureau is taking a stand against the nation’s largest servicer of both federal and private student loans. The bureau is alleging that Navient systemically and illegally failed borrowers at every stage of repayment by creating obstacles to repayment, providing bad information, processing payments incorrectly, and failing to act when borrowers complained. According to the complaint, the company is also said to have “cheated” many borrowers out of their rights to lower repayments, causing them to pay much more than they had to for their loans. The CFPB is seeking to recover significant relief for the borrowers harmed by these illegal servicing failures.
Formerly part of Sallie Mae, Inc., Navient is the largest student loan servicer in the United States. It services the loans of more than 12 million borrowers, including more than 6 million accounts under its contract with the Department of Education. Altogether, it services more than $300 billion in federal and private student loans. The CFPB has named in its suit Navient Corporation and two of its subsidiaries: Navient Solutions, a division responsible for loan servicing operations; and Pioneer Credit Recovery, which specializes in the collection of defaulted student loans.
Allegations. Specifically, among the allegations in the CFPB’s complaint, the bureau charges that Navient:
The Consumer Financial Protection Bureau is taking a stand against the nation’s largest servicer of both federal and private student loans. The bureau is alleging that Navient systemically and illegally failed borrowers at every stage of repayment by creating obstacles to repayment, providing bad information, processing payments incorrectly, and failing to act when borrowers complained. According to the complaint, the company is also said to have “cheated” many borrowers out of their rights to lower repayments, causing them to pay much more than they had to for their loans. The CFPB is seeking to recover significant relief for the borrowers harmed by these illegal servicing failures.
Formerly part of Sallie Mae, Inc., Navient is the largest student loan servicer in the United States. It services the loans of more than 12 million borrowers, including more than 6 million accounts under its contract with the Department of Education. Altogether, it services more than $300 billion in federal and private student loans. The CFPB has named in its suit Navient Corporation and two of its subsidiaries: Navient Solutions, a division responsible for loan servicing operations; and Pioneer Credit Recovery, which specializes in the collection of defaulted student loans.
Allegations. Specifically, among the allegations in the CFPB’s complaint, the bureau charges that Navient:
- Fails to correctly apply or allocate borrower payments to their accounts: As soon as a borrower begins to pay back their loans, student loan servicers are supposed to take a borrower’s payment and follow instructions from the borrower about how to apply it across their multiple loans. Navient repeatedly misapplies or misallocates payments—often making the same error multiple times over many months.
- Steers struggling borrowers toward paying more than they have to on loans: When borrowers run into trouble repaying their federal student loans, they have a right under federal law to apply for repayment plans that allow for a lower monthly payment. However, the complaint alleges that Navient steers many borrowers into forbearance, an option designed to let borrowers take a short break from making payments. But interest continues to add up during forbearance. Certain consumers with subsidized loans end up paying a heavy price because they could have potentially avoided those interest charges.
- Obscured information consumers needed to maintain their lower payments: Borrowers who successfully enroll in an income-driven repayment plan need to recertify their income and family size annually. But Navient’s annual renewal notice sent to borrowers failed to adequately inform them of critical deadlines or the consequences if they failed to act. Many borrowers did not renew their enrollment on time and they lost their affordable monthly payments, which could have caused their monthly payments to jump by hundreds or even thousands of dollars. When that happens, accrued interest is added to the borrower’s principal balance, and these borrowers may have lost other protections, including interest subsidies and progress toward loan forgiveness.
- Deceived private student loan borrowers about requirements to release their co-signer from the loan: Navient told borrowers that they could apply for co-signer release if they made a certain number of consecutive, on-time payments. Even though it permits borrowers to prepay monthly installments in advance and tells customers who do prepay that they can skip upcoming payments, when borrowers did so, Navient reset the counter on the number of consecutive payments they made to zero.
- Harmed the credit of disabled borrowers, including severely injured veterans: Student loan payments are reported to credit reporting companies. Severely and permanently disabled borrowers with federal student loans, including veterans whose disability is connected to their military service, have a right to seek loan forgiveness under the federal Total and Permanent Disability discharge program. Navient misreported to the credit reporting companies that borrowers who had their loans discharged under this program had defaulted on their loans when they had not.
The bureau also alleges that Navient, through its subsidiary Pioneer, made illegal misrepresentations relating to the federal loan rehabilitation program available to defaulted borrowers. Pioneer misrepresented the effect of completing the federal loan rehabilitation program by falsely stating or implying that doing so would remove all adverse information about the defaulted loan from the borrower’s credit report. Pioneer also misrepresented the collection fees that would be forgiven upon completion of the program, said the complaint.
Cordray’s remarks. In prepared remarks at a press call regarding the bureau’s most recent enforcement action, CFPB Director Richard Cordray highlighted the critical role that student loan servicers play in managing borrower’s loans. “They are the link between the borrower and the owner of the loan.” He continued saying, “They communicate directly with borrowers, collect and apply payments, and can help work out modifications to the loan terms.” This is especially important because consumers cannot easily take their business elsewhere. Instead, they are simply stuck with their student loan servicer, whether they are being treated well or poorly.
Cordray said the bureau’s investigation found that Navient has failed to follow the law and caused borrowers needless anxiety and aggravation. “Borrowers and the CFPB have reason to expect better from the nation’s largest student loan servicer,” concluded Cordray.
For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.
Cordray’s remarks. In prepared remarks at a press call regarding the bureau’s most recent enforcement action, CFPB Director Richard Cordray highlighted the critical role that student loan servicers play in managing borrower’s loans. “They are the link between the borrower and the owner of the loan.” He continued saying, “They communicate directly with borrowers, collect and apply payments, and can help work out modifications to the loan terms.” This is especially important because consumers cannot easily take their business elsewhere. Instead, they are simply stuck with their student loan servicer, whether they are being treated well or poorly.
Cordray said the bureau’s investigation found that Navient has failed to follow the law and caused borrowers needless anxiety and aggravation. “Borrowers and the CFPB have reason to expect better from the nation’s largest student loan servicer,” concluded Cordray.
For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.
Tuesday, January 17, 2017
Supreme Court hears arguments on constitutionality of New York law banning credit card surcharges
By Thomas G. Wolfe, J.D.
Recently, the U.S. Supreme Court, in Expressions Hair Design v. Schneiderman, heard competing arguments about whether a New York law that prohibits the imposition of surcharges on customers who use credit cards but allows “discounts” for customers who use cash is an unconstitutional abridgment of the First Amendment’s guarantee of free speech.
In the underlying case, the U.S. Court of Appeals for the Second Circuit ruled that New York’s credit card “no surcharge” law does not violate the First Amendment because the state law is directed more toward price regulation and conduct than toward “speech” and does not regulate speech as applied to “single-sticker-price” sellers.
New York law. Among other things, New York’s credit card “no surcharge” law provides that “[n]o seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means.”
Petitioners. At the outset of the oral argument, on behalf of the petitioning New York merchants who are challenging the state law, attorney Deepak Gupta clarified that one of the merchants has engaged in “dual pricing”—charging one price for cash and another price for credit. That merchant focuses on communicating only the cash discount to comply with New York’s “no surcharge” law, Gupta related. The other merchants have refrained from dual pricing altogether because they don’t want to run the risk of “failing to comply with this regime.”
“As applied” challenge. During questioning by the Justices, Gupta emphasized that the merchants “want to engage in truthful speech. They want to disclose more.” However, some of the Justices questioned the anchor for the constitutional challenge, given the language of the New York law.
For instance, Justice Breyer maintained that the statute states only that a merchant “can’t charge a surcharge” for credit and is silent about any cash discount. Similarly, Justice Sotomayor commented, “I just don’t see anything about speech in the statute.” Later, Justice Kagan remarked that Gupta’s stance placed a lot of emphasis “on a few cases in which prosecutors describe the law in a certain way,” but that the New York law, “as written, doesn’t really do any of the things that you’re saying.” Further, Justice Alito indicated he was not entirely comfortable about ruling on the state law’s constitutionality without knowing how New York’s highest court would interpret the statute.
In response, Gupta emphasized that the merchants were raising an “as applied” constitutional challenge, which focuses on how the law has been applied and on the way the law has been enforced by New York officials. He also pointed out that the state law provides a criminal penalty for its violation.
In response to Justice Breyer’s comment that, on its face, the state law appeared to be “a form of price regulation,” Gupta asserted that New York officials told various merchants that they didn’t need to change what they charged but needed to change what they said. According to Gupta, “that’s not price regulation. That’s the regulation of how prices are communicated.”
Assistant Solicitor General. Next, Eric Feigin, Assistant to the Solicitor General, spoke as amicus curiae on behalf of the United States. Feigin suggested that the Court analyze the case by consulting precedents on “speech regulation.” He also suggested that the Court use the former federal law on credit card surcharges as a makeshift “baseline” for discussing the issue.
Notably, Feigin ultimately recommended that the Court remand the case to the Second Circuit “and allow for the New York Court of Appeals to have a definitive interpretation of the law, because there's clearly some dispute about what the New York law does.”
Price regulation. On behalf of the Attorney General of New York, Steven Wu, Deputy Solicitor General of New York, argued that the “plain text of New York's statute refers only to a pricing practice and not to any speech.”
In an exchange with Wu, Justice Alito expressed his concern about the fact that individual attorneys general or district attorneys in New York could arrive at different interpretations of the law’s prohibition against credit card surcharges. In addition, Justice Kagan remarked that New York’s “enforcement history” of the state law appeared to be at odds with Wu’s argument that as long as a merchant’s listed price is the credit card price, the merchant’s cashier “can call it whatever she wants.”
In response to Wu’s statement that the case involved “direct price regulation” that was not subject to First Amendment scrutiny, Justice Ginsburg commented that the New York law “doesn't set any price at all. It lets the merchant set the price. And the question is how that price is described.”
After further questioning by the Justices about hypothetical pricing scenarios and how the state law would be engaged in those scenarios, Justice Kennedy wondered whether these “complicated” pricing schemes might support the notion that the New York law is too vague. Wu disagreed, contending that the state law would withstand a “vagueness” challenge under the Due Process Clause.
In an exchange with Justice Kagan, Wu indicated that a “dual pricing scheme” would be legal under the state statute. Kagan noted that the Second Circuit had “abstained” from deciding that issue.
Rebuttal. In his rebuttal, Gupta underscored that the case involved a “criminal speech restriction.” According to Gupta, while a typical governmental “disclosure regime” tells a merchant “precisely what to say,” serious constitutional issues arise in the New York law’s situation because the governmental disclosure regime “does not tell the merchant precisely what to say.” Further, Gupta queried whether the cost of credit card usage was being suppressed as part of the law’s mix.
For more information about the interpretation of state laws governing credit cards, subscribe to the Banking and Finance Law Daily.
Recently, the U.S. Supreme Court, in Expressions Hair Design v. Schneiderman, heard competing arguments about whether a New York law that prohibits the imposition of surcharges on customers who use credit cards but allows “discounts” for customers who use cash is an unconstitutional abridgment of the First Amendment’s guarantee of free speech.
In the underlying case, the U.S. Court of Appeals for the Second Circuit ruled that New York’s credit card “no surcharge” law does not violate the First Amendment because the state law is directed more toward price regulation and conduct than toward “speech” and does not regulate speech as applied to “single-sticker-price” sellers.
New York law. Among other things, New York’s credit card “no surcharge” law provides that “[n]o seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means.”
Petitioners. At the outset of the oral argument, on behalf of the petitioning New York merchants who are challenging the state law, attorney Deepak Gupta clarified that one of the merchants has engaged in “dual pricing”—charging one price for cash and another price for credit. That merchant focuses on communicating only the cash discount to comply with New York’s “no surcharge” law, Gupta related. The other merchants have refrained from dual pricing altogether because they don’t want to run the risk of “failing to comply with this regime.”
“As applied” challenge. During questioning by the Justices, Gupta emphasized that the merchants “want to engage in truthful speech. They want to disclose more.” However, some of the Justices questioned the anchor for the constitutional challenge, given the language of the New York law.
For instance, Justice Breyer maintained that the statute states only that a merchant “can’t charge a surcharge” for credit and is silent about any cash discount. Similarly, Justice Sotomayor commented, “I just don’t see anything about speech in the statute.” Later, Justice Kagan remarked that Gupta’s stance placed a lot of emphasis “on a few cases in which prosecutors describe the law in a certain way,” but that the New York law, “as written, doesn’t really do any of the things that you’re saying.” Further, Justice Alito indicated he was not entirely comfortable about ruling on the state law’s constitutionality without knowing how New York’s highest court would interpret the statute.
In response, Gupta emphasized that the merchants were raising an “as applied” constitutional challenge, which focuses on how the law has been applied and on the way the law has been enforced by New York officials. He also pointed out that the state law provides a criminal penalty for its violation.
In response to Justice Breyer’s comment that, on its face, the state law appeared to be “a form of price regulation,” Gupta asserted that New York officials told various merchants that they didn’t need to change what they charged but needed to change what they said. According to Gupta, “that’s not price regulation. That’s the regulation of how prices are communicated.”
Assistant Solicitor General. Next, Eric Feigin, Assistant to the Solicitor General, spoke as amicus curiae on behalf of the United States. Feigin suggested that the Court analyze the case by consulting precedents on “speech regulation.” He also suggested that the Court use the former federal law on credit card surcharges as a makeshift “baseline” for discussing the issue.
Notably, Feigin ultimately recommended that the Court remand the case to the Second Circuit “and allow for the New York Court of Appeals to have a definitive interpretation of the law, because there's clearly some dispute about what the New York law does.”
Price regulation. On behalf of the Attorney General of New York, Steven Wu, Deputy Solicitor General of New York, argued that the “plain text of New York's statute refers only to a pricing practice and not to any speech.”
In an exchange with Wu, Justice Alito expressed his concern about the fact that individual attorneys general or district attorneys in New York could arrive at different interpretations of the law’s prohibition against credit card surcharges. In addition, Justice Kagan remarked that New York’s “enforcement history” of the state law appeared to be at odds with Wu’s argument that as long as a merchant’s listed price is the credit card price, the merchant’s cashier “can call it whatever she wants.”
In response to Wu’s statement that the case involved “direct price regulation” that was not subject to First Amendment scrutiny, Justice Ginsburg commented that the New York law “doesn't set any price at all. It lets the merchant set the price. And the question is how that price is described.”
After further questioning by the Justices about hypothetical pricing scenarios and how the state law would be engaged in those scenarios, Justice Kennedy wondered whether these “complicated” pricing schemes might support the notion that the New York law is too vague. Wu disagreed, contending that the state law would withstand a “vagueness” challenge under the Due Process Clause.
In an exchange with Justice Kagan, Wu indicated that a “dual pricing scheme” would be legal under the state statute. Kagan noted that the Second Circuit had “abstained” from deciding that issue.
Rebuttal. In his rebuttal, Gupta underscored that the case involved a “criminal speech restriction.” According to Gupta, while a typical governmental “disclosure regime” tells a merchant “precisely what to say,” serious constitutional issues arise in the New York law’s situation because the governmental disclosure regime “does not tell the merchant precisely what to say.” Further, Gupta queried whether the cost of credit card usage was being suppressed as part of the law’s mix.
For more information about the interpretation of state laws governing credit cards, subscribe to the Banking and Finance Law Daily.
Friday, January 13, 2017
CFPB survey finds over 27 percent of consumers feel threatened by debt collectors
By Stephanie K. Mann, J.D.
A Consumer Financial Protection Bureau report found that over one-in-four consumers contacted by debt collectors feel threatened by the interaction. The report was drawn from the first-ever national survey of consumer experiences with debt collectors in which over 40 percent of consumers who said they were approached about a debt in collection requested that a creditor or collector stop contacting them. Of these consumers, three-in-four report that debt collectors did not honor their request to cease contact. The CFPB also released a study of potential risks in the online debt marketplace, where consumer debts and personal information are for sale for fractions of pennies on the dollar. Finally, the CFPB is unveiling an online series of consumers’ stories about their debt collection experiences.
"The Bureau today casts light on troubling problems in the debt collection industry," said CFPB Director Rich Cordray. "More than one-in-four consumers report feeling threatened by a debt collector, and a majority of those contacted about debt say the calls persist even after requests to stop. The Bureau is working to clean up abuses in this industry, and to see that all consumers are treated with fairness, decency, and respect."
Survey results. The CFPB survey provides an in-depth analysis of consumers’ encounters with the debt collection industry. The national survey is part of an ongoing CFPB effort to explore industry practices and consumer experiences with debt collectors. Consumers were asked about their encounters with debt collectors for loans and unpaid bills. Questions included whether consumers had been contacted by debt collectors in the past year, how frequently, and the nature of the debt.
According to the debt collection survey, about one-third of consumers—more than 70 million Americans—were contacted by a creditor or debt collector about a debt in the previous 12 months. Consumers are most often contacted about medical and credit card debt.
Collection stories. To illustrate consumers’ experiences with debt collection, the CFPB is sharing personal debt collection stories from consumers in an ongoing effort to highlight issues in the debt collection marketplace and to inform consumers about their rights.
Online debt sales market. In order to better inform public understanding of the debt collection industry, the bureau is also releasing a white paper highlighting potential risks to consumers’ personal information posed by debt sales online. Many debts sold in online marketplaces come with sensitive personal information attached, and are easily available at extremely low prices. The report raises questions about protections for that information and the dangers of it falling into the wrong hands.
Blog post. In the accompanying blog post, the CFPB emphasized that "you are not alone." In the United States, debt collection is a $13.7 billion dollar industry with more than 6,000 debt collection firms operating in the United States, said the post. Debt collection affects 70 million consumers who have or are contacted about a debt in collection. To date, the CFPB has published more than 129,000 debt collection complaints in its Consumer Complaint Database.
For more information about the study, subscribe to the Banking and Finance Law Daily.
A Consumer Financial Protection Bureau report found that over one-in-four consumers contacted by debt collectors feel threatened by the interaction. The report was drawn from the first-ever national survey of consumer experiences with debt collectors in which over 40 percent of consumers who said they were approached about a debt in collection requested that a creditor or collector stop contacting them. Of these consumers, three-in-four report that debt collectors did not honor their request to cease contact. The CFPB also released a study of potential risks in the online debt marketplace, where consumer debts and personal information are for sale for fractions of pennies on the dollar. Finally, the CFPB is unveiling an online series of consumers’ stories about their debt collection experiences.
"The Bureau today casts light on troubling problems in the debt collection industry," said CFPB Director Rich Cordray. "More than one-in-four consumers report feeling threatened by a debt collector, and a majority of those contacted about debt say the calls persist even after requests to stop. The Bureau is working to clean up abuses in this industry, and to see that all consumers are treated with fairness, decency, and respect."
Survey results. The CFPB survey provides an in-depth analysis of consumers’ encounters with the debt collection industry. The national survey is part of an ongoing CFPB effort to explore industry practices and consumer experiences with debt collectors. Consumers were asked about their encounters with debt collectors for loans and unpaid bills. Questions included whether consumers had been contacted by debt collectors in the past year, how frequently, and the nature of the debt.
According to the debt collection survey, about one-third of consumers—more than 70 million Americans—were contacted by a creditor or debt collector about a debt in the previous 12 months. Consumers are most often contacted about medical and credit card debt.
Collection stories. To illustrate consumers’ experiences with debt collection, the CFPB is sharing personal debt collection stories from consumers in an ongoing effort to highlight issues in the debt collection marketplace and to inform consumers about their rights.
Online debt sales market. In order to better inform public understanding of the debt collection industry, the bureau is also releasing a white paper highlighting potential risks to consumers’ personal information posed by debt sales online. Many debts sold in online marketplaces come with sensitive personal information attached, and are easily available at extremely low prices. The report raises questions about protections for that information and the dangers of it falling into the wrong hands.
Blog post. In the accompanying blog post, the CFPB emphasized that "you are not alone." In the United States, debt collection is a $13.7 billion dollar industry with more than 6,000 debt collection firms operating in the United States, said the post. Debt collection affects 70 million consumers who have or are contacted about a debt in collection. To date, the CFPB has published more than 129,000 debt collection complaints in its Consumer Complaint Database.
For more information about the study, subscribe to the Banking and Finance Law Daily.
Thursday, January 12, 2017
New York Governor Cuomo proposes comprehensive consumer financial protections
By Charles A. Menke, J.D.
For more information about state regulation of financial services, subscribe to the Banking and Finance Law Daily.
New York Governor Andrew C. Cuomo used his 2017 regional state of the state addresses to unveil a series of proposals targeting cybercrime, elder financial abuse, and misconduct in the financial services industries. Cuomo proposed a comprehensive package of new legislation, as well as additional regulatory programs and oversight.
Cybercrime. Cuomo’s fourth proposal of his state of the state addresses seeks to better protect New York residents and government entities from cyber-attack threats through the strengthening and modernization of cybercrime and identity theft laws. “This proposal will give police and prosecutors the authority and the tools they need to bring cyber thieves to justice and protect New Yorkers,” he said.
Cuomo proposed a three-pronged approach to strengthen the state’s cybercrime penalties, including:
- gradating cybercrimes to ensure that the penalties reflect their severity, such as creating a new Class B felony to punish those responsible for causing over $1 million in damage by computer tampering;
- updating current identity theft laws to address mass-identity theft through gradated criminal punishments ranging from an A misdemeanor to a D felony, and expanding aggravated identity theft protections to other vulnerable groups outside of military service members, such as seniors and the mentally and physically disabled; and
- expanding computer intrusion laws to better protect private citizens.
Cuomo also directed the state’s Division of Homeland Security and Emergency Services to establish a Cyber Incident Response Team within the office of Counter Terrorism. According to Cuomo, the team will serve as a go-to resource for non-executive agencies, local governments, and public authorities in how to better protect their information technology assets, critical operating systems and data from cyberattacks, malware, and ransomware.
Elder financial abuse. In his fifth proposal of the addresses, Cuomo submitted a comprehensive plan aimed at better protecting senior citizens in the state from financial exploitation and foreclosure. The plan includes amending New York’s banking law to empower banks to place holds on potentially fraudulent transactions.
Cuomo also requested strengthening legislation to protect senior homeowners with reverse mortgages. He further stated that he intends to direct the Department of Financial Services (DFS) to revisit and revise any rules and regulations pertaining to reverse mortgages.
In addition, Cuomo proposed the creation of an Elder Abuse Certification Program for banks located in the state. According to the Governor, the DFS will design the program, which will include training bank employees on how to recognize the signs of financial abuse.
Financial industry misconduct. The Governor’s sixth proposal of the addresses aims to further protect consumers from egregious and deceptive behavior in the financial services industry. Cuomo proposed new legislation empowering the DFS to ban individuals from the financial services industry if it is determined that they have engaged in conduct that directly bears on their fitness or ability to continue participating in the industry. The proposal builds upon guidance previously issued by the DFS after the Wells Fargo scandal where bank employees secretly opened new accounts and funded them with transfers from existing ones without the knowledge or consent of the account holder.
Wednesday, January 11, 2017
Tribal immunity test set by California high court
By J. Preston Carter, J.D., LL.M.
For more information about payday lenders, subscribe to the Banking and Finance Law Daily.
California payday lenders’ affiliation with federally recognized Indian tribes was insufficient to entitle them to the tribes’ sovereign immunity from complying with state licensing and consumer protection laws, the Supreme Court of California determined. The California high court set out a five-part analysis for determining when affiliated entities are rightfully entitled to a tribe’s sovereign immunity (The People ex rel. Jan Lynn Owen v. Miami Nation Enterprises, Dec. 22, 2016, Liu, G.).
"This ruling is an important win for California’s payday loan consumers," said the California Department of Business Oversight (DBO) Commissioner Jan Lynn Owen. "It strengthens our ability to enforce laws prohibiting excessive fees and unlicensed activity by denying payday lenders’ ability to inappropriately use tribes’ sovereign immunity to avoid complying with state law."
Affiliated payday lending entities. The Miami Tribe of Oklahoma and Santee Sioux Nation of Nebraska had formed affiliated payday lending entities that did business in California. Those entities contracted with a private firm run by brothers Scott and Blaine Tucker to operate the payday lending businesses. The businesses operated under the following names: Ameriloan, United Cash Loans, U.S. Fast Cash, Preferred Cash, and One Click Cash.
In 2006, the DBO issued an order against the five payday lending entities to stop them from engaging in unlicensed activity. After the businesses ignored the order, the DBO filed suit alleging that the businesses were violating several provisions of the state’s payday lending statute, the California Deferred Deposit Transaction Law (Fin. Code, § 23000 et seq.). The alleged violations included: charging unlawfully high fees, with some APRs reaching 845 percent; making transactions that exceeded the $300 statutory cap; using threats and harassment to collect payments; and unlicensed activity.
Lower court decision. The state Court of Appeal found in favor of immunity. Although the Tuckers signed all the businesses’ checks, and the tribes exercised little or no control over the day-to-day operations, the court concluded that, "Absent an extraordinary set of circumstances not present here, a tribal entity functions as an arm of the tribe if it has been formed by tribal resolution and according to tribal law, for the stated purpose of tribal economic development and with the clearly expressed intent by the sovereign tribe to convey its immunity to that entity, and has a governing structure both appointed by and ultimately overseen by the tribe."
High court response. The high court determined that the lower court gave "inordinate weight" to formal considerations. Here, the court continued, the language of the management agreements is not, by itself, sufficient to warrant the lower court’s conclusion that the lending entities "are not merely passive bystanders to the challenged lending activities."
Test for immunity. The high court said the main legal question in the case is how to determine whether a tribally affiliated entity shares in a tribe‘s immunity from suit. It concluded that an entity asserting immunity bears the burden of showing by a preponderance of the evidence that it is an "arm of the tribe" entitled to tribal immunity. In making that determination, courts should apply a five-factor test that considers (1) the entity‘s method of creation, (2) whether the tribe intended the entity to share in its immunity, (3) the entity‘s purpose, (4) the tribe‘s control over the entity, and (5) the financial relationship between the tribe and the entity.
Applying those five factors, the court held that the affiliated lending entities did not show that they were entitled to tribal immunity as an arm of its affiliated tribe. "Having clarified the legal standard and burden of proof for establishing arm-of-the-tribe immunity," the court concluded, "we express no view on whether the parties have had the opportunity to fully litigate their claims under that standard. The trial court may examine that issue on remand."
For more information about payday lenders, subscribe to the Banking and Finance Law Daily.
Tuesday, January 10, 2017
Rescission not available for purchase money mortgage, homeowners told
By Richard Roth, J.D.
Homeowners could not invoke the Truth in Lending Act to rescind a mortgage loan because the loan was a residential mortgage transaction that was exempt from TILA’s rescission provisions, according to the U.S. Court of Appeals for the Eighth Circuit. A document attached to the homeowners’ complaint and another presented by the creditor made clear the loan had funded the purchase of the home, which made it an exempt residential mortgage transaction (Dunn v. Bank of America N.A.).
The loan was consummated on Oct. 5, 2009. In a rescission demand dated more than 16 months later, the homeowners claimed they had not been given the notice of their right to cancel that was required by TILA and Reg. Z—Truth in Lending (12 CFR Part 1026). After a later foreclosure, they sued both the original lender, Bank of America, and the foreclosing creditor, Nationstar Mortgage, for failing to accede to their rescission demand.
Rescission under TILA. TILA and Reg. Z generally give a borrower a three-business day period to rescind a loan transaction secured by the borrower’s home (15 U.S.C. §1635). The three-day time limit can be extended under some circumstances, such as if the creditor does not give the required notice of the right to rescind.
However, not all loan transactions can be rescinded. If the loan finances the borrower’s original acquisition or construction of the home, the loan is a residential mortgage transaction that is exempt from rescission.
What the documents revealed. The court noted that the homeowners attached a copy of the loan agreement to their complaint and that the agreement was dated Oct. 5, 2009. B of A and Nationstar provided a copy of the deed that transferred ownership of the property to the homeowners, and that deed carried the same date as the mortgage. The two documents also were recorded on the same day.
That left no doubt that the loan was a residential mortgage transaction that could not be rescinded, the court said.
For more information about the Truth in Lending Act, subscribe to the Banking and Finance Law Daily.
Homeowners could not invoke the Truth in Lending Act to rescind a mortgage loan because the loan was a residential mortgage transaction that was exempt from TILA’s rescission provisions, according to the U.S. Court of Appeals for the Eighth Circuit. A document attached to the homeowners’ complaint and another presented by the creditor made clear the loan had funded the purchase of the home, which made it an exempt residential mortgage transaction (Dunn v. Bank of America N.A.).
The loan was consummated on Oct. 5, 2009. In a rescission demand dated more than 16 months later, the homeowners claimed they had not been given the notice of their right to cancel that was required by TILA and Reg. Z—Truth in Lending (12 CFR Part 1026). After a later foreclosure, they sued both the original lender, Bank of America, and the foreclosing creditor, Nationstar Mortgage, for failing to accede to their rescission demand.
Rescission under TILA. TILA and Reg. Z generally give a borrower a three-business day period to rescind a loan transaction secured by the borrower’s home (15 U.S.C. §1635). The three-day time limit can be extended under some circumstances, such as if the creditor does not give the required notice of the right to rescind.
However, not all loan transactions can be rescinded. If the loan finances the borrower’s original acquisition or construction of the home, the loan is a residential mortgage transaction that is exempt from rescission.
What the documents revealed. The court noted that the homeowners attached a copy of the loan agreement to their complaint and that the agreement was dated Oct. 5, 2009. B of A and Nationstar provided a copy of the deed that transferred ownership of the property to the homeowners, and that deed carried the same date as the mortgage. The two documents also were recorded on the same day.
That left no doubt that the loan was a residential mortgage transaction that could not be rescinded, the court said.
For more information about the Truth in Lending Act, subscribe to the Banking and Finance Law Daily.
Monday, January 9, 2017
State AGs seek disbursement of remaining funds in CFPB’s action against Sprint
By Thomas G. Wolfe, J.D.
The Attorneys General for the states of Connecticut, Indiana, Kansas, and Vermont have jointly requested to intervene in the Consumer Financial Protection Bureau’s enforcement action against Sprint Corporation in New York federal district court to ensure that the approximately $14 million of Sprint’s remaining, unused “consumer redress funds” are used for “consumer protection purposes.” Noting that neither Sprint nor the CFPB plans on objecting to its intervention, the state AGs are specifically asking the court to direct the CFPB to disburse the remaining funds to the National Association of Attorneys General (NAAG) so as to continue and complete the development of the NAAG Training and Research Institute Center for Consumer Protection.
The CFPB filed its enforcement action against Sprint in U.S. District Court for the Southern District of New York, alleging that Sprint knowingly allowed unauthorized third-party charges to be billed to its wireless telephone customers between 2004 and 2013.
As observed by the state AGs, the CFPB claimed that Sprint’s third-party billing system elicited the unauthorized charges by: “(i) enrolling customers in third-party billing without their authorization; (ii) giving third-parties access to Sprint's customers and billing system without implementing adequate compliance controls; (iii) failing to adequately resolve customer disputes; and (iv) ignoring warnings from customers, government agencies, and public-interest groups about the increasing incidence of unauthorized wireless charges.”
During 2015, in addition to Sprint entering into separate multi-million dollar settlements with the Federal Communications Commission and with all 50 states and the District of Columbia to resolve charges stemming from its third-party billing practices, the CFPB similarly obtained a “Stipulated Final Judgment and Order” in the New York federal court. Among other things, the stipulated judgment’s “Redress Plan” has required Sprint to provide up to $50 million in refunds to its affected customers through a specified claims process.
Unused funds. In their Jan. 3, 2017, “Memorandum in Support of Joint Motion to Intervene to Modify Stipulated Final Judgment and Order,” the state AGs note that the claims period for Sprint consumers has expired, and approximately $14 million of the Sprint “consumer redress funds remain unused.” According to the state AGs, “Absent modification of the Stipulated Judgment, the Remaining Funds will therefore be deposited in the U.S. Treasury as disgorgement.”
Accordingly, in support of their intervention request to modify the existing stipulated judgment, the state AGs underscore that: (i) along with the CFPB, they also are government officials charged with enforcement of the Consumer Financial Protection Act and have adopted the same claims asserted by the CFPB against Sprint; and (ii) by disbursing the unused funds to the NAAG Training and Research Institute Center for Consumer Protection, the remaining funds would be used to “train, support and improve the coordination of the state consumer protection attorneys charged with enforcement of the laws prohibiting the type of unfair and deceptive practices alleged by the CFPB in this Action.”
For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.
The Attorneys General for the states of Connecticut, Indiana, Kansas, and Vermont have jointly requested to intervene in the Consumer Financial Protection Bureau’s enforcement action against Sprint Corporation in New York federal district court to ensure that the approximately $14 million of Sprint’s remaining, unused “consumer redress funds” are used for “consumer protection purposes.” Noting that neither Sprint nor the CFPB plans on objecting to its intervention, the state AGs are specifically asking the court to direct the CFPB to disburse the remaining funds to the National Association of Attorneys General (NAAG) so as to continue and complete the development of the NAAG Training and Research Institute Center for Consumer Protection.
The CFPB filed its enforcement action against Sprint in U.S. District Court for the Southern District of New York, alleging that Sprint knowingly allowed unauthorized third-party charges to be billed to its wireless telephone customers between 2004 and 2013.
As observed by the state AGs, the CFPB claimed that Sprint’s third-party billing system elicited the unauthorized charges by: “(i) enrolling customers in third-party billing without their authorization; (ii) giving third-parties access to Sprint's customers and billing system without implementing adequate compliance controls; (iii) failing to adequately resolve customer disputes; and (iv) ignoring warnings from customers, government agencies, and public-interest groups about the increasing incidence of unauthorized wireless charges.”
During 2015, in addition to Sprint entering into separate multi-million dollar settlements with the Federal Communications Commission and with all 50 states and the District of Columbia to resolve charges stemming from its third-party billing practices, the CFPB similarly obtained a “Stipulated Final Judgment and Order” in the New York federal court. Among other things, the stipulated judgment’s “Redress Plan” has required Sprint to provide up to $50 million in refunds to its affected customers through a specified claims process.
Unused funds. In their Jan. 3, 2017, “Memorandum in Support of Joint Motion to Intervene to Modify Stipulated Final Judgment and Order,” the state AGs note that the claims period for Sprint consumers has expired, and approximately $14 million of the Sprint “consumer redress funds remain unused.” According to the state AGs, “Absent modification of the Stipulated Judgment, the Remaining Funds will therefore be deposited in the U.S. Treasury as disgorgement.”
Accordingly, in support of their intervention request to modify the existing stipulated judgment, the state AGs underscore that: (i) along with the CFPB, they also are government officials charged with enforcement of the Consumer Financial Protection Act and have adopted the same claims asserted by the CFPB against Sprint; and (ii) by disbursing the unused funds to the NAAG Training and Research Institute Center for Consumer Protection, the remaining funds would be used to “train, support and improve the coordination of the state consumer protection attorneys charged with enforcement of the laws prohibiting the type of unfair and deceptive practices alleged by the CFPB in this Action.”
For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.
Friday, January 6, 2017
CFPB FY 2016 in review
By Katalina M. Bianco, J.D.
The Consumer Financial Protection Bureau has published its annual report to the Senate and House Committees on Appropriations for 2016. The report, required by Section 1017(e)(4) of the Dodd-Frank Act, provides a detailed roadmap on the steps the bureau undertook during the year to promote transparency and accountability and meet its statutory responsibilities. It covers the period of Oct. 1, 2015 through Sept. 30, 2016, the CFPB’s 2016 fiscal year.
For more information about CFPB Dodd-Frank Act activities, subscribe to the Banking and Finance Law Daily.
The Consumer Financial Protection Bureau has published its annual report to the Senate and House Committees on Appropriations for 2016. The report, required by Section 1017(e)(4) of the Dodd-Frank Act, provides a detailed roadmap on the steps the bureau undertook during the year to promote transparency and accountability and meet its statutory responsibilities. It covers the period of Oct. 1, 2015 through Sept. 30, 2016, the CFPB’s 2016 fiscal year.
The report lists the specific responsibilities tasked to the CFPB by the Dodd-Frank Act and explains how the bureau has met those responsibilities. Components of the 2016 report include:
- listening to consumers;
- the CFPB’s budget;
- diversity and inclusion, including the areas of recruitment and hiring;
- staff education and training; and
- consumer resources developed by the bureau.
Regulations and upcoming rulemaking. The CFPB report describes in detail bureau regulations and guidance intended to implement statutory protections. In the last fiscal year, the CFPB issued a number of proposed and final rules that relate to the Dodd-Frank Act, including, but not limited to:
- a proposed rule on arbitration clauses included in certain contracts for a consumer financial product or service;
- a proposed rule on payday loans, vehicle title loans, and other similar credit products intended to address consumer harm;
- a final rule to amend various provisions of the mortgage servicing rules implementing the Real Estate Settlement Procedures Act and the Truth in Lending Act; and
- a final rule amending Regulation C, implementing the Home Mortgage Disclosure Act.
The CFPB notes in the report that Section 1071 of the Dodd-Frank Act amends the Equal Credit Opportunity Act to require financial institutions to report information concerning credit applications made by women-owned, minority-owned, and small businesses. The bureau is in its early stages with respect to implementing Section 1071 and is currently focused on outreach and research. In addition, the bureau is working on a proposed rule concerning debt collection practices. Currently, the bureau is continuing to analyze the results of a survey to obtain information from consumers about their experiences with debt collection and plans to publish a report in the coming months.
Other research in preparation of rulemaking includes an analysis of overdraft programs on checking accounts and possible methods to streamline and modernize regulations inherited from other federal agencies.
The report also includes details on materials the CFPB has developed to aid implementation of its rules, such as small entity compliance guides, a HMDA implementation page, and a webinar on the final HMDA rule.
Supervision. During the 2016 fiscal year, the CFPB issued the following public supervisory documents:
- Supervisory Highlights;
- interagency guidance on deposit reconciliation practices;
- guidance on submission of credit card agreements under TILA;
- a compliance bulletin on furnishers’ responsibilities under the Fair Credit Reporting Act (Compliance Bulletin 2016-01);
- a compliance bulletin to provide guidance to creditors, debt buyers, and third-party collectors about compliance with Sections 1031 and 1036 of the Dodd-Frank Act and the Fair Debt Collection Practices Act when collecting debt from consumers (Compliance Bulletin 2015-07);
- a compliance bulletin to remind entities of their obligations under the Electronic Fund Transfer Act and Regulation E when obtaining consumer authorizations for preauthorized electronic fund transfers from a consumer’s account (Compliance Bulletin 2015-06);
- the revised supervisory matter appeals process;
- a compliance bulletin on RESPA compliance and marketing services agreements (Compliance Bulletin 2015-05); and
- guidance for service providers (Compliance Bulletin 2016-02).
The report provides an opportunity to review CFPB guidance issued in FY 2016.
Enforcement activity. The report includes a list of enforcement actions undertaken by the CFPB in the 2016 fiscal year. The bureau took action against a number of companies for consumer protection violations, including actions against an online lender, a credit repair company, a for-profit college chain, auto title lenders, indirect auto lenders, and Wells Fargo Bank, N.A. Violations charged by the CFPB included, among others, unfair or deceptive practices, illegal debt collection practices, and misleading advertising practices.
A full list of enforcement actions can be found in the report.
Thursday, January 5, 2017
CFPB charges credit reporting companies with deceptive marketing practices
By Katalina M. Bianco, J.D.
The Consumer Financial Protection Bureau has charged credit reporting companies Equifax, Inc. and TransUnion, as well as their subsidiaries, with deceiving consumers about credit scores the companies sold to consumers. According to the bureau, the companies not only misrepresented the usefulness and actual cost of the credit scores but "lured consumers into costly recurring payments for credit-related products with false promises." The CFPB entered separate consent orders against Chicago-based TransUnion and Atlanta-based Equifax that require the companies to pay a total of more than $17.6 million in restitution to consumers and fines totaling $5.5 million to the CFPB.
Under the consent orders, both credit reporting companies also must:
For more information about CFPB enforcement, subscribe to the Banking and Finance Law Daily.
The Consumer Financial Protection Bureau has charged credit reporting companies Equifax, Inc. and TransUnion, as well as their subsidiaries, with deceiving consumers about credit scores the companies sold to consumers. According to the bureau, the companies not only misrepresented the usefulness and actual cost of the credit scores but "lured consumers into costly recurring payments for credit-related products with false promises." The CFPB entered separate consent orders against Chicago-based TransUnion and Atlanta-based Equifax that require the companies to pay a total of more than $17.6 million in restitution to consumers and fines totaling $5.5 million to the CFPB.
“TransUnion and Equifax deceived consumers about the usefulness of the credit scores they marketed, and lured consumers into expensive recurring payments with false promises,” said CFPB Director Richard Cordray. “Credit scores are central to a consumer’s financial life and people deserve honest and accurate information about them.”
Charges. The CFPB alleged that from at least July 2011 until March 2014, both TransUnion and Equifax violated the Dodd-Frank Act by falsely representing that the credit scores they marketed and provided to consumers were the same scores lenders typically use to make credit decisions. The bureau also charged that the credit reporting companies falsely claimed that their credit scores and credit-related products were free or, in the case of TransUnion, cost only "$1." Finally, the CFPB alleged that Equifax violated the annual free credit report provisions of the Fair Credit Reporting Act by requiring consumers to view Equifax advertisements before receiving their free credit reports.
Consent orders. Under the terms of its consent order, Equifax, along with its subsidiary Equifax Consumer Services, LLC, must provide almost $3.8 million in restitution to affected consumers. The consent order for TransUnion, and its subsidiaries TransUnion Interactive, Inc., and TransUnion LLC, requires payment of $13.9 million in restitution to affected consumers.
- clearly inform consumers about the nature of the scores they are selling to consumers;
- obtain the express informed consent of consumers before enrolling them in any credit-related product with a negative option feature; and
- give consumers a simple, easy-to-understand way to cancel the purchase of any credit-related product, and stop billing and collecting payments for any recurring charge when a consumer cancels.
For more information about CFPB enforcement, subscribe to the Banking and Finance Law Daily.
Tuesday, January 3, 2017
Fed seeks comment on proposed guidelines for evaluating joint account requests
By Thomas G. Wolfe, J.D.
The Federal Reserve Board is requesting public comment on its proposed guidelines to evaluate requests for joint accounts at Federal Reserve Banks by private-sector arrangements within the U.S. payment system. As indicated by the Fed’s recent release, requests for joint accounts usually are intended to facilitate settlement between depository institutions participating in U.S. payment systems. Comments to the Fed must be received by Feb. 21, 2017.
As observed by the Fed, the FRBanks “typically permit a single master account per eligible depository institution.” In the past, the FRBanks opened joint accounts on a limited basis and for specific purposes. These joint accounts have been held for the benefit of multiple depository institutions and have been managed by an agent on behalf of those depository institutions. Noting a growing interest in joint accounts, the Fed explains that, in light of “ongoing developments to improve the U.S. payment system,” it “anticipates interest by industry participants in establishing joint accounts to facilitate settlement.”
Proposed guidelines. According to the Fed’s “Proposed Guidelines for Evaluating Joint Account Requests” (Docket No. OP-1557), the requests “would be evaluated on a case-by-case basis, and evaluating a particular request would likely require more-specific considerations and information based on the complexity of the arrangement and other factors.” Moreover, the proposed guidelines are centered on several core principles, including:
- each joint account holder must meet all applicable legal requirements to have a Federal Reserve account, and the FRBank will not have any obligation to any non-account holder with respect to the account funds;
- the private-sector arrangement must demonstrate that it has a sound legal and operational basis for its payment system;
- the design and rules of a private-sector arrangement must be consistent with the Fed’s policy objectives to promote a “safe, efficient, and accessible payment system for U.S. dollar transactions” and must be consistent with the “intended use” of the arrangement;
- a joint account must not create undue credit, settlement, or other risks to the FRBanks; and
- a joint account must not create undue risk to the overall payment system and must not adversely affect monetary policy operations.
Specific feedback sought. Notably, the Fed is seeking specific comments on certain aspects of the proposed guidelines. The Fed asks:
- What information, if any, about the establishment of an individual joint account should be made public?
- If the FRBanks reserved the right to set limits on balances in joint accounts, to require information on projected balances or volatility of balances, or to further restrict or close joint accounts, how, if at all, would the possibility of such limits affect interest in establishing a joint account, or use of the account once opened?
- Are there other types of restrictions or conditions that, while equally effective in attaining the same objectives, might be less burdensome to a private-sector arrangement if placed on joint accounts once in use?
- Are there additional criteria or information that may be relevant to evaluate joint account requests for U.S. depository institutions to provide services to foreign clearing and settlement arrangements?
- Should the Fed or the FRBanks consider other steps or actions to facilitate settlement for private-sector arrangements in light of market participants’ efforts to develop faster retail payment solutions?
For more information about Federal Reserve Board proposals affecting the banking industry, subscribe to the Banking and Finance Law Daily.
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