Marijuana business-targeted credit union gets second chance at Fed’s services

By Richard A. Roth, J.D.

 

A Colorado credit union that has said it plans to provide banking services to marijuana-related businesses will be allowed to proceed with its suit demanding a master account at the Federal Reserve Bank of Kansas City. A fractured three-judge panel of the U.S. Court of Appeals for the Tenth Circuit has reversed an order dismissing the suit with prejudice, with each of the judges writing a separate opinion advocating a different result. However, the resulting order is that The Fourth Corner Credit Union’s complaint should be dismissed without prejudice, allowing the financial institution another opportunity to plead its case (The Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City, June 27, 2017, per curiam).

 

A master account is an account that an FRBank opens for a bank or credit union to give the institution access to Federal Reserve System services. While the credit union could gain access through a correspondent account at another financial institution, it told the appellate court that efforts to do so had failed. And, as the district judge explained in his order, “Simply put, without this access The Fourth Corner Credit Union is out of business.”

 

The Kansas City Fed refused to open a master account for Fourth Corner. According to the FRBank, the credit union posed too much risk due to its plan to offer services that would facilitate customers’ violations of the federal Controlled Substances Act. The district court judge dismissed Fourth Credit Union’s suit seeking an injunction ordering the FRBank to open the account because a court’s equity powers cannot be invoked to aid illegal activity.

 

Appellate court indecision. Each of the three circuit judges had his own idea on how the appeal should be decided. One wanted to affirm the dismissal with prejudice; the second believed the complaint should have been dismissed because the matter was not ripe for decision; and the third believed the complaint should not have been dismissed. Ordering the complaint to be dismissed without prejudice was said to comply with the belief of the latter two judges that Fourth Corner should be able to proceed with its claims.

 

Dismissal with prejudice. Judge Nancy L. Moritz agreed with the district judge that the complaint should have been dismissed with prejudice because Fourth Corner apparently intended to facilitate business activities that violated federal criminal laws. 

 

Judge Moritz was skeptical of the credit union’s assertion that it would not assist illegal businesses, noting that Fourth Corner’s statements on the issue were equivocal. As a result, there was no reason to accept them as true, as normally would be the case in considering a motion to dismiss.

 

Even if the marijuana-related businesses complied with Colorado law, they still would violate federal law, she pointed out. In fact, “A court-ordered master account would thus serve as the linchpin for the Credit Union’s facilitation of illegal conduct,” Moritz wrote.

 

She also rejected the argument that guidance issued by the Financial Crimes Enforcement Network and Department of Justice could make permissible activities that Congress had banned.

 

Dismissal for “unripeness.” Fourth Corner applied for a master account and sued when the application was denied. When the Kansas City Fed raised the illegality issue in its motion to dismiss, the credit union amended its complaint to include a promise to serve credit unions only if doing so was legal. As a result, the suit was not ripe for decision because it had “become divorced from the factual backdrop that gave rise to the original dispute,” said Judge Scott M. Matheson. Simply put, the credit union that promised only to serve legal marijuana-related businesses was not the same as the one that was denied a master account.

 

According to Judge Matheson, a claim is not ripe for adjudication if it relies on future events that might not take place as expected or might not take place at all. A dispute should be considered not to be ripe if it turns on facts that are not sufficiently developed and delay will not work a hardship on the parties.

 

There was no way to know whether the Kansas City Fed would open a master account for Fourth Corner based on a promise to serve only legal marijuana-related businesses because such an application had not been made, Judge Matheson observed. He noted that the Kansas City Fed cited several reasons for denying the master account. In addition to the credit union’s business plans, the FRBank was concerned about Fourth Corner’s capital, failure to obtain deposit insurance, and status as a de novo institution. Even if the FRBank believed the credit union’s promise, it still might deny the master account.

 

Putting off judicial consideration would not impose a hardship on Fourth Corner, Judge Matheson believed. If the credit union was seriously harmed by being unable to conduct business, it could apply for a master account after promising not to serve illegal businesses, a step it had never taken.

 

Dismissal was in error. Judge Robert E. Bacharach took the position that the credit union’s complaint should not have been dismissed at all. The district judge should have assumed that Fourth Corner would comply with any court decision on whether the marijuana-related businesses were legal and that it would live up to its promise, made in the amended complaint, that it would do so. As a result, a concern over the possible facilitation of illegal activity did not offer a reason to dismiss the complaint, he said.

 

In its amended complaint, Fourth Corner said that its charter committed it to “comply with both state and federal law, and it intends to do so,” Bacharach noted. The credit union added that it would implement its business plan to serve marijuana-related businesses only if doing so was legal under both state and federal law. It also said that if serving marijuana-related business was found to be illegal, it would restrict its activities to serving members of social groups that advocated the legalization of marijuana, which everyone agreed would be legal.

 

According to Judge Bacharach, the district judge interpreted Fourth Corner’s statements as promises to obey what the credit union believed the law to be, not what the court said the law was. This was contrary to the rule that, in considering a motion to dismiss, a judge should assume that the claims of a complaint are true.

 

Because he would have reversed the dismissal of the credit union’s complaint, Judge Bacharach moved on to discuss the Kansas City’s Fed’s arguments supporting the district court judge’s order.

• The Federal Reserve Act does not give the Kansas City Fed the discretion to refuse to open a master account for an applicant, Judge Bacharach said. The Fed Reserve System’s services must be available to all nonmember depository institutions.
• The charter granted by Colorado to Fourth Corner is not preempted in full by the Controlled Substances Act. The charter is preempted only to the extent that it would authorize the credit union to facilitate the activities of illegal businesses. Since the charter remained valid, at least in part, the credit union remained entitled to a master account.

Judge Bacharach also rejected the argument that the appeal was unripe. It was clear to him that the Kansas City Fed would refuse to allow a master account and that Fourth Corner would suffer a hardship as a result.

 

For more information about banking for marijuana-related businesses, subscribe to the Banking and Finance Law Daily.

TARP to cost $33B, CBO says

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

The Troubled Asset Relief Program will cost the federal government $33 billion, the Congressional Budget Office estimates. The CBO states that $445 billion of the initially authorized $700 billion will be disbursed through TARP, including $438 billion that has already been disbursed and $8 billion in additional projected disbursements.

According to the Report on the Troubled Asset Relief Program—June 2017, the estimated cost of TARP stems largely from assistance to American International Group, aid to the automotive industry, and ongoing grant programs aimed at avoiding foreclosures on home mortgages. Taken together, it states, other transactions with financial institutions have yielded a net gain to the federal government, in the CBO’s estimation. All of TARP’s future disbursements are expected to occur in its mortgage programs as grants to borrowers, servicers, investors, and state housing finance agencies.

In its March 2016 report, the CBO projected that TARP would cost $30 billion over its lifetime. Since the publication of that report, the estimated cost has risen by about $3 billion, primarily because of the increase to CBO’s estimate of outlays for the mortgage program

For more information about the Troubled Asset Relief Program, subscribe to the Banking and Finance Law Daily.

Student loan servicers ‘mishandling’ loan forgiveness programs: CFPB

By Katalina M. Bianco, J.D.

Student loan borrowers are reporting that loan servicers are "mishandling" the Public Service Loan Forgiveness program, according to the Consumer Financial Protection Bureau. The CFPB has published a report on the costs to those in the public service industry when the program fails them. The bureau also updated its education exam procedures and unveiled the "Certify Your Service" campaign. The campaign is intended to help public servants stay on track for federal loan forgiveness, the bureau said.

"More than 500,000 people have signaled their intention so far to pursue debt relief under this program," CFPB Director Richard Cordray said in prepared remarks for a Public Service Student Loan Forgiveness event in Raleigh, N.C. on June 22. "According to the Department of Education, almost two-thirds of them earn less than $50,000 per year. And 86 percent earn less than $75,000 per year. Many are in public service careers, such as military service or social work, with no real private sector equivalent."

Loan forgiveness program. The public service loan forgiveness program, launched in 2007, is meant to encourage people to enter public service despite increasing levels of student loan debt. To be eligible, borrowers: must have a qualifying loan; be enrolled in a qualifying repayment plan, such as an income-driven repayment plan; and make 120 on-time payments while working for a qualified public service employer. Student loan servicers are responsible for administering these requirements. However, student loan borrowers have reported that servicers delay or deny access to loan forgiveness through wrong information about their loans, flawed payment processing, and "bungled" job certifications, according to the bureau.

Report on servicing breakdown costs. The report on the cost of student loan servicing breakdowns for people serving their communities. Evidence suggests that many professions in this segment of the workforce typically require advanced levels of education and that education requirements in many of these fields have increased over time. While the public broadly shares the benefits of a highly educated professional workforce serving in their communities, often the financial costs of these new credentials fall on individuals in careers with limited opportunity for wage growth to offset these costs. The loan forgiveness protections were intended to ensure that nurses, teachers, first responders, and other public servants can serve their communities without it being to their long-term financial detriment.

Examination manual. The CFPB updated its exam procedures to prioritize its supervision of potentially illegal practices used by student loan servicers to administer loan forgiveness benefits. Bureau supervision examinations will look at whether servicers: tell eligible consumers what they need to do to qualify for forgiveness; warn consumers who believe they are on track to qualify when they are not; provide clear information about the loan forgiveness program; and accurately evaluate borrowers’ eligibility and progress toward loan forgiveness. According to the bureau, this will be part of the CFPB’s regular oversight of these companies’ compliance with federal consumer law.

For more information about student loans and loan forgiveness programs, subscribe to the Banking and Finance Law Daily.

CFPB 11th semi-annual report highlights efforts to achieve mission

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published its 11th semi-annual report to Congress as required by the Dodd-Frank Act. The report highlights the CFPB’s efforts in the last six months to achieve its mission of "making consumer financial markets work better for the American people, and helping consumers improve their financial lives." The report covers the bureau’s supervisory activities since its last report: enforcement actions, rulemaking, consumer complaints, reports, and outreach initiatives.


Enforcement actions. In the last six months, CFPB supervisory actions resulted in more than $6.2 million in redress to over 16,549 consumers. During that timeframe, the bureau also announced orders through enforcement actions for approximately $200 million in total relief for consumers and over $43 million in civil money penalties. Enforcement for violations of the Dodd-Frank Act and other consumer compliance laws include actions against:

• three reverse mortgage companies; and
• all three major credit reporting agencies—Equifax, TransUnion, and Experian.

Rulemaking. During the last six months, the CFPB issued final rules on:

• Reg. E—prepaid accounts under the Electronic Fund Transfer Act; and
• Fair Credit Reporting Act disclosures.

Reports. The bureau published several reports and other publications during this reporting period, including reports on:

• prepaid card fee disclosures;
• online debt sales;
• consumer views on debt; and
• two issues of Supervisory Highlights.

Consumer complaints. From July 21, 2011, through March 31, 2017, the CFPB has handled over 1.1 million consumer complaints about, among other things:

• debt collection;
• credit cards;
• mortgages;
• vehicle, payday, pawn, title, and student loans;
• prepaid cards;
• debt settlement services; and
• credit repair services.

Outreach initiatives. According to the report, the CFPB’s progress on achieving its mission "has been made possible thanks to the engagement of hundreds of thousands of Americans who have utilized our consumer education tools, submitted complaints, participated in rulemakings, and told us their stories through our website and at numerous public meetings from coast to coast." The bureau also has an ongoing dialogue with its advisory groups, supervised institutions, community banks and credit unions, and consumer advocates.

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

Regulators weigh on promoting economic growth and bank supervision

By John M. Pachkowski, J.D.

 

In the third hearing held by the Senate Banking Committee on measures that can be taken to improve economic growth, federal and state banking regulators gave their perspectives. The Committee heard testimony from Jerome H. Powell, a Governor at the Federal Reserve Board; Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation; J. Mark McWatters, Acting Chairman of National Credit Union Administration; Keith A. Noreika, Acting Comptroller of the Currency; and Charles G. Cooper, Commissioner of the Texas Department of Banking and testifying on behalf of the Conference of State Bank Supervisors.

 

The hearings followed a call by the Committee’s Chairman and Sen. Mike Crapo (D-Idaho) and Ranking Member Sen. Sherrod Brown (D-Ohio) for legislative proposals that would promote economic growth and/or enable consumers, market participants and financial companies to better participate in the economy.

 

The first hearing, held June 8, 2017, examined the role of financial institutions in local communities. The second hearing, held June 15, 2017, heard from banking executives who characterized regulations under the Dodd-Frank Act as unnecessary and stifling to economic growth, while opponents expressed concern over accountability and the potential for more bailouts.

 

Bipartisan legislation. At the start of the hearing, Crapo noted, "One of my key priorities this Congress is passing bipartisan legislation to improve the bank regulatory framework and promote economic growth." He added, "As this process continues, I will be working with all members of the Committee from both sides of the aisle to bring strong, robust bipartisan legislation forward."

 

Wall Street wish list. Brown’s opening statement criticized the Treasury Department’s June 2017 report on financial regulatory reform as "a Wall Street wish list, specifically targeting the capital and liquidity rules for the largest banks and seeking to undermine the [Consumer Financial Protection Bureau]." He also raised concern that many of Treasury’s recommendations will undermine or delay the effectiveness of bank supervision, something that was severely lacking leading up to the crisis. Brown did concede that "There are some ideas worth considering in the Treasury report, as evidenced by overlap with some of the recommendations in the Agencies’ [Economic Growth and Regulatory Paperwork Reduction Act of 1996] review for small institutions, but many of Treasury’s recommendations seem like a steep price for Americans to pay after the 2008 financial crisis."

 

Tailor requirements. Powell focused his testimony on four key regulatory areas designed to improve and maintain the resiliency of the banking industry: capital, stress testing, liquidity, and resolution planning. He noted that the core elements of the reforms for our largest banking firms in capital regulation, stress testing, liquidity regulation, and resolvability should be protected. Also, regulators should continue to tailor their requirements to the size, risk, and complexity of the firms subject to those requirements with a special emphasis on community banks that community banks face higher costs to meet complex requirements. Powell also called on the regulators to "assess whether we can adjust regulation in common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness." Finally he stated, "we should strive to provide appropriate transparency to supervised firms and the public regarding our expectations."

 

Addressing the Volcker Rule, Powell noted, "The Federal Reserve is reassessing whether the Volcker rule implementing regulation most efficiently achieves its policy objectives, and we look forward to working with the other four Volcker rule agencies to find ways to improve the regulation. In our view, there is room for eliminating or relaxing aspects of the implementing regulation that do not directly bear on the Volcker rule's main policy goals."

 

Simple and straightforward regulations. Gruenberg noted, "It is desirable that financial regulations be simple and straightforward, and that regulatory burdens and costs be minimized, particularly for smaller institutions." Commenting on the agencies’ Economic Growth and Paperwork Reduction Act review, the FDIC Chairman stated that the agencies have taken, or are in the process of taking, actions to address comments received during the EGRPRA process, including but not limited to: simplifying the capital rules; reduced examination frequency; reduced regulatory reporting requirements; raising appraisal threshold; and reviewing and modernizing the examination process.

 

As for FDIC initiatives, Gruenberg cited the promoting de novo institutions, clarifying capital rules treatment for S-Corporations, and streamlining living will requirements as a few examples.

 

Commenting on the Treasury Department’s recommendations that the FDIC be removed from the living will process, Gruenberg noted, "The FDIC brings its perspective as the agency charged with the resolution of failed depository institutions. Both perspectives have value, and both agencies should remain involved in the review of living wills."

 

Strike the right balance. In his testimony, Noreika called the banks that the OCC supervises "engines of economic growth for the nation." He added, "When the federal banking system is running well, it can power growth and prosperity for consumers, businesses, and communities across the country." Noreika continued, "Our job as bank supervisors is to strike the right balance between supervision that effectively ensures safety, soundness, and compliance, while—at the same time—enabling economic growth. To achieve that balance, we need to avoid imposing unnecessary burden and creating an environment so adverse to risk that banks are inhibited from lending and investing in the businesses and communities they serve. Regulation does not work when it impedes progress, and banks cannot fulfill their public purpose if they cannot support and invest in their customers and communities."

 

One area in which Noreika had sought to promote a regulatory environment that is balanced and that provides the certainty needed to encourage investment is the Volcker Rule. He noted, "There is near unanimous agreement that this framework needs to be simplified and clarified."

 

Noreika further testified that multiple regulators to solve the same problem can "lead to waste, redundancy, and duplication of resources both in the regulatory agencies and for the institutions we supervise."

 

Enhanced flexibility. McWatters recommended that Congress support the NCUA’s efforts to ease regulatory burdens on credit unions by tailoring and simplifying federal law. He encouraged "Congress to consider providing regulators with enhanced flexibility to write rules rather than imposing rigid requirements." He continued saying, "Such flexibility would allow the agency to effectively limit additional regulatory burdens consistent with safety and soundness considerations."

 

Disproportionately burdened. Providing a state regulator’s perspective, Cooper noted that community banks provide about 45 percent of small loans to U.S. businesses and three-fourths of agriculture loans they "are disproportionately burdened by oversight that is not tailored to their business model or activities." He provided four key changes to the Committee to address this issue:

1. Adopting an activities-based definition for community banks, which lawmakers and regulators can use to exempt smaller banks from regulations aimed at larger banks. 
2. Reducing the complexity of capital rules for smaller banks. 
3. Exempting from certain regulations community banks that retain mortgages in portfolio. 
4. Improving the transparency and timeliness of fair lending supervision.  

Industry reaction. In a letter leading up to the hearing, the U.S. Chamber of Commerce called on the Committee and the regulators to "rigorously examine the impact of bank capital and liquidity rules on small and medium enterprises’ access to credit. Such examination is necessary to balance the equally important goals of financial stability and growth—the twin pillars of true prosperity."

 

Following the hearing, the Regional Bank Coalition issued a statement agreeing with the need to move away from basing regulations solely on asset size. The statement continued, "Matching requirements to the overall risk of an institution—including their interconnectedness and complexity—would ensure the safety and soundness of the financial system without limiting critical Main Street lending, as the current environment has done. A multi-factored approach to risk—one of the only Dodd-Frank reform proposals to garner bipartisan support—would allow regional banks to better serve their communities and thereby foster needed economic growth."

 

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

CFPB report helps consumers plan for retirement

By Thomas G. Wolfe, J.D.

 

As part of its stated mission to “empower consumers to take more control over their financial lives,” the Consumer Financial Protection Bureau has issued a report, titled “Consumer insights on managing funds at the time of retirement.” As the June 2017 report explains, the CFPB commissioned research to better understand solutions to some of the challenges that consumers face in planning for their retirement and in spending their funds during those retirement years. In reporting the results of its research, the CFPB aims to “help consumers more effectively plan for retirement and manage personal retirement accounts.”

 

In her blog post about the research study, the CFPB’s Irene Skricki notes that the bureau recognizes that when people approach retirement age, “they have to make many difficult, often irreversible choices.” Accordingly, the CFPB “tested ways to help people better visualize the results of their retirement choices and plan ahead for significant decisions.”

 

Report highlights. According to the CFPB’s report:

 

• 40 percent of “late baby boomers” are approaching retirement with limited or no savings and “are projected to face a savings shortfall;”
• more than 50 percent of consumers have indicated that they “worry about running out of money” in retirement;
• about 62 percent of workers between the ages of 55 and 64 have accumulated, during the course of their working lives, less than one year’s worth of income in retirement savings;
• when making decisions about retirement at or before age 55, consumers generally reported an interest in “an advance planning tool;” and
• when making decisions about retirement after age 55, consumers generally reported a preference for receiving information about retirement accounts, including “simplified forms” for managing the accounts.

In addition to the research results, the CFPB’s report promotes “optimal choices” for consumers through two approaches: simplification and pre-commitment. The report encourages consumers to overcome “common biases and challenges in the decision context.” Further, the CFPB indicates that its research findings “can be used by a wide variety of participants in retirement financial decisions, services, and products, including employers, retirement plan administrators, financial educators, and others who help consumers with retirement choices.”

 

For more information about reports issued by the Consumer Financial Protection Bureau, subscribe to the Banking and Finance Law Daily.

Two flood insurance bills pass Financial Services Committee

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

The House Financial Services Committee passed two bills to reform and reauthorize the National Flood Insurance Program (NFIP), which is set to expire on Sept. 30, 2017—the National Flood Insurance Program Policyholder Protection Act of 2017 (H.R. 2868) and the 21st Century Flood Reform Act of 2017 (H.R. 2874). The Committee will reconvene on June 21, 2017, to consider an additional four measures to reauthorize the NFIP.

H.R. 2868, sponsored by Rep. Lee Zeldin (R-NY), would protect NFIP policyholders from unreasonable premium rates and require the Federal Emergency Management Agency to conduct a study to analyze the unique characteristics of flood insurance coverage of urban properties. The bill passed the Committee by a vote of 53-0.

H.R. 2874, sponsored by Rep. Sean Duffy (R-Wis), would improve the financial stability of the NFIP, enhance the development of more accurate estimates of flood risk through new technology and better maps, increase the role of private markets in the management of flood insurance risks, and provide for alternative methods to insure against flood peril. The bill passed the Committee by a vote of 30-26.

Hensarling opposes program bailout. In the Committee press release, Chairman Jeb Hensarling (R-Texas) said, “We cannot continue to call on the American taxpayer to bailout a program that is currently drowning in $25 billion of red ink and suffers a $1.4 billion annual actuarial deficit. These bills put the National Flood Insurance Program on a path toward actuarial soundness where all will be protected, no one will be denied a policy, all will benefit from competition, the NFIP will be sustainable, and the national debt clock will spin a little less rapidly.” In his opening statement, Hensarling said he opposed a permanent taxpayer subsidy. “[P]eople should gradually—gradually—be expected to pay actuarial rates.”

Waters promises amendments. In her opening statement at the Committee markup, Rep. Maxine Waters (D-Calif) expressed concern that “in many respects the package of bills would actually make matters worse by restricting coverage, increasing costs, and opening the door to cherry-picking by the private sector.” She added that “Democrats will offer amendments to provide the reauthorization language needed to keep the NFIP’s doors open and keep the real estate market from spiraling out of control.”

Committee members Reps. Carolyn B. Maloney (D-NY) and Lee Zeldin (R-NY) praised passage of the NFIP Policyholder Protection Act, stating that it would result in a credit to homeowners with NFIP policies who invest in mitigation activities, such as elevating their homes, adding porous foundations, or moving boilers to a higher floor, which would result in lower premiums and help reduce the cost to homeowners.

ABA’s grave concerns. In its memorandum to the Committee, the American Bankers Association expressed “grave concerns” over a section of the 21st Century Flood Reform Act of 2017 that would “provide for the elimination of coverage for properties with excessive lifetime claims, defined in the bill as claims exceeding twice the replacement cost of the property.” The ABA stated that “Cutting off such properties from NFIP coverage will likely lead to significant hardship for homeowners, lenders and communities.” The association also opposes the bill’s increase in penalties for lender non-compliance from $2,000 to $5,000.

FSR applauds package. The Financial Services Roundtable applauded the Committee’s legislative package of “reforms to improve the consumer experience and increase private sector involvement.” The FSR stated that many reforms will better enable the Write-Your-Own insurance program to deliver insurance coverage to consumers.

For more information about flood insurance reforms, subscribe to the Banking and Finance Law Daily.

CFPB turns attention to credit card promotions, debt collection

By Andrew A. Turner, J.D.

 

The Consumer Financial Protection Bureau has sent a number of letters to retail credit card companies, encouraging them to consider using more transparent promotions. Many of these retailers offer credit cards with no interest over a set period if the promotional balance is paid in full by the end of the term. The letters outline bureau concerns that these promotions may surprise consumers with high, retroactive interest charges after the promotional period ends. Therefore, the CFPB has suggested that companies consider using a zero-percent-interest promotion that is more transparent and carries less risk for consumers.

 

“With its back-end pricing, deferred interest can make the potential costs to consumers more confusing and less transparent,” said CFPB Director Richard Cordray. “We encourage companies to consider more straightforward credit promotions that are less risky for consumers.” Turning his attention to another topic, Cordray affirmed the bureau's intention to move forward on debt collection regulation.

 

Retail cards. These credits are typically offered through retail stores to allow consumers to finance large purchases such as appliances, furniture, and medical or dental services, and pay the cost over time. Under a deferred-interest plan, the consumer pays no interest if the purchase amount is paid off within a set period, typically six to 12 months. If any promotional balance remains when the promotional period ends, consumers are charged accrued interest, usually 25 percent, on the promotional balance from the time of purchase.

 

The bureau has urged these retailers to use a more straightforward zero-percent-interest promotion where consumers are charged interest only on the balance that remains. 

 

Consumer tips. The CFPB has published consumer tips to help individuals understand the different credit card interest-rate promotions. According to the bureau, consumers should be aware of factors that determine the cost of borrowing, which include:

• length of the promotional period;
• interest rate after the promotional period; and
• payment each month needed to pay off the purchase during the promotional period

 

Debt collection rules. The CFPB intends to adopt rules to regulate debt collections by both debt collectors and first-party creditors, according to CFPB Director Richard Cordray. In remarks prepared for a Consumer Advisory Board meeting, Cordray said that the bureau has changed its plan to adopt separate rules for debt collectors and creditors and now intends to write what he termed a “right consumer, right amount” rule that will apply across the debt collection market.

 

According to Cordray, the debt collection industry and consumer advocates agree that updated FDCPA interpretations are needed due to changes in technology and the growth of debt buying since the Act was passed in 1977. The bureau outlined its initial plans for debt collection rules last July, addressing debt information integrity, disclosures, limits on communications, and debt disputes. Initially, the intent was to adopt a rule that would have applied only to companies who were covered by the Fair Debt Collection Practices Act, with creditors collecting their own debts to be addressed separately.

 

However, the bureau’s analysis of the comments it has received on the July 2016 proposal has revealed that separating the debt information integrity issues into different rules for debt collectors and creditors was problematic, the director said. Creditors create the data and then pass it on to debt collectors; however, all companies that collect debts need to have complete and accurate data. That will be better addressed by a single regulation, he said.

 

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

Debt buyer is not debt collector under federal consumer debt collection law

By Richard Roth

Companies that buy debts originated by others and then collect the debts for themselves are not debt collectors under the Fair Debt Collection Practices Act and therefore are not required to comply with the FDCPA’s consumer protection provisions, according to the Supreme Court. The unanimous opinion in Henson v. Santander Consumer USA Inc.—the first opinion attributed to Justice Gorsuch—affirmed a decision by the U.S. Court of Appeals for the Fourth Circuit (Henson v. Santander Consumer USA Inc.).

According to the Supreme Court opinion, Santander Consumer USA bought defaulted auto loans from CitiFinancial Auto, the original lender. Santander then attempted to collect the loans without complying with the FDCPA’s requirements. The question was whether buying the debts made Santander a company that “regularly collects or attempts to collect . . . debts owed or due” someone else, i.e. whether it made Santander a debt collector (15 U.S.C. §1692a(6)).

The text of the FDCPA makes clear that “All that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another’,” the opinion said. How the debt owner came to own the debt, whether by origination or by purchase, is irrelevant.

Parsing the text. The consumers attempted to rely on the FDCPA’s use of “owed . . . another,” which they argued covered any debts that previously were owed to someone other than the current owner. If Congress intended to exclude debt buyers from the definition of debt collectors, the act would have referred to debts “owing . . . another.”

The Court rejected that argument as contrary to both proper grammar and common understanding. After all, the FDCPA actually refers to debts “owed or due . . . another,” the opinion pointed out. Accepting the consumers’ argument would require that to mean “debts that were owed or are due another.” “[S]upposing such a surreptitious subphrasal shift in time seems to us a bit much,” Gorsuch wrote.

The words used elsewhere in the FDCPA did not support the consumers’ position, the opinion added. Congress was able to distinguish between debt originators and debt buyers when it wanted to.

Significance of default. It is true that the FDCPA excludes from its debt collector definition those who buy debts that are not in default, the opinion conceded. However, that did not imply that anyone who bought a debt after default was a debt collector.

Assuming for the sake of argument that a company must be either a debt collector or a creditor, and not both, with respect to a specific debt, there was no reason that a debt buyer like Santander could not be a creditor, the opinion added.

Public policy. The court believed that the consumers preferred to rely on their public policy argument—the FDCPA was intended to protect consumers from improper tactics by independent debt collectors, and furthering that purpose required applying the act to debt buyers. However, the consumers also conceded that debt buying arose after the FDCPA was enacted, the opinion observed, which meant that Congress never had the opportunity to consider whether the practice should be covered.

“[I]t is never our job to rewrite a constitutionally valid statutory text under the banner of speculation about what Congress might have done had it faced a question that, on everyone’s account, it never faced,” Gorsuch wrote. Regardless of the public policy argument urged by the consumers, it had to be presumed that the FDCPA text meant what it said.

Excluded questions. Gorsuch’s opinion also noted that two related issues were not being considered. The Court was not addressing whether Santander should be considered a debt collector because, regardless of the ownership of these debts, it does regularly collect debts owned by other persons. Neither was it addressing whether the company was a debt collector because it was engaged in a business that had debt collection as its principal purpose.

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CFPB debt-relief suit survives challenge under practice-of-law exclusion

By Katalina M. Bianco, J.D.

 

Law firms and attorneys engaged in providing consumer debt relief services were unable to convince a U.S. district judge that the Consumer Financial Protection Act practice-of-law exclusion required the dismissal of the Consumer Financial Protection Bureau’s enforcement suit. The bureau’s suit claiming violations of the Federal Trade Commission’s Telemarketing Sales Rule also survived several other arguments for dismissal raised by the attorneys (CFPB v. Howard, May 26, 2017, Staton, J.).

 

According to the CFPB, the attorneys and their law firms continued the illegal debt-relief business of Morgan Drexen after the bureau essentially forced the company into bankruptcy. The attorneys’ financial arrangements with clients included what was termed an "upfront engagement fee" of between $1,000 and $3,250, as well as an administrative fee. While the CFPB claims these fees constituted advance fees that are prohibited by the Telemarketing Sales Rule provisions on debt relief services, the attorneys claim they were fees for bankruptcy case legal services that actually were performed.

 

Legal provisions. The TSR, adopted by the FTC under the Telemarketing and Consumer Fraud and Abuse Prevention Act, prohibits debt relief service providers from seeking or accepting any payments until at least one of the consumer’s debts has been renegotiated and the consumer has made at least one payment. Any fee charged must be proportionate to either the consumer’s total debt or the amount the debt renegotiation saved the consumer (16 CFR §310.4(a)).

 

Debt relief services fall under the CFPB’s general enforcement authority under the CFPA. The Act says that the bureau has no enforcement authority over a licensed attorney’s activities that are part of the practice of law (15 U.S.C. §5517(e)). However, the CFPA adds a limitation on that exclusion—the exclusion does not apply to the activities of an attorney who is "otherwise subject to any of the enumerated consumer laws" that the bureau is to enforce.

 

The Telemarketing and Consumer Fraud and Abuse Prevention Act is one of those enumerated consumer laws when consumer financial products or services are involved, the judge pointed out. Moreover, the FTC considered including an exclusion in the TSR for attorneys but declined to do so.

 

Practice of law exclusion. The attorneys claimed that the limitation on the exclusion simply meant that an attorney engaged in activities that are not part of the practice of law is subject to the CFPB’s authority. The judge disagreed, saying that this interpretation would make the limitation unnecessary. The CFPA denies the bureau the authority to regulate the practice of law under its general enforcement authority but allows the bureau to act against legal practices that are subject to other consumer financial protection statutes, she said.

 

The judge also disagreed with the attorneys’ assertion that the upfront fees were permitted by the Bankruptcy Code and thus not banned by the TSR. The bureau claimed that the bankruptcy services contracts had been created to evade the TSR upfront-fee ban, and that was enough to prevent the dismissal of the suit.

 

Other arguments. Other arguments for dismissal that were raised by the attorneys were disposed of quickly:

• The CFPB could seek an injunction even though the attorneys had ceased the challenged conduct because the attorneys could easily resume it.
• The bureau’s complaint was not subject to the Federal Rules of Civil Procedure heightened pleading standards for fraud complaints because the bureau’s claim that the attorneys had facilitated Morgan Drexen’s conduct "does not sound in fraud." The attorneys could have facilitated Morgan Drexen’s fraud without themselves making any fraudulent statements.
• The bureau’s choice to proceed separately and first against Morgan Drexen did not, under theories of estoppel or issue preclusion, prevent its subsequent enforcement action against the attorneys.

For more information about the CFPB and practice of law exclusion, subscribe to the Banking and Finance Law Daily.

Florida, Nevada senators urge Administration to protect seniors under reverse mortgage program

By Thomas G. Wolfe, J.D.

Expressing their concern that President Donald Trump’s fiscal-year 2018 budget would “remove protections for widows and widowers facing eviction under the reverse mortgage program,” Senators Catherine Cortez Masto (D-Nev) and Marco Rubio (R-Fla) have jointly submitted a letter to the Secretary of the Department of Housing and Urban Development and the Director of the Office of Management and Budget. The May 31, 2017, letter asks the HUD Secretary and OMB Director to provide a written response “outlining the rationale underlying this proposed change.”

Both legislators are members of the Senate Special Committee on Aging. While seeking to address a nationwide concern, the letter observes that Rubio’s home state of Florida has the “largest percentage of seniors in the country and countless retirement communities,” and Cortez Masto’s home state of Nevada has a “booming elderly population” with unique housing challenges.

Concerns. The two senators note that while reverse mortgages “can provide an important source of financial security,” a significant concern arises “when a homeowner dies, and is survived by a spouse that was not an original borrower on the reverse mortgage.” Under previous Home Equity Conversion Mortgage (HECM) rules, such a surviving spouse often faced having to pay the loan balance in full or face eviction at a time when he or she was already grieving the loss of a spouse.

While Rubio and Cortez Masto observe that, in recent years, HUD has taken action to “reform the HECM program, protect consumers, and shield taxpayers from the risk posed to the FHA’s insurance fund,” the senators discern a different trend under the Trump Administration. “It appears that the President’s FY 2018 budget seeks to make a change to the reverse mortgage program,” they state. In particular, the senators point out that a “portion of the HUD budget seeks to amend language in the National Housing Act pertaining to safeguards which protect widows and widowers from displacement.”

Request. Accordingly, Cortez Masto and Rubio request additional information about the President’s budget impacting the ability of seniors to stay in their homes after the death of a spouse. Moreover, the letter asks HUD and the OMB to provide the rationale for the apparent policy change.

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

CFPB begins assessment of mortgage rules

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau is conducting an assessment of the Ability-to-Repay/Qualified Mortgage rule (ATR/QM rule) and mortgage servicing rule with a request for recommendations and information. The Dodd-Frank Act requires the CFPB to review some of its rules within five years after they take effect to assess effectiveness. The rules being assessed were adopted in Jan. 2013 and took effect in Jan. 2014.

 

The CFPB is asking for comments on the assessment plan for the ATR/QM rule under the Truth in Lending Act (Regulation Z) by July 31, 2017. The comment date on the assessment plan for the mortgage servicing rule under the Real Estate Settlement Procedures Act (Regulation X) expires on July 10, 2017. The CFPB intends to issue the assessment reports by January 2019. 

 

In the Dodd-Frank Act, Congress established new standards for mortgage lending that, among other things, required lenders to assess consumers’ ability to repay. The Dodd-Frank Act also provided for a class of “qualified mortgage” loans that cannot have certain risky product features and are presumed to comply with the ATR requirement. The ATR-QM rules require lenders to consider and verify a number of different underwriting factors, such as a mortgage applicant’s assets or income, debt load, and credit history, and make a reasonable determination that a borrower will be able to pay back the loan.

 

The RESPA servicing rule requires mortgage servicers to provide disclosures to borrowers related to force-placed insurance, respond to errors asserted by borrowers in a timely manner, and follow procedures related to loss mitigation applications and communications with borrowers. For example, servicers generally must acknowledge written notices of error within five days and investigate and respond to the borrower in writing within 30 days.

 

Specific research activities. The CFPB will examine the impact of major provisions of the ATR/QM rule on a set of consumer outcomes, including: mortgage cost; origination volumes; approval rates; and subsequent loan performance. In addition to these measurable outcomes, the bureau will also consider changes in creditors’ underwriting policies and procedures which might affect consumer outcomes.

 

The CFPB plans to conduct or has begun conducting several research activities in connection with the assessment of the ATR/QM rule:

• quantitative research on loan originations, rejection rates, and loan performance, using available mortgage data;
• analysis of cost of credit before and after the rule, as well as recent trends;
• interviews with creditors regarding their activities undertaken to comply with the requirements of the ATR/QM Rule; and
• consultations with government regulatory agencies, government-sponsored enterprises, and private market participants.

To assess the effectiveness of the 2013 RESPA servicing rule, the CFPB also plans to analyze a variety of metrics and data to the extent feasible. Feasibility will depend on the availability of data and the cost to obtain any new data.

 

Issues for comment. In particular, the CFPB invites the public, to submit the following:

• comments on the feasibility and effectiveness of the plans, as well as the outcomes, metrics, baselines, and analytical methods for assessing the rules:
• data and other factual information that may be useful;
• recommendations to improve the assessment plan, as well as data, other factual information, and sources of data that would be useful;
• data and other factual information about the benefits and costs of the rules for consumers, creditors, and other stakeholders in the mortgage industry; and about the impacts of the rules on transparency, efficiency, access, and innovation in the mortgage market;
• data and other factual information about the rules' effectiveness in meeting Dodd-Frank Act objectives; and
• recommendations for modifying, expanding, or eliminating the rules.

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