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.
Friday, January 27, 2017
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.
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