Consumer Financial Services Alert - April 15, 2014

The CFPB, in alignment with its continuing focus on the mortgage closing process, announced that it will hold a field hearing in Washington, D.C. on April 23, 2014, on this subject. The CFPB previously solicited public comment on “key consumer ‘pain points’” of the mortgage closing process (see January 7, 2014 Alert).

After denying a petition to set aside a civil investigative demand (see October 1, 2013 Alert), the CFPB, filed a petition in the United States District Court for the Central District of California to enforce its civil investigative demand against online payday lenders affiliated with Indian tribes. In its petition, the CFPB alleged that the lenders failed to comply with the civil investigative demand and requested that the court issue a show cause order and an order requiring the lenders to comply. The lenders filed their opposition arguing that the CFPB’s petition “barely mentions the key fact of [the] case” that the lenders were “arms of a sovereign Indian Tribe, vested with all attributes of tribal sovereignty.” The lenders continue to advance the argument that they are outside the CFPB’s jurisdiction because they are chartered under the laws of federally recognized Indian tribes (see October 2, 2012 Alert). Lenders affiliated with tribes have made similar arguments when facing oversight and enforcement action by regulators (see April 1, 2014 Alert).

The United States District Court for the District of South Dakota Central Division entered a final order and judgment approving a settlement between the FTC and a payday lender, in which the company agreed to pay civil money penalties for alleged unfair and deceptive acts and practices in violation of the FTC Act, the FTC’s Credit Practices and the Electronic Fund Transfer Act. According to the FTC, the payday lender’s wage garnishment practices (1) did not meet the requirements of the Credit Practices Rule, which required that wage assignment clauses be revocable, a payroll deduction or preauthorized payment plan made at the time of the transaction, or applicable only to wages or other earnings already earned at the time of assignment and (2) violated the EFTA and Regulation E by conditioning the extension of credit on repayment by means of preauthorized electronic funds transfers. Consequently, the payday lender was alleged to have violated Section 5 of the FTC Act for making misrepresentations or deceptive omissions, for including in its communications with consumers and their employers that it was legally authorized to garnish wages. The FTC also alleged that the payday lender attempted to manipulate the legal system by forcing consumers to appear in a tribunal court that did not have jurisdiction over the debt collection cases.  In addition to the civil money penalty, the terms of the settlement require that the payday lender surrender profits and bars the payday lender from suing any consumer in the course of collecting a debt, except where such suit is a counterclaim. This continues a trend by the FTC, CFPB and state regulators to target the practices of payday lenders.

Continuing a trend of rejecting challenges to foreclosure by Massachusetts borrowers, the First Circuit affirmed dismissal of a complaint alleging several commonly made arguments in foreclosure litigation. After defaulting, the borrower’s home was foreclosed upon. The borrower filed suit alleging wrongful foreclosure, slander of title and unfair and deceptive business practices under Massachusetts law. The lender moved to dismiss the borrower’s suit, which was granted by the lower court. The borrower appealed.

In the appeal, the borrower alleged that the Mortgage Electronic Recording System, the electronic loan registry that serves as mortgagee as nominee for the lender and successor noteholders, lacked authority to assign the mortgage to the lender who ultimately foreclosed on the borrower. The First Circuit, noting that it had twice rejected this argument under Massachusetts law, rebuffed it again. The Court detailed “MERS’s business model,” which relies on MERS’s “ability to remain mortgagee of record, possessing a legal interest in a homeowner’s mortgage, while the beneficial interest in that accompanying note is transferred among MERS’s member institutions.” The fact that MERS tracks mortgage transfers electronically does not make these transfers “electronic assignments,” or otherwise cast doubt upon MERS’s authority to assign mortgages on behalf of its members, according to the Court. The Court also rejected the borrower’s allegation that the assignment of his mortgage from MERS to the foreclosing lender was “robo-signed,” again relying on a recent opinion in which the First Circuit had rejected this argument. Here, as there, the borrower asserted “no particular legal theory as to why a ‘robo-signed’ document is necessarily invalid.” And, because the signature was notarized, under Massachusetts law it was generally binding upon the entity, MERS, on whose behalf the signature was executed.

The Court also considered the borrower’s allegation that the MERS assignment violated the pooling and servicing agreement of the trust into which his loan was securitized because (1) there were no assignments to securitization intermediaries and (2) the assignment occurred after the closing date of the trust. Considering the claim under Massachusetts law, rather than New York law (as borrower did not argue below, but asserted on appeal), the First Circuit ruled that the borrower’s allegation, even if true, would only render the assignment voidable—not void. And, under Massachusetts law, a borrower lacks standing to challenge a mortgage assignment that is not void, but merely voidable, and thus capable of subsequent ratification.   Next, the Court rejected the borrower’s argument that the current mortgage-holder failed “to unify the mortgage and note,” because the argument was based on a Massachusetts Supreme Judicial Court ruling, Eaton v. Fed. Nat’l Mortg. Ass’n, 462 Mass. 569 (2012), that applies only prospectively, to conduct occurring after Eaton was issued, and to cases already on appeal while Eaton was decided. Though the borrower had filed his complaint before Eaton was decided, it was not on appeal at the time, and so Eaton did not apply. Finally, the Court refused to consider the borrower’s argument related to the validity of the notice he received—though the First Circuit observed that, had the borrower not waited until his appeal to raise this claim, but instead pled the claim in his complaint, it may have survived a motion to dismiss.

The United States Court for the Eastern District of Pennsylvania denied a motion to dismiss a borrower’s claim that a debt collection letter failed to provide adequate notice of her right to dispute the validity of the debt. The Fair Debt Collection Practices Act requires, among other things, that debt collectors notify consumers that they have a 30-day period to dispute the debt in writing. While the letter sent by the debt collector included the required 30-day notice period by which to dispute the debt, the borrower alleged that the FDCPA notice was not “prominent and conspicuous” because it was in smaller text on the back page of the letter and was “overshadowed” by the other information in the letter.

The Court, which in its opinion included an image of both the front and back pages of the letter, found that the notice was not prominently displayed as a matter of law. Considering the case under a “least sophisticated consumer” standard, which is the standard adopted by the Third Circuit and cited in the opinion, the Court declined to rule that placing a notice on the back of the letter in smaller text was enough, standing alone, to violate the FDCPA. But, the Court nonetheless ruled that the content concerning debt and repayment demand, which implied that the borrower could dispute her debt by calling the debt collector, overshadowed the content of the notice concerning the debtor’s rights, which discussed disputing the debt “in writing.” The Court analyzed Third Circuit precedent (e.g., Caprio v. Healthcare Revenue Recovery Group, LLC, 709 F.3d 142 (3d Cir. 2013)) to consider similar letters that advised debtors to call the debt collector and presented some tension with the FDCPA’s requirement that the borrower dispute the debt “in writing.” In analyzing the letter challenged by the borrower as violative of the FDCPA, the Court ruled the prominent statement that “[i]f necessary, you may contact our client directly at” a given telephone number, would lead the “least sophisticated consumer” to conclude that a telephone call would be an adequate means of disputing her debt. And, the Court ruled, the more specific, less prominent language on the back of the letter about disputing the debt in writing did not “salvage the received message.” Of note, the Court called for “[m]ore explicit regulation” that does not require courts to engage in “mind-reading the ‘least sophisticated debtor’ (or Congress).”

The Texas Department of Banking issued a supervisory memorandum clarifying the applicability of the Texas Money Services Act to various activities involving virtual currencies. The Department of Banking determined that exchanging virtual currency for sovereign currency is not currency exchange under the Act (because the definition of “currency” in the Act does not encompass virtual currencies) and that no currency exchange license is therefore required in Texas to conduct any type of transaction exchanging virtual with sovereign currencies.

The Department of Banking also analyzed whether the state’s licensing requirements for money transmitters applied to cryptocurrencies—currencies based on a cryptographic protocol that manages the creation of new units of the currency through a peer-to-peer network. The Department of Banking determined that because cryptocurrencies cannot be considered “money or monetary value” under the Act, in the absence of the involvement of sovereign currency in a transaction (e.g., when receiving cryptocurrency in exchange for a promise to make it available at a later time or different location), no money transmission can occur. However, when a cryptocurrency transaction does include sovereign currency, it may be money transmission depending on how the sovereign currency is handled. To provide further guidance, the Department of Banking analyzed five fact patterns and made the following corresponding determinations as to whether money transmission had occurred:

• The exchange of cryptocurrency for sovereign currency between two parties. The Department of Banking stated that such exchange, essentially a sale of goods between two parties, is not money transmission.
• The exchange of one cryptocurrency for another cryptocurrency. Such exchange is not money transmission because there is no receipt of “money.”
• The transfer of cryptocurrency by itself. Such transfer is not money transmission because cryptocurrency is not “money or monetary value.” Such transfer would include intermediaries who receive cryptocurrency for transfer to a third party, and entities who hold cryptocurrency on behalf of customers.
• The exchange of cryptocurrency for sovereign currency through a third party exchanger. Using Mt. Gox as an example, the Department of Banking determined that irrespective of its handling of the cryptocurrency, the exchanger conducts money transmission by receiving the buyer’s sovereign currency in exchange for a promise to make it available to the seller.
• The exchange of cryptocurrency for sovereign currency through an automated machine. The Department of Banking determined that when a third party is involved, the exchange is money transmission. For further clarification, when a machine acts as an intermediary between a buyer and seller, the operator of the machine receives the buyer’s sovereign currency in exchange for a promise to make it available to the seller and, according to the memorandum, is engaged in money transmission. If, however, the machine is configured to only conduct transactions between the customer and the machine’s operator, with no third parties involved, there is no money transmission because at no time is money received in exchange for a promise to make it available at a later time or different location.

The Massachusetts Division of Banks established the maximum fee that state-chartered banks and credit unions are permitted to assess consumer accounts in connection with processing a dishonored check. The maximum fee, which was determined based upon a review of cost data the DOB obtained during the course of regular examinations, is set at $5.71. This fee cap is the same maximum as had previously been in place. This maximum fee will remain in effect until April 30, 2015, or until such time as the DOB issues its 2015 fee decision.