Consumer Financial Services Alert - July 13, 2010 July 13, 2010
In This Issue

U.S. District Court Rules That HUD Interpretation of RESPA Is Unconstitutionally Vague

A U.S. District Court judge concluded that Policy Statement 1996-2, in which HUD set forth factors to aid in determining whether an affiliated business arrangement is a bona fide provider of settlement services under the Real Estate Settlement Procedures Act, is unconstitutionally vague. Plaintiffs contended that their real estate firms’ partial ownership of the affiliated business arrangements from which plaintiffs purchased their title insurance violated RESPA’s anti-kickback provision. Defendants asserted in a summary judgment motion that the statutory exception for affiliated business arrangements barred plaintiffs’ claims. In response, plaintiffs argued that an affiliated business arrangement must be a bona fide provider of settlement services in order to take advantage of this exception, an inquiry typically guided by a ten-factor test set forth in the Policy Statement.

The court declined to apply that test, concluding that it raised serious constitutional concerns. By employing broad terms such as “sufficient,” “substantial,” and “reasonable” without providing guidance as to how to determine the meaning of such terms in the context of the title insurance business, the court noted the Policy Statement invited a highly subjective evaluation. In addition, HUD’s directive that the ten factors be considered together required further subjective judgments, because the Policy Statement provided no guidance as to how many factors would be determinative, or how much weight was to be given to the individual factors. As a result, the court concluded that the regulation did not contain sufficient detail to prevent arbitrary enforcement and to give notice of what an individual must do to comply with the Policy Statement, and instead applied the terms of the statute itself. After concluding that no violation of the anti-kickback provision had occurred, the court entered summary judgment for the defendants. Click here for Carter v. Wells-Bowen Realty, Inc., No. 3:05 CV 7427 (N.D. Ohio June 30, 2010).

FTC Issues Report on Debt Collection Litigation and Arbitration

The FTC issued a report concluding that litigation and arbitration do not provide enough protection for consumers in debt collection actions. The report identifies a number of concerns that the FTC believes contribute to this issue. According to the report, the litigation concerns include:

  • filing suits based on insufficient evidence;
  • failing to properly notify consumers of suits;
  • high prevalence of default judgments;
  • improperly garnishing exempt funds from bank accounts; and
  • suing or threatening to sue on time-barred debts.

The arbitration concerns include:

  • binding consumers to resolve disputes through arbitration without meaningful choice or awareness;
  • bias or the appearance of bias in arbitration proceedings;
  • procedural unfairness in arbitration proceedings; and
  • requiring consumers to pay substantially more to participate in arbitration proceedings than in comparable court proceedings.

The report offers a number of findings and recommendations with respect to debt collection litigation and arbitration. Regarding litigation:

  • states should consider adopting measures to make it more likely that consumers will defend themselves in litigation;
  • states should require debt collectors to include more information about the debt in their complaints;
  • states should take steps to make it less likely that debt collectors will sue on time-barred debt and that consumers will unknowingly waive statute of limitations defenses available to them; and
  • federal and state laws should be changed to prevent the freezing of a specified amount in a bank account into which a consumer has deposited funds that are exempt from garnishment.

And, regarding arbitration:

  • consumers should have a meaningful choice about arbitration;
  • arbitration forums and arbitrators should eliminate bias and the appearance of bias;
  • arbitration forums should require that awards contain more information about how the case was decided and how the award amount was calculated; and
  • arbitration forums should make their process and results more transparent.

Click here for the report.