Consumer Financial Services Alert - September 17, 2013 September 17, 2013
In This Issue

CFPB Issues Guidance Bulletin on Furnisher’s Duty to Investigate

The CFPB issuedguidance bulletin setting forth its expectations for how companies that supply information for credit reports, commonly referred to as furnishers, should comply with the requirements of the Fair Credit Reporting Act in handling investigations of consumer disputes. FCRA requires consumer reporting agencies to notify and provide all relevant information to a furnisher when a consumer disputes the accuracy or completeness of information provided by the furnisher to the CRA. The furnisher is then required to conduct an investigation, including a review of "all relevant information" provided by the CRA. Of particular concern to the CFPB are furnishers’ obligations to review all relevant dispute information provided by the CRAs. The bulletin advises that the CFPB expects each furnisher to comply with FCRA by: (1) maintaining a system reasonably capable of receiving consumer dispute information from CRAs, including supporting documentation; (2) conducting an investigation of the disputed information including reviewing "all relevant information" forwarded by the CRA and the furnisher’s own information with respect to the dispute; (3) reporting the results of the investigation to the CRA that sent the dispute; (4) providing corrected information to every nationwide CRA that received the information, if the information is inaccurate or incomplete; and (5) modifying or deleting the disputed information, or permanently blocking the reporting of the information, if the information is incomplete, inaccurate, or cannot be verified. The bulletin notes that the CFPB will "prioritize examinations" on the basis of risks posed to consumers and will take any necessary supervisory and enforcement actions to address violations of FCRA.

CFPB Issues Guidance Bulletin on Employer Payroll Cards

The CFPB issuedguidance bulletin warning employers of the prohibition on requiring employees to use payroll cards. Payroll cards are regulated by the Electronic Fund Transfer Act and its implementing regulation, Regulation E. Regulation E generally prohibits a financial institution or other person from requiring that an employee receive direct deposit into an account at a particular institution. The bulletin was issued after the CFPB heard reports of employers distributing wages solely through payroll cards. Of import, the CFPB noted that it will assess supervised entities’ and third-party service providers’ compliance with federal consumer financial laws including the EFTA and Regulation E. The CFPB noted that it plans to use its enforcement authority to "stop violations before they grow into systematic problems, maximize remediation to consumers, and deter future violations." The CFPB has used its guidance bulletins to direct and warn entities of potential violations and resulting enforcement actions for violations of federal consumer financial laws. For example, in December 2012, the CFPB issued warning letters to nationwide specialty consumer reporting agencies in complying with the Fair Credit Reporting Act (see December 11, 2012 Alert). The FTC later took enforcement action against a nationwide specialty consumer reporting agency for violations of FCRA (see August 20, 2013 Alert).

CFPB Finalizes Clarifications to Mortgage Rules

In a continuing effort to resolve issues and answer questions "identified during the implementation process," the CFPB finalized revisions to the mortgage rules it published in January (see January 22, 2013 Alert) and subsequently amended in June 2013 (see June 25, 2013 Alert). While the final rules adopts many of the changes in its June 2013 proposal, the CFPB also added new sections and modified certain provisions to clarify interpretative issues and facilitate compliance. In particular, the final rule clarifies what action constitutes the "first notice or filing" for purposes of the general ban on proceeding to foreclose before a borrower is 120 days delinquent, and provides exemptions from the 120-day prohibition for foreclosures for certain reasons other than nonpayment. Under the revisions, a document is considered the "first notice or filing" on the basis of foreclosure procedure under applicable state law. The revision also adopts new commentary that more specifically addresses the different type of foreclosure procedures. For example, in judicial foreclosure states, a document is considered the first notice of filing if it is the earliest document required to be filed with a court or other judicial body to commence the action or proceeding (e.g., complaint, order to docket); whereas in a non-judicial foreclosure state, the first notice or filing is the earliest document required to be recorded or published to initiate the foreclosure process. The CFPB also incorporated a new section to require that, if a borrower submits all missing information listed in the required early delinquent notice, or if no additional information is requested in the notice, the application is considered "facially complete" and will trigger borrower protections. Further, servicers are required to treat a facially complete application as complete for purposes of a borrower’s appeal rights and the borrower response timeline. The final rule also added a new provision clarifying what constitutes financing of credit insurance premiums by creditors. Financing occurs when a creditor treats a credit insurance premium as an amount owed and provides a consumer the right to defer payment of that obligation.

CFPB and FTC File Joint Amicus Brief Related to Threatened Litigation Under FDCPA

The CFPB and FTC jointly filed an amicus brief urging the United States Court of Appeals for the Seventh Circuit to uphold a district court’s decision denying defendant’s motion to dismiss a class action alleging violations of the Fair Debt Collection Practices Act. Defendant, a debt collector, sent plaintiff a "dunning" letter seeking to collect a debt by offering plaintiff a settlement. Plaintiff filed a class action alleging that by failing to disclose that the debt was time-barred and by offering to settle the debt, defendant violated the FDCPA’s prohibition on providing false and misleading representation in the collection of the debt. Defendant moved to dismiss the class action arguing that the FDCPA does not expressly require debt collectors to disclose that a debt is time-barred, and that its letter to plaintiff did not explicitly or implicitly threaten litigation. The district court denied defendant’s motion to dismiss. Citing several reports by the FTC, the district court found that an "unsophisticated consumer" might be confused or intimidated by the letter, perceiving that refusal to settle would result in the debt collector filing suit to collect the debt. However, recognizing that other courts had held such letters did not violate the FDCPA so long as they did not constitute threatened litigation, the district court certified its decision for interlocutory review.

In their amicus brief, the FTC and CFPB argue that the FDCPA prohibits debt collectors from suing or threatening to sue on a time-barred debt. The agencies, however, push the argument further, contending that the outcome should not hinge on whether the letter threatened litigation because no threat of litigation is necessary for the letter to be deceptive. Rather, in the agencies’ view, the letter’s failure to disclose that the debt was time-barred is a deceptive omission under the FDCPA even if the letter did not threaten to sue on the debt, because it could mislead an unsophisticated consumer into thinking that a lawsuit would follow if the settlement were not accepted. Of concern to the agencies was the practical effect of such practice by debt collectors. Unsophisticated consumers, according to the agencies, "do not know or understand their legal rights with respect to time-barred debts." The deadline in defendant’s letter to plaintiff, could imply that failure to pay by the date would result in litigation. Ultimately, the agencies argued that "in some circumstances, a debt collector may be required to make affirmative disclosures in order to avoid misleading consumers."

Debt collection has been an area of concern for both state and federal regulators. Reminiscent of previous remarks, included among the "Four Ds" that the CFPB has been focused on, was the activities of debt collectors—"dead ends" identified by Director Richard Cordray as issues consumers face. Further, California has taken action to prevent such "misleading" debt collection tactics. In July 2013, the California legislature passed and the governor signed into law the Fair Debt Buying Practices Act, which, among other things, prohibits a debt buyer from initiating a suit to collect a debt if the statute of limitations on the cause of action has expired (see July 19, 2013 Alert).

Steven Antonakes Named Deputy Director

Steve Antonakes was named as the CFPB’s Deputy Director. Mr. Antonakes was named Acting Deputy Director in February 2013 following the departure of Deputy Director Raj Date (see February 5, 2013 Alert). Mr. Antonakes will continue to perform his duties as Associate Director for Supervision, Enforcement and Fair Lending.

CFPB To Hold Field Hearing on Credit Cards

The CFPB will hold a field hearing on credit cards in Chicago, Illinois on October 2, 2013.

Seventh Circuit Reverses Decertification of Class in ATM Fee Suit

The United States Court of Appeals for the Seventh Circuit reversed a lower court’s decertification of a class alleging violations of the Electronic Fund Transfer Act. Plaintiffs filed a class action alleging that defendants, ATM operators, violated the EFTA, by failing to post a notice on the ATMs that defendants charged a fee for use of the ATMs. Initially, the lower court certified a class of ATM users, but then granted defendants’ motion to decertify the class for two reasons: (1) the recovery available to borrowers would be greater in individual suits than a class action and (2) because the ATM did not store users’ names, class members could not be practicably notified without subpoenaing hundreds of banks. The EFTA provides a $100 minimum in statutory damages for individual suits, but caps recovery at 1% of defendant’s net worth for class actions. Because of defendants’ net worth, damages would be capped at $10,000 with the class of over 2,800 members—resulting in a limited award for class members.

Weighing two competing considerations—maximizing recovery for individual class members and maximizing deterrence of violations, the Seventh Circuit came down on the side of deterrence. The Seventh Circuit concluded while the statutory damages under the EFTA for individuals suits was greater than the 1% cap for class actions, it was still not enough to incentivize attorneys to take individual suits. While the potential limited recovery for plaintiffs in a class action "would provide no meaningful relief," such limited recovery should not drive the class certification decision—"the district court must be careful not to allow the litigation expenditure tail to wage the remedy dog." The Seventh Circuit suggested a cy pres award to a charity, which might provide some public benefit in furtherance of the aims of the EFTA, in lieu of the potential limited class award, which would neither meaningfully compensate plaintiffs nor incentivize meritorious suits. The Seventh Circuit also rejected the lower court’s concern for class notice. Notice by publication, according to the Seventh Circuit, could be sufficient, and would probably be the most effective means of providing notice, given that Rule 23 of the Federal Rules of Civil Procedure requires the "best notice that is practicable under the circumstances," and requires only "effort commensurate with the stakes."

Of note, the EFTA has since been amended to remove the requirement that ATM operators provide notice on the ATM of any fees charged for usage.

California Municipality Approves Mortgage Seizure Plan

The City Council of Richmond, California recently approved a plan that would allow the city to seize mortgages in which the remaining mortgage balance exceeds the property value by using eminent domain, making it the first city to do so. The plan would allow the city to buy the loans from residential mortgage-backed securities trusts at a discounted price by exercising eminent domain powers and then refinance them with federally-insured loans in partnership with a private company. The plan also allows other cities to join Richmond through a joint partnership, in what it describes as an effort to refinance these loans to avoid foreclosures. The use of eminent domain to seize mortgages has faced opposition from the banking, real estate, securities industries and the federal government. In particular, two banking institutions jointly filed a complaint in the United States District Court for the Northern District of California against the city and its investment partner. The banks argue that the city’s plan is unconstitutional, seeks to enrich the city at the expense of the trustees and their beneficiaries in part by targeting performing loans, and could have negative effects on the residential mortgage-backed securities market. The banks also seek to permanently enjoin the city from implementing its plan and a declaratory judgment that the plan is unlawful. FHFA also issued a statement and memorandum in August 2013 to express its "serious concerns on the use of eminent domain to restructure existing financial contracts" and determined that such use of eminent domain "presents a clear threat to the safe and sound operations" of the GSEs.

New York Department of Financial Services Proposes Slumlord Prevention Guidelines for Bank Lending

The New York Department of Financial Services released proposed Slumlord Prevention Guidelines for banks lending to landlords in multifamily properties. In announcing the new guidelines and state Community Reinvestment Act regulations, the Superintendent of Financial Services, Benjamin Lawsky, stated that "banks are critical gatekeepers in deciding who becomes a landlord in local communities." The guidelines include new state CRA regulations from DFS aimed to "incentivize banks to lend to landlord who are committed to the long-term health of a community." The proposals being considered by DFS include, reviewing whether a bank meets its responsibility to ensure that any loan made contributes to, and does not undermine, the availability of affordable housing or neighborhood conditions. For example, DFS will look at the quality of the housing and whether the bank has carefully assessed the true value of their loan in determining whether the loan has a primary purpose of neighborhood revitalization. The guidelines provide that a loan on a multifamily property would not be found to have a community development purpose—CRA eligible—if it: (1) significantly reduces or has the potential to reduce affordable housing; (2) facilitates substandard housing; (3) is in technical default in the loan agreement; or (4) has been unwritten in an unsound manner (e.g., debt load). The guidelines also set forth best practices for property management, community relations, due diligence and appraisals. For example, the guidelines provide that a bank’s due diligence process should consider, at a minimum, the borrower’s record of housing code violations. The guidelines also suggest that banks should ensure that properties are adequately maintained by borrowers by tracking violations including tenant complaints in media reports and/or consumer groups.