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A further update on state AG/regulator lawsuits using Dodd-Frank authority

Posted in UDAAP

Below is an update on the lawsuits we have been following that state attorneys general and a state regulator have brought using their Dodd-Frank enforcement authority.  Under Dodd-Frank Section 1042, a state AG or regulator is authorized to bring a civil action to enforce provisions of Dodd-Frank Title 10 or regulations issued under Title 10, including the Dodd-Frank prohibition of unfair, deceptive or abusive acts or practices (UDAAP).

Illinois.  The Illinois AG has filed two lawsuits using her Section 1042 authority.  In March 2014, the Illinois AG filed a state court lawsuit against a small loan lender alleging violations of the Dodd-Frank UDAAP prohibition as well as state law violations.  In April 2014, the defendant removed the case to an Illinois federal court.  In May 2014, the defendant filed a motion to dismiss and the AG responded to the motion on July 21, 2014.  Since our prior update, the defendant filed a reply memorandum in support of its motion to dismiss on September 18.

The Illinois AG’s second use of Section 1042 was in a lawsuit initially filed in state court against a for-profit college and its owners.  In March 2014, the state court granted the AG’s motion to further amend her complaint to add new counts alleging that the defendants’ practices were unfair and abusive under Dodd-Frank and in May 2014, the defendants removed the case to a federal district court in Illinois.

On June 16, 2014, the defendants filed a motion with the federal district court to dismiss the amended complaint and on June 18, the AG filed a motion asking the court to sever and remand Counts I and II of the amended complaint. Both parties’ motions were denied.

Since our prior update, the AG filed a substantially similar second amended complaint on September 30 to which the defendants filed an answer on October 3.  The court has set a summary judgment motion filing deadline of December 12, 2014 and scheduled a bench trial for June 15, 2015.

New York.  In April 2014, Benjamin Lawsky, the Superintendent of the New York Department of Financial Service, using his Section 1042 authority, brought a civil action in a New York federal court for a violation of the Dodd-Frank UDAAP prohibition against a large subprime auto lender and its CEO and president.  In May 2014, the court entered a preliminary injunction freezing the defendants’ assets and enjoining them from engaging in new loan business and an order appointing a receiver.  On June 10, the court denied the defendants’ motion to modify the preliminary injunction.

On August 1, the court denied a renewed motion by the defendants to modify the preliminary injunction.  As we reported, the defendants have filed an appeal from that order with the U.S. Court of Appeals for the Second Circuit and must file their brief by December 8.

Since our last update, the district court issued a ruling on October 28 that by appealing the August 1 order, the defendants divested the court of jurisdiction to modify that order and denied a request by the defendants to modify the order while the appeal is pending.  On November 6, the court entered an order formally reaffirming that the receiver had absolute discretion to enter into a sale of the lender’s customer loan portfolio and use the proceeds to satisfy amounts owed to the lender’s secured creditors.  On the same day, the lender and its CEO submitted a letter to the court seeking permission to participate in the marketing and sale of the lender’s remaining assets.

Florida/Connecticut.  On July 29, 2014, another Section 1042 lawsuit was filed jointly by the Attorneys General of Florida and Connecticut in a Florida federal court.  The lawsuit alleges that four individuals and their four businesses formulated and participated in a mortgage rescue scam that deceived consumers into paying upfront fees to be included as plaintiffs in so-called “mass-joinder” lawsuits against their mortgage lenders or servicers.

In addition to asserting claims under their states’ unfair trade practices acts, the AGs allege in their amended complaint that the defendants’ conduct violated the federal Mortgage Assistance Relief Services Rule (MARS Rule).  The AGs assert their MARS Rule claim pursuant to Section 1097 of Dodd-Frank (12 USC Section 5538), which authorizes a state AG to bring civil actions on behalf of his or her state’s residents to enforce the MARS Rule.

The AGs also assert a UDAAP claim under Section 1042 of Dodd-Frank.  Dodd-Frank Section 1097 further provides that a violation of the MARS Rule “shall be treated as a violation of a rule prohibiting unfair, deceptive, or abusive acts or practices under the Consumer Financial Protection Act of 2010.”  The defendants assert that pursuant to Section 1097, a violation of the MARS Rule is a UDAAP under Dodd-Frank.

Contemporaneously with the filing of the original complaint, the court entered a temporary restraining order freezing certain of the defendants’ assets and appointing a receiver and on August 22, 2014, the court entered a preliminary injunction continuing such relief.

Since our initial report, one of the individual defendants filed an answer to the amended complaint on October 7 and the remaining defendants have received extensions to file answers until December 2 and 8.

Mississippi. In May 2014, the Mississippi AG filed a lawsuit against Experian in Mississippi state court alleging widespread federal and state law violations.  (While the AG’s complaint did not expressly allege that his claim of alleged UDAAP violations by Experian was brought under Section 1042, his complaint seeks various remedies under Dodd-Frank Section 1055 (12 U.S.C. 5565).)  In June 2014, Experian removed the case to a federal district court in Mississippi.  There have been no significant developments since our prior update.

 

Some thoughts on the St. John’s School of Law’s analysis of consumer understanding of arbitration agreements

Posted in Arbitration

Following on the heels of the Pew Foundation’s survey of consumer attitudes towards arbitration and the CFPB’s on-going empirical study of consumer arbitration, a group of professors from St. John’s University School of Law recently conducted an empirical study purporting to explore the extent to which consumers are aware of and understand the effect of arbitration clauses in their consumer contracts.  According to the study, which is presently in draft form, 668 consumers completed an online survey in which they were shown a generic but supposedly “typical” credit card contract with an arbitration clause containing a class action waiver and were then asked questions about what they understood and what they thought their legal rights were in various hypothetical situations.

The study concluded that there is “a lack of understanding about the existence and effect of arbitration agreements among consumers.”  It found that there are “troubling issues” about whether consumers’ consent to arbitration is “informed in any sense of the word” and whether “consumers should be bound by agreements they cannot comprehend but which strip them of their constitutional rights.”  “Overall,” the authors state, “of the more than 5,000 answers we recorded to questions offering right and wrong answers [about arbitration], only a quarter were correct.”

In our view, the survey is deeply flawed because it does not even attempt to examine how consumers actually fare in individual arbitrations, or how their experience compares with how class members fare in certified or settled class actions.  Before dismissing consumer arbitration clauses as “Whimsy Little Contracts with Unexpected Consequences” (the title of the study), the St. John’s study should have made a serious effort to canvas individuals who have actual first-hand experience with the arbitration process and individuals who have participated as class members in a class action.  Unfortunately, the study avoids this central issue, stating that: “We will not attempt to resolve the debate over the comparative advantages of arbitration and litigation in this article.”  And, “they express no opinion here about the efficacy of class actions,” although they acknowledge it is “a subject of heated debate.”  Tellingly, the final question out of the 40 questions in the survey (coming after stock demographic questions about age, annual income and ethnicity) is the question that should have been first: “Have you ever been a party to or otherwise involved in an arbitration?”

It is our view that a significant measure of the fairness of arbitration is how it compares to other procedures for resolving disputes, in particular class actions.  A consumer who was able to successfully resolve a dispute in a few months and with minimal expense would likely prefer arbitration (even pre-dispute mandatory arbitration) to a class action in which, after years of litigation, he or she receives a $5 check or a coupon towards a future purchase while the attorneys for the class obtain millions in “class counsel” fees.  Because it focuses myopically on the “understandability” of a hypothetical arbitration clause in a hypothetical contract, the St. John’s study does not further our understanding of the critical question of whether individual arbitration is fair to consumers compared with class action litigation.

In fact, many earlier studies have concluded that consumers do fare well in arbitration, even better than they fare in litigation.  For example, an Ernst & Young empirical study in 2004, which included a telephone survey, found that consumers prevailed more often than businesses in cases that went to an arbitration hearing, with 55% of the cases that faced an arbitration decision being resolved in favor of the consumer; consumers obtained favorable results (including settlements) in 79% of the cases that were reviewed; and 69% of consumers surveyed were satisfied with the arbitration process.  A 2005 Harris Interactive survey of 609 adults who had participated in a binding arbitration that culminated in a decision found that arbitration was widely seen as faster (74%), simpler (63%) and cheaper (51%) than going to court; two-thirds (66%) of the participants said they would be likely to use arbitration again, with nearly half (48%) saying they were extremely likely to do so; even among those who lost, one-third said they were at least somewhat likely to use arbitration again; and most participants were very satisfied with the arbitrator’s performance, the confidentiality of the process and its length.  More recently, a 2009 study by the Northwestern University School of Law of 301 American Arbitration Association consumer arbitrations concluded that arbitration is an expeditious way to resolve disputes (averaging 6.9 months) and that consumers won relief in 53.3% of the cases filed and recovered an average of $19,255.

The ultimate irony here is that even if some consumers in the St. John’s study who never participated in a consumer arbitration may purport to be confused when they are asked hypothetical questions about what arbitration is and what effect it has, consumers who have actually participated in arbitration appear to have very definite opinions about what arbitration is and what it does.  They like arbitration because it works better than the court system.  Eliminating their views skews the analysis and produces an artificial anti-arbitration conclusion.

In our opinion, asking consumers whether they know, based upon reading a hypothetical credit card agreement, whether they agreed to arbitrate or whether they can go to small claims court or participate in a class action does not shed any light on the ultimate question of whether individual arbitration is fair to consumers compared to class action litigation.  Moreover, it is misguided to focus narrowly on whether the consumer has “consented” to the arbitration clause alone.  Had the individuals who claim they were confused about the arbitration clause been quizzed about how the credit card’s daily interest rate is computed, what the parties’ respective rights are in the event of default, what their billing rights are or what information was contained in the Schumer box, they probably would have expressed the same confusion.  But with rare exceptions, the law has always been that contracts are to be viewed objectively.

Typically, if an individual agrees to a contract and receives its benefit, he or she will not be heard to complain that the contract is unenforceable because it could not be understood.  If a contract is understandable enough to bind a consumer to its business terms, it should be understandable enough to bind the consumer to the contract’s dispute resolution provision.  Contracts as a whole are legal documents that affect the parties’ rights.  Taking the arbitration clause out of context ignores that the entire contract is supposed to be based upon consent, a meeting of the minds.  If anything, given the great care that most drafters make to ensure that the arbitration clause is understandable and clearly and conspicuously disclosed, the arbitration clause is likely one of the most comprehensible parts of a modern-day financial contract.  In any event, ask a consumer who has prevailed in an arbitration proceeding a few months after filing a demand if he or she understands what arbitration is.  That person will give a much different, and more meaningful, response than respondents who lack real-world experience with arbitration and are asked hypothetical questions.

Even before the advent of consumer arbitration clauses, many contracts contained jury trial waiver provisions.  Many, if not most, states will enforce such waivers if they are disclosed in a clear and conspicuous fashion.  Relinquishing a jury trial is the only “constitutional right” that is waived when a party agrees to arbitrate.  Bringing or participating in a class action is not a constitutional right.  It is a mere procedural right.  But it is the inclusion of a class action waiver in an arbitration provision that is the root of the frenzied opposition of plaintiffs’ lawyers and consumer advocates to consumer arbitration.  The St. John’s article itself expresses “doubt about the legitimacy of the class action waivers contained in arbitration clauses.”

As noted above, there are statistics that support the conclusion that a consumer fares better in an individual arbitration than as a member of a class.  But even aside from statistics, consumers have much to gain from arbitration that is not reflected in the St. John’s survey questions.  They can have their disputes resolved in a matter of months, not years.  In most cases they pay less than what it costs to file a complaint in court.  They get the opportunity to sit at a conference table with the decision maker and tell their side of the story unconstrained by the formalities of a courtroom or strict evidentiary rules.  Win or lose, they are treated with courtesy and respect by the arbitrator and are given the kind of personal attention that is impossible in a courtroom setting.  If those same consumers had been class members, at best they might have recovered a few pennies on the dollar, or received a coupon for a future purchase, after years of litigation, only to watch their counsel walk away with the lion’s share of the settlement or recovery.  Is that more or less fair to the consumer than arbitration?

And what does a consumer really “understand” about the mechanics of class actions?  When a consumer has to make an opt-out decision based upon the dense legalese in a typical class action notice, and then is referred to a 50-page or longer settlement agreement filled with even more legalese for further details, is the consumer’s understanding of his or her legal rights any clearer than after reading a arbitration clause?  Is the consumer’s understanding of the right to opt out of a class action any clearer than his or her understanding of the right to opt out of an arbitration clause?  Aren’t those the types of questions that the St. John’s study should have explored before castigating arbitration clauses as “whimsy little contracts” that are not “understandable” to some consumers?  (The hypothetical card agreement used in the St. John’s study did not even contain an opt-out provision, although a substantial number of arbitration clauses in use today contain such a provision).

Focusing on just the hypothetical arbitration clause in a hypothetical contract presents an incomplete and distorted picture of how consumers are asked to make choices that affect their legal rights, and how they make those decisions.  We hope that the CFPB takes a more balanced and comprehensive approach as it continues its study of consumer arbitration so that the fairness of consumer arbitration is not decided in a vacuum, but rather in comparison to class actions and other dispute resolution mechanisms.

CFPB “mystery” field hearing is no longer a mystery

Posted in Prepaid Cards

On October 30, Barbara Mishkin reported that the CFPB scheduled a field hearing in Wilmington, Delaware on November 13. Barbara speculated at that time that the field hearing would be the occasion for the CFPB to unveil its long-awaited proposed regulation pertaining to prepaid cards. The CFPB has updated its announcement to state that the hearing will deal with “prepaid accounts.” We await the list of speakers at the event.

 

 

 

CFPB’s constitutionality again before D.C. Circuit in Morgan Drexen appeal

Posted in CFPB General

The CFPB’s constitutionality is again before the D.C. Circuit, with the D.C Circuit now being asked to consider the impact of the U.S. Supreme Court’s decision in NLRB v. Canning on actions taken by the CFPB while Director Cordray was serving as a recess appointee.  In that decision, the Supreme Court ruled that President Obama exceeded his constitutional recess appointment authority when he filled three vacancies on the National Labor Relations Board in January 2012.  The D.C. Circuit, whose decision was reviewed by the Supreme Court, had also ruled that the NLRB recess appointments were invalid but did so based on a different reading of the President’s recess appointment authority.

As previously reported, in July 2013, Morgan Drexen filed a lawsuit against the CFPB in a Washington, D.C. federal district court in which it alleged the CFPB’s structure was unconstitutional because it violated the Constitution’s separation of powers.  In August 2013, the CFPB responded by filing an enforcement action against Morgan Drexen in a California federal district court alleging that Morgan Drexen had charged unlawful advance fees for debt relief services and engaged in deceptive acts and practices.  That was followed by Morgan Drexen’s filing of a motion for a preliminary injunction in which it asked the D. C. court to enjoin the CFPB from prosecuting the CA action until the D.C. case was resolved.

In October 2013, the D.C. federal district court granted the CFPB’s motion to dismiss Morgan Drexen’s lawsuit.  The court agreed with the CFPB that injunctive relief as requested by Morgan Drexen was unwarranted because Morgan Drexen could raise its constitutional challenge as a defense in the CA enforcement action.  It also agreed with the CFPB that dismissal was appropriate because Morgan Drexen’s filing was an attempt to prevent the CFPB from having its enforcement action adjudicated in the Ninth Circuit.

In November 2013, Morgan Drexen appealed the dismissal to the D.C. Circuit.  Briefing on the appeal by Morgan Drexen and the CFPB was completed this past spring.  However, on November 3, Morgan Drexen submitted a letter to the D.C. Circuit regarding the Supreme Court’s Canning decision.  The letter asserts that the Supreme Court’s rationale in Canning for invalidating the NLRB appointments means that Director Cordray’s recess appointment was also invalid.  The letter suggests that the CFPB’s enforcement action against Morgan Drexen is invalid because it resulted from an investigation conducted while Mr. Cordray was not lawfully serving as CFPB Director.  (Lawmakers have questioned Director Cordray’s ability to ratify actions he took while a recess appointee.  On August 30, 2013, the CFPB published a notice in the Federal Register in which Director Cordray ratified those actions.)  Oral argument before the D.C. Circuit is scheduled for November 19.

In January 2014, the California federal district court hearing the CFPB’s enforcement action against Morgan Drexen rejected Morgan Drexen’s motion to dismiss based on a challenge to the CFPB’s constitutionality.  The court found that none of the CFPB’s structural features cited by Morgan Drexen rendered the CFPB unconstitutional.  Although similar challenges have been made in other cases, this appears to be the first decision to rule on the merits of such a challenge.

On October 7, 2014, the CFPB filed a motion for summary judgment in which it seeks a permanent injunction barring the defendants from providing debt relief services, $90.7 million in restitution, and a civil money penalty in an unspecified amount.  Morgan Drexen has filed a brief opposing the motion.

 

CBO provides cost estimate for bill to reform CFPB’s inspector general

Posted in CFPB General

The Congressional Budget Office has issued an estimate of the costs associated with the Inspector General Reform Act of 2013 (H.R. 3770).  The bill would direct the President to appoint an Inspector General (IG) for the CFPB within 60 days of enactment who would be subject to Senate confirmation.  It would also require the CFPB to set aside 2% of its annual funding to operate the IG’s  office.  Currently, the Fed and CFPB share an IG who is appointed by the Fed Chairman without the need for Senate confirmation.

According to the CBO, over the 2015-2024 period, the bill would increase direct spending by $100 million but would increase revenues by $51 million over that period because it would reduce costs for the Fed OIG.  Taking those effects together, the CBO estimates the bill would increase budget deficits by $49 million over that period.

CFPB issues snapshot of debt collection complaints filed by older consumers

Posted in CFPB Rulemaking, Debt Collection

The CFPB’s Office of Older Americans has issued a report titled “a snapshot of debt collection complaints submitted by older consumers,” which provides information drawn from complaints submitted to the CFPB from July 2013 to September 2014.  For purposes of the report, a complaint submitted by an “older consumer” is one that was submitted by or on behalf of someone who voluntarily reported their age as 62 or older.

The report indicates that over one-third of the approximately 25,800 complaints handled by the CFPB during the covered time period were about debt collection.  (The report notes that debt collection complaints from consumers of all ages accounted for 35 percent of all complaints received by the CFPB during the same period.)

The report provides the following information on the complaints filed by older consumers:

  • The most frequent debt collection complaint is that collectors demanded payment of a debt not owed, with many reporting that they may have the same name as the actual consumer alleged to owe the debt.
  •  Nearly one-third (29 percent) of complainants were unable to identify the debt being collected.
  •  Difficulty was reported in obtaining accurate and trustworthy information about alleged debts from collectors.
  • Problems in the collection of medical debts were reported, including attempts to collect medical bills covered by insurance and first learning that a medical expense is considered unpaid when they review their credit report.
  • Debt collectors were reported to repeatedly attempt to collect debts of deceased family members after the collectors were told the consumer was not responsible for the debt or there was no money left in the deceased borrower’s estate.
  • Debt collectors were reported to use abusive communication tactics, such as repeated calls and offensive language, and to threaten dire consequences for non-payment.

The CFPB is likely to use the report’s data about older consumers’ complaints, as well as data drawn from debt collection complaints filed by other consumers, in support of its anticipated debt collection rulemaking.  However, as we have previously noted, anyone who has reviewed a significant volume of debt collection complaints knows the unfortunate fact that a small number of legitimate complaints are frequently buried in an avalanche of totally unmeritorious complaints.  Indeed, as we also have previously noted, the CFPB indicates on its website (but rarely mentions in its reports) that it makes no effort to verify the accuracy of the complaints it receives.  Thus, if it wants to avoid basing its rulemaking on unwarranted conclusions, the CFPB needs to come to terms with the fact that consumer complaints about debt collection may not be reliable as evidence that the complained about conduct occurred.

Disparate impact on the ropes: federal district court vacates HUD rule

Posted in Fair Credit

A federal district court in Washington, D.C. dealt a heavy blow on Monday to HUD’s position that disparate impact claims are cognizable under the Fair Housing Act (FHA).  In American Insurance Association v. U.S. Department of Housing and Urban Development, a case we have been watching for some time, the court issued an opinion vacating the HUD disparate impact rule on the ground that “the FHA prohibits disparate treatment only, and that the defendants, therefore, exceeded their authority under the” Administrative Procedure Act.  The court’s concluding admonition – “This is yet another example of an Administrative Agency trying desperately to write into law that which Congress never intended to sanction.” – could just as easily have been directed to the CFPB’s assertion in Bulletin 2013-02 that disparate impact claims are cognizable under the Equal Credit Opportunity Act.  For a detailed discussion of the opinion, see our legal alert.

HUD’s position could soon be dealt a knockout blow by the U.S. Supreme Court.  The issue of whether disparate impact claims are cognizable under the FHA is now before the Supreme Court as a result of the court’s recent grant of the certiorari petition filed by the Texas Department of Housing and Community Affairs in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc.  Should the court finally get the opportunity to rule on the merits (having been denied that opportunity twice before), it is widely expected to reach the same conclusion as that reached by the Washington, D.C. district court.

 

CFPB and Fed to conduct Nov. 18 webinar on TILA-RESPA integrated disclosures rule

Posted in Mortgages

On November 18, the CFPB and the Federal Reserve will co-host the fourth in a series of webinars on the TILA-RESPA integrated mortgage loan disclosures rule.  The webinar will focus on how to complete the new closing disclosure form.  A link to register is available here.

See our prior blog posts for details about the information provided to participants at the three webinars conducted earlier this year on June 17, August 26, and October 1.

CFPB QM cure and other mortgage rule amendments now effective; HUD nixes CFPB cure for FHA QM rule

Posted in Mortgages

The CFPB’s final rule amending certain provisions of the 2013 Title XIV final mortgage rules which includes a post-consummation points and fees cure mechanism for qualified mortgage loans, became effective on Monday, November 3, when it was published in the Federal Register.  (The only exception is a commentary revision in the final rule dealing with the relationship between the QM cure and the RESPA/Regulation X tolerance cure under the
TILA-RESPA integrated disclosure rule that becomes effective next year.)  The cure provision will apply to loans consummated on or after November 3, 2014 and on or before January 10, 2021.

The CFPB’s final rule also includes an amendment to the exemption in the ability-to-repay rule for certain nonprofits that make mortgage loans to low or moderate income borrowers from certain provisions of the rule if they make no more than 200 dwelling-secured loans per year and meet other specific requirements.  The rule amended the exemption so that subordinate lien loans for down payment assistance and certain other purposes that are interest-free, forgivable, and meet certain other conditions (so-called “soft seconds”) would not count toward the annual 200 loan limit.

In an announcement also published in the November 3 Federal Register, HUD announced that it was adopting the CFPB’s amendment to the nonprofits exemption for purposes of HUD’s QM rule that applies to FHA-insured mortgages.  However, HUD also announced that it was not adopting the CFPB’s post-consummation QM cure mechanism for purposes of HUD’s QM rule.  Among the reasons given by HUD is that FHA loans must meet all eligibility requirements, including the QM points and fees limit, prior to insurance endorsement and the CFPB’s cure is inconsistent with this requirement because it would allow a points and fees cure beyond insurance endorsement.

 

Leading industry trade groups comment on HMDA/Reg. C proposal

Posted in CFPB Rulemaking, Mortgages

Six leading industry trade groups have submitted a letter commenting on the CFPB’s proposed rule amending Regulation C to expand Home Mortgage Disclosure Act data reporting requirements.  The trade groups consist of the Consumer Bankers Association, Mortgage Bankers Association, American Bankers Association, Consumer Mortgage Coalition, Financial Services Roundtable and Housing Policy Council.

In the letter, the trade groups question the CFPB’s proposal to add various new data fields, including automated underwriting recommendations, borrower paid origination charges, total points and fees, total discount points, interest rate, prepayment penalty, QM status and HELOC first draw amount.  The trade groups ask the CFPB to weigh the consequences and value of adding the new fields.

The trade groups also urge the CFPB:

  • Not to extend the scope of Regulation C to require reporting of commercial and other loans that are for purposes other than home mortgage financing
  • To keep all additional data collected under the proposal private pending promulgation of privacy and data security rules to protect the confidentiality of HMDA data
  • To adopt a reasonable implementation schedule and not require HMDA reporting under a new rule earlier than 24 months after the January 1st following issuance of a final rule
  • To codify data integrity standards with reasonable tolerances either in Regulation C or authoritative guidance
  • To adopt a higher reporting threshold of at least 250 home mortgage financing transactions each year for both depository and non-depository institutions
  • To conform Regulation C with related mortgage regulations and industry standards, and
  • To coordinate with the prudential regulators before making changes that may affect CRA reporting.