Redlining Enforcement Actions Are Becoming a Point of Emphasis

In what many suggest may be the tip of the iceberg, the Department of Justice and CFPB have partnered together to enter into a proposed consent order with Hudson City Savings Bank resolving allegations that the bank engaged in a pattern or practice of redlining predominantly black and Hispanic neighborhoods in its residential mortgage lending practice.  The consent order, if approved, would be the largest redlining settlement in history to provide direct subsidies, according to the CFPB.  The settlement follows a 2014 CFPB investigation into the bank’s mortgage lending practices and a subsequent referral to the Department of Justice.

The complaint alleges that between 2009 and 2013, the bank’s policies and procedures discouraged consumers in majority Black-and-Hispanic neighborhoods from applying for credit from the bank and therefore violated the Equal Credit Opportunity Act and the Fair Housing Act.  Both Acts prohibit discrimination based upon race, color and national origin.  The agencies alleged that the bank placed its branches and loan officers principally outside of majority Black-and-Hispanic neighborhoods, excluding majority-Black-and-Hispanic neighborhoods from its Community Reinvestment Act assessment areas, selecting mortgage brokers that were mostly outside of and did not effectively serve the majority Black- and-Hispanic neighborhoods and focusing its marketing efforts on neighborhoods with relatively few Black and Hispanic residents. More specifically, the CFPB and Department of Justice contended:

• The bank engaged in a branch expansion and acquisition strategy that excluded and formed a “semi-circle around the four counties in New York State with the highest proportions of majority-Black-and-Hispanic neighborhoods”;  
• A significant disparity existed between the applications the bank derived from majority-Black-and-Hispanic tracts in their metropolitan statistical areas (“MSAs”) when compared to those derived from the bank’s peers in the same areas;
• The bank generated 80% of their mortgage applications from brokers and the bank’s broker network was heavily concentrated outside of majority-Black-and-Hispanic areas;
• The bank discouraged lending in majority-Black-and-Hispanic neighborhoods by excluding most of the majority-Black-and-Hispanic neighborhoods in two of its MSAs from its Community Reinvestment Act assessment areas;
• The bank engaged in limited marketing outside of its branch network and failed to meaningfully advertise in majority-Black-and-Hispanic neighborhoods;
• The bank failed to adequately oversee or hire sufficient staff to ensure fair lending compliance and had no written policies or procedures to monitor for compliance; and
• The CFPB made recommendations to the bank in 2012 that it begin monitoring at least its top 10 brokers for loan volume and the bank failed to do so.

The bank, while neither admitting nor denying the allegations of the complaint, entered into the consent order “solely for the purpose of avoiding contested litigation with the United States and the Bureau, and to instead devote its resources to providing fair credit services to eligible persons, and to providing important and meaningful assistance to borrowers in certain markets.”  The bank further contended that it believed it was satisfying its obligations to meet the credit needs of majority Black-and-Hispanic neighborhoods by purchasing mortgages that were secured by residential properties in majority Black-and-Hispanic neighborhoods.  

The consent order requires the bank:

• Pay a $5.5 million penalty to the CFPB;
• Invest $25 million in a loan subsidy program which will offer residents in majority-Black-and-Hispanic neighborhoods within the bank’s MSAs home mortgage loans on a more affordable basis than otherwise available from the bank, including subsidizing home mortgage loans to “qualified applicants” as the term is defined in the Consent Order;
• Spend at least $750,000 to partner with local community based organizations in the redlined communities to provide financial or other assistance to residents;
• Spend at least $100,000 annually (for five years) to sponsor consumer financial education programs, including the sponsorship of a minimum of twelve events per year;
• Spend at least $200,000 annually (for five years) on a targeting advertising company that advertises the loan subsidy program and is targeted to generate loan applications from majority Black-and-Hispanic neighborhoods;
• Open or acquire two new branches within majority-Black-and-Hispanic neighborhoods in the affected MSAs, with the mandate that the branches be full service retail branches accessible to concentrations of owner-occupied residential properties that will accept first-lien mortgage applications;
• Revise its CRA areas to include specifically all of Bronx, Queens, Kings and New York counties in New York, the city of Camden NJ, and the city of Philadelphia, PA;
• Hire a third party consultant to assess and revise the bank’s compliance management system with respect to redlining and submit to the CFPB and Department of Justice a written compliance plan with respect to fair lending compliance and training; and
• Hire a third party consultant to assess the credit needs of majority-Black-and-Hispanic neighborhoods within the bank’s MSAs and submit a remedial plan to the CFPB and Department of Justice that details the bank’s plan to implement the remedial goals of the consent order.

So what can other banks learn from this consent order?

• First and foremost, redlining is not an express discrimination but an implied discrimination based upon the totality of the circumstances.  Banks, therefore need to review their loans, applications, branch placement, loan availability and advertising efforts from a similar view point; 
• Banks need to review and analyze HMDA, demographic and geographic data to ascertain their geographic and market impact and identify redlining risks;
• Banks need to make sure they have an effective compliance management plan in place which:
  • Provides for monitoring of branch and broker loan activities;
  • Statistically monitors for redlining risk (see above), including statistical peer analysis of applications and originations from minority neighborhoods within the bank’s MSAs; and
  • Provides for effective fair lending training of all impacted employees; and
• Banks need to adequately staff for fair lending.

The answer to the big question of whether redlining will remain an enforcement focus is likely a “yes.”  The Department of Justice has noted in recent speeches that it is seeing a trend of increased red lining practices and this trend is likely to lead to further enforcement actions and settlements like the one entered into by Hudson City Savings Bank.

TCPA: North Carolina District Court Recognizes Good Faith Defense for Wrong Number Call

In cursory fashion, a North Carolina District Court has recognized a good faith defense to TCPA claims where the calls were made to a wrong number.  In Danehy v. Time Warner Cable Enterprises, a contractor acting on behalf of Time Warner made six calls to plaintiff over the course of two days.  The calls were intended for a third party Time Warner customer who had provided the cell number in question to Time Warner as a secondary number at which he could be reached.  The calls were made in response to a request for service by the third party customer.  The plaintiff filed suit asserting two claims under the TCPA: (a) placing unsolicited calls to a cell number through an ATDS without the recipient’s prior express consent; and (b) calling a number listed on the national do-not-call registry.  On summary judgment, Time Warner argued, among other things, that both of plaintiff’s claims should be dismissed based upon Time Warner’s good faith reliance on its customer’s consent to call the number in question.  The motion was referred to a magistrate judge who agreed and recommended that the motion for summary judgment be granted and the claims dismissed.  In reviewing the magistrate’s recommendations, the district court found no clear error and entered summary judgment in favor of Time Warner.

In its memorandum and recommendations, the magistrate judge noted that “it is undisputed that defendant believed in good faith not only that it did have consent to call the…number, but also that the calls were being made for a service TWC’s Customer had requested.”  Danehy, Dkt No. 19, p. 11. After  looking at the circumstances surrounding the calls to the plaintiff, the magistrate judge found that “[u]nder the circumstances presented, defendant’s good faith belied that it had consent to call the…number would make imposition of liability under section 227(b) unjust.” Id.

The facts the court gave deference to were as follows:

·         Time Warner’s Residential Services Subscriber Agreement with its customer expressly provided consent to be called at numbers provided by the customer for any purpose.  The agreement further acknowledge Time Warner’s potential use of automated telephone dialing systems and automated messaging;

·         The customer had provided the number at issue as a secondary number at which he could be reached;

·         Time Warner had made calls to the customer and received calls from the customer at the number in question over the course of four years;

·         The calls in question were made after calls to the customer’s primary number resulted in a busy signal;

·         The six calls made were made the night prior to and the morning of the scheduled service;

·         Of the six calls made, the first two reached the plaintiff’s cellular telephone, but no voice mail was left.  The third call was answered by plaintiff, but he took no action.  The fourth and fifth calls (both made the day of service) reached the cellular telephone, but no voice mail was left.  The final call resulted in a voice mail;

·         The cellular number was obtained by the plaintiff a few months before the calls occurred.

The case provides some cautious optimism for the debt collection industry that under the right circumstances, a good faith defense may have some traction in TCPA wrong number cases.  It’s also worth noting that both the magistrate judge and the district court cited favorably Chyba v. First Financial Asset Mgmt., 2014 WL 1744136 (S.D. Cal. Apr. 30, 2014) (holding that the collection agency was not liable under the TCPA for calls made to a wrong party where the agency was acting in good faith based upon information provided to it). 

What Mortgage Lenders and Servicers Should Know: CFPB Issues Monthly Complaint Report

The CFPB issued its Monthly Complaint Report today. The report is a high level snapshot of trends in consumer complaints and provides a summary of the volume of complaints by product category, by company and by state.  Additionally, each month it highlights a product type and a geographic area.  This month’s report highlights mortgage product complaints and provides helpful insight to mortgage lenders and servicers regarding complaints which appear to be of import to the CFPB. 

Each month, the Report breaks down complaint volume by product looking at a three month average and comparing the same to 2014.  In its third month, the Report continues to indicate that the three products yielding the highest volume of complaints were debt collection, mortgage and credit reporting.  It should come as no surprise then that in its first three monthly reports, debt collection, credit reporting and mortgage have been the CFPB’s featured product spot light.  

Mortgage lenders and servicers should pay close attention to this month’s report as it highlights what are likely to be points of emphasis with regulators in upcoming examinations – particularly, servicing transitions and effective loss mitigation programs. 

• Over half of the consumers submitting mortgage complaints in the past month complain about problems that occur when they are unable to make their payments, particularly with loan modifications and foreclosures.  Consumers complained about difficulties in the loss mitigation processes, delays with review of their loan modification applications, frequent changes in their point of contact, and servicers proceeding forward with foreclosure while modification applications remain under review;
• Consumers also complained about problems they incurred during the transition from one servicer to another including payments increasing unexpectedly, unexplained fees charged by the prior servicer, and issues with the successor servicer honoring modifications made by prior servicers;
• Misapplication of payments was also a common complaint.  Consumer complained about payments simply being misapplied, as well as issues with the timely disbursement of escrow amounts for taxes and insurance premiums;
• Consumers also expressed frustration with the communications with their servicer.  The Report notes that consumers were frustrated with having to resubmit paper work in the loan origination, modification and foreclosure stages; and
• Consumers also complained about lengthy approval processes for loans.

While all of these complaints have to be viewed from an objective stand point, they do suggest that mortgage lenders and servicers need to focus on their compliance management systems and processes for upcoming examinations, particularly with respect to the implementation of TRID and the continuing emphasis on Regulation X’s mortgage servicing rules.

Collection Agencies May Need to Reconsider Collection Strategies for Time Barred Accounts

Following on the heels of the Sixth Circuit’s decision in Buchanan v. Northland Group, Inc. 776 F.3d 393 (6^th Cir. 2015), a Texas District Court has held that a complaint alleging that debt collector’s use of the term "settlement" in a letter to collect a time barred debt may violate the FDCPA absent a disclosure that the underlying debt is time barred.

In Carter v. First National Collection Bureau, the consumer received a letter which provided: "We would like to extend the following settlement offer: A 90% discount payable in 4 payments of $138.92. Each payment within 30 days of the previous payment. We are not obligated to renew this offer. For your convenience you may pay via a check over the phone or credit card. You have our word that your account executive will treat you fairly and with respect…" Carter v. First National Collection Bureau. C.A. No. 4:15-cv-1695 (S.D. Tex. Sep. 11, 2015), Slip Op. at 1-2. The consumer alleged that the letter was unfair and deceptive and violated sections 1692e and 1692f of the FDCPA. The collection agencies moved to dismiss because the letter did not contain any inference or threat of litigation and did not contain any misrepresentations of the status of the debt.

Section 1692e of the FDCPA contains a broad prohibition against the use of false, deceptive or misleading representations or means in connection with the collection of a debt. It also contains within it specific non-exclusive examples of representations that violate the statute including the false representation of the character, amount or legal status of any debt. The courts are currently split as to whether seeking to collect a time barred debt, without the threat of suit or disclosure of the time barred nature of the debt, violates section 1692e. Decisions from the Sixth and Seventh Circuits suggest that adequate disclosure of the time barred nature of the debt is required. See Buchanan, supra; McMahon v. LVNV Funding, LLC, 774 F.3d 1010 (7^th Cir. 2014). Courts in the Third and Eighth Circuit disagree and have held that "the FDCPA permits a debt collector to seek voluntary repayment of the time-barred debt so long as the debt collector does not initiate or threaten legal action in connection with its debt collection efforts." Huerta v. Galaxy Asset Mgmt., 641 F.3d 28, 32-33 (3d Cir. 2011); see also Freyermuth v. Credit Bureau Sers., Inc., 248 F.3d 767 (8^th Cir. 2001).

In denying the motion to dismiss, the court bought into the consumer’s argument that the mere use of the term "settle" or "settlement" is enough to potentially mislead the least sophisticated consumer into believing that a stale debt is legally enforceable -particularly where there is no disclosure that the debt is time barred. In doing so, the court relied upon the FDCPA’s general prohibition against false, deceptive or misleading representations and particularly those regarding the legal status of the debt. The court also relied heavily upon the FTC and CFPB findings that "consumers can be misled or deceived when debt collectors seek partial payments on stale debt," as well as a research study submitted by plaintiff’s counsel which found that "consumers who are aware that a debt is not legally enforceable will, in a statistically significant number of cases, decline to pay it." Slip Op. at 10-12.

The decision is troubling on a number of levels. First, a statute of limitations only bars judicial remedies but does not eliminate the debt or bar voluntary repayment of the debt. Thus, the debt is still subject to credit reporting and settling the debt is of some intrinsic value to the consumer. Secondly, in Texas, a partial payment on a time barred debt does not revive the statute of limitations. So while a more compelling case can be made that nondisclosure of the time barred nature of a debt may violate the FDCPA in a jurisdiction which provides for revival, that was not the underlying law at issue in this case. Finally and most troubling, the court appears to have given significant deference to the findings of the FTC and CFPB. Given the high volume of reports being published by the CFPB, it is likely that consumers will continue to push courts to rely upon favorable CFPB findings to help advance creative legal theories for recovery.

Debt collectors need to keep a close eye on this issue and may need to rethink their settlement strategies. While a few states, including North Carolina, expressly require disclosure of the time barred nature of debts, most states do not. Where state statutes are silent (as is the FDCPA), cases like this one and Buchanan should be taken into account when assessing risk and determining collection strategies on time barred accounts.

Another Court Weighs in on the Envelope Window

Since the Third Circuit’s decision in Douglass v. Convergent Outsourcing, FDCPA cases concerning information visible through the debt collector’s envelope have been on the rise.  The Northern District of Illinois has now weighed in, cautioning parties about statutory interpretations which yield absurd results.  In Schmid v. Transworld Systems, et al., C.A. No. 15 C 02212 (N.D. Ill. Sept. 4, 2015), the plaintiff alleged that a string of digits and letters which were visible through the envelope’s transparent window included the consumer’s account number within the string.  The plaintiff alleged that the display of this text violated 15 U.S.C. §1692f(8) which prohibits, among other things, the use of any “language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by use of the mails or by telegram.”   

In reviewing the consumer’s claim, the court first noted that section 1692f(8) must be reviewed within the context of the statute, noting that “the statute’s literal terms cannot be read without taking the entirety of the statute into account.” Schmid, Slip Op. at 8.  The court first looked at the prefatory language of section 1692f which prohibits unfair or unconscionable means to collect or attempt to collect a debt.  The court noted that the conduct therefore must be a means to collect a debt.  The court then noted that subsection 8 requires that the language or symbols communicate something to the consumer.  The court concluded that the alphanumeric string communicated nothing (even though the account number was imbedded within) and cautioned that a literal statutory interpretation must be avoided when it would lead to absurd results.  To apply a literal interpretation to subsection 8, the court continued, would preclude any information aside from the debt collector’s address from being on the envelope, including a stamp or the consumer’s address.

While this opinion offers some good news for the debt collection industry, a couple of notes to temper the good news:

• The Seventh Circuit (which includes the Northern District of Illinois) has rejected the least sophisticated consumer standard and applies a less strict “unsophisticated consumer” standard.  Under the stricter standard, a different result may have occurred; and
   
• The Court did not go so far as to suggest it would reach the same result if faced with the same facts as presented by Douglass.  In fact, the court was careful to note that “[t]he display of text on an envelope that makes it readily apparent to anyone who might see it that the enclosed contents deal with the recipient’s debt obligations…would breach…[the recipient’s] privacy and thus represent the kind of “unfair and unconscionable means” covered by § 1692f.”

 

FDIC Consent Orders with Comenity Entities Provides Guidance to Effective Third Party Management Systems

The FDIC has entered into a settlement with Comenity Bank and Comenity Capital Bank regarding their servicing and marketing of credit card add-on products and once again emphasized the importance of effectively managing third party relationships.  The premise for liability was Section 5 of the FTC Act which prohibits unfair and deceptive practices and stems from the banks’ provision through third parties of payment protection/debt cancellation add on products.  As part of the settlement, both banks agreed to pay a total of approximately $61.5 million in restitution to consumers, as well as civil money penalties of approximately $2.5 million dollars. As part of the enforcement action leading to the consent order, the FDIC determined that the banks violated the FTC Act by:

• Representing to consumers that there would be no fee associated with their payment protection/debt cancellation add-on products so long as the account had no balance but then charging a fee in those circumstances;
• Making material misrepresentations or omissions as to the refund process for the consumers’ cancellation of the product during the first thirty days of enrollment; and
• Making material misrepresentations or omissions to consumers regarding the condition of receipt of certain incentives for enrollment.

Beyond the monetary implications, the orders contain remediation provisions which should provide guidance to other banks, particularly in their management of third party relationships. The Consent Orders require the implementation of an effective third party oversight program, which includes:

• A review of all aspects of the banks’ agreements with third parties that provides services or products to or on behalf of the banks;
• Procedures for effective monitoring, training, record-keeping, and audit of the banks’ third parties;
• Access by the banks to all necessary systems of the banks’ third parties to insure compliance with all consumer protection laws;
• Monitoring of all third party agreements to ensure they contain specific expectations, obligations, and consequences for compliance with all consumer protection laws;
• Maintenance of records of all third party agreements and any marketing or solicitation materials developed by the banks’ third parties for add on products;
• Prompt notification by the banks’ third parties regarding any regulatory inquiries, customer complaints and/or legal actions received by the banks’ third parties (“other than routine requests such as requests for cease and desist collection contact);
• Procedures to address and resolve consumer complaints and inquiries regarding services or products provided by the banks’ third parties; and
• Procedures to effectively analyze the root cause of complaints and identify any patterns or trends in complaints about specific products or practices.

Enforcement actions and the resulting consent orders should be reviewed carefully by other financial service companies not only to identify regulatory points of emphasis and prohibited practices, but also as guidance provided by regulators as to their expectations for effective compliance management systems. 

Property Taxes Are Not a Debt under the FDCPA

As cases attempting to stretch the reach of the FDCPA continue, courts continue to hold steady, requiring a voluntary credit transaction.  The Middle District of North Carolina joined the fray last week, holding that unpaid property taxes are not a debt under the FDCPA.  Armstrong v. Bardill, C.A. No. 1:13-cv-1140 (M.D.N.C. Sep. 2, 2014).  In dismissing the complaint, the court noted that a threshold requirement for application of the FDCPA is an attempt to collect a debt.  The court held that property taxes and associated costs do not arise out of the type of “transaction” contemplated by the FDCPA. 

OCC Continues to Emphasize Compliance with Servicemembers Civil Relief Act

In prepared remarks to the Association of Military Banks, the OCC re-emphasized its focus on bank compliance with the Servicemembers Civil Relief Act (the “SCRA”) and its ramp up to enforce the Military Lending Act regulations which were recently passed.  Deputy Comptroller Grovetta Gardineer noted that the “OCC has seen deficiencies in the practices and procedures at some banks related to their SCRA-compliance programs.”  The OCC’s remarks set forth the following expectations:

• Banks improve their SCRA-compliance policies and procedures for determining whether servicemembers are eligible for requested SCRA-related benefits in all accounts the borrower may have, not just the account that is subject of the request;
• Banks calculate SCRA benefits correctly
• Banks have policies and procedures in place for verifying the status of a servicemember’s eligibility for SCRA protections before seeking default judgments on extensions of credit or initiating foreclosure repossession processes

Inadequate compliance with the SCRA has been a component of several recent enforcement actions, including those against JP Morgan Chase and Bank of America.  The OCC remarks also serve as a reminder that banks should be ramping up for the new Military Lending Act rules which will begin to take effect in October 2015.