CFPB Shines Its Light on Auto Finance in its Monthly Complaint Report

The CFPB issued its Monthly Report this week. 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.  This month’s report highlights consumer loans with auto lending playing the starring role.  The report provides some forecasting of areas regulators are likely to focus on in upcoming examinations and auto lenders, in particular, should take note.

 

Each month, the Report breaks down complaint volume by product looking at a three month average and comparing the same to the prior year.  As has been the case in prior months, the Report continues to indicate that the three products yielding the highest volume of complaints are debt collection, credit reporting and mortgage.  If there is good news to be had, the Report indicates that debt collection complaints remained flat in a year to year comparison with 2015.  Student loans showed the most significant increase in volume over last year’s comparable period with an increase of 61%. Taking this into account, we are likely to see an increased focus on student lending issues in coming months.

 

This month’s report focuses on consumer loan products and in particular, auto finance. According to the Report and within the product category, vehicle loans comprise 52% of all complaints.  The Report indicates that: 

• The most common complaint received regarding auto loans is that consumers have difficulty managing their loans.  The report does not explain what in particular that means, but the complaints received are centered on payment processing issues, disputes as to balances, and repossessions without prior notification.
• The Report also notes that consumers are submitting complaints regarding warranty coverage on used vehicles.  It would not be surprising to see the Bureau at some point turn its attention to extended and third party warranty products.
• Another issue highlighted by the CFPB is concerns with the advertising practices at “Buy Here, Pay Here” dealerships.  Consumers are complaining about false and deceptive advertising centered on “no credit check” policies and promises to rebuild credit.

So What Are the Key Take Aways? The CFPB appears focused on the “unfair and deceptive” aspects of auto lending.  The CFPB is reporting that their analysis of the complaint data "shows consumers sometimes have difficulty understanding loan features during the loan negotiations" and find the terms of their financing "confusing".   Many Consumers Face Challenges in Understanding Auto Financing, Says New CFPB Report (June 27, 2016).  Lenders should keep in mind that the CFPB often relies upon the “unfair and deceptive” provision of Dodd Frank to regulate through enforcement actions. Based upon the Report and the “Know Before You Owe” campaign by the CFPB, it would not be surprising therefore to see the CFPB  focus in upcoming examinations on the manner in which payments are being processed, adequate disclosures as to the application of payments and repossession procedures and policies.  It would also not be surprising at some point focus to see some sort of mandated disclosures by the CFPB, particularly in the used vehicle setting and with respect to add on products.

 

 

District Court Holds Settlement Letter on Time Barred Debt Does Not Violate FDCPA

A district court in New Jersey recently held that a letter offering settlement on a time barred debt did not threaten litigation and therefore did not violate the FDCPA.  In Lugo v. Firstsource Advantage, C.A. No. 2:15-cv-06405-SDW-SCM, 2016 U.S. Dist. LEXIS 78636 (D.N.J. Jun. 16, 2016), the debt collector sent a settlement letter to the plaintiff which provided

This account has been placed with our office for collection to resolve your delinquent debt. If you wish to settle this account for a lump sum payment of $334.54 within 45 days from the date of this letter, please contact one of our representatives to discuss this settlement.  This offer will remain open for 45 days from the date of this letter and we are not obligated to renew this offer. If you are unable to take advantage of this offer within the 45 days allotted, please contact one of our representatives to discuss payment options.

Complaint, Ex. A.  At the time the letter was sent, the debt was time barred; however, the letter did not disclose this fact.

The plaintiff filed a putative class action alleging the debt collector violated 15 U.S.C. §§1692e and f because it was sent “to mislead her into paying the entire debt, or to deceive her into making partial payment in order to reset the statute of limitations and renew Defendant’s ability to legally collect the debt.”  The court granted the debt collector’s motion to dismiss relying on the Third Circuit’s opinion in Huertas v. Galaxy Asset Management, 641 F.3d 28 (3d Cir. 2011).  The court found that the FDCPA permits the debt collector to seek voluntary repayment so long as it does not initiate or threaten legal action.  The court was persuaded by the fact that the letter set forth a single lump sum payment option and used the word “settle”.  The court concluded that under the Circuit’s “least sophisticated consumer” standard, the letter did not threaten litigation.

CFPB Continues to Focus on Mortgage Servicing

The CFPB has issued a special edition of its Supervisory Highlights making clear it remains dissatisfied with the advances the mortgage industry has made in the wake of the regulatory upheaval.  Many of the concerns expressed by the CFPB relate to information technology failures.  As noted in the Supervisory Highlights, “[t]he magnitude and persistence of compliance challenges since 2014, particularly in the areas of loss mitigation and servicing transfers, show that while the servicing market has made investments in compliance, those investments have not been sufficient across the marketplace.”  Supervisory Highlights Mortgage Servicing Special Edition, p. 3.  Notably, the CFPB attributes many of the failings to technology failures. 

The CFPB Approach to Examinations.  The CFPB readily admits that it uses a prioritization approach to determining which mortgage servicers to examine.  Its approach takes into account:

o   The size and market presence of the servicer – a relatively large servicer with a dominant market presence will take precedence over a comparatively smaller servicers;

o   Field and market intelligence including compliance management system strengths, existence of regulatory actions from prior examinations, servicing transfer activity, and the number, severity and trends of consumer complaints.

Lessons to Be Learned from the Supervisory Highlights. Those involved in the mortgage industry should place close attention to this edition of the Supervisory Highlights and make adjustments in their policies, practices and procedures accordingly.  Here are the key takeaways:

·       Mortgage Servicers need to carefully review their systems, processes and contents of their Acknowledgement Notices.  Specifically:

o   Some servicers are not sending out the loss mitigation acknowledgment notices  after receipt of a loss mitigation application from a consumer;

o   Some servicers are not providing the acknowledgements in a timely fashion;

o   Other servicers’ notices were deemed deceptive because they:

§  Failed to state the additional documents necessary to complete the loss mitigation application;

§  Requested documents inapplicable to the borrower’s circumstances;

§  Requested documents the borrowers had already submitted;

§  Failed to include a reasonable deadline to complete the application;

§  Gave a deadline to complete the application and then denied the application prior to the deadline running; and

§  “Failed to include a statement that borrowers should consider contacting servicers of any other mortgage loans secured by the same property to discuss available loss mitigation options.”

·       Mortgage Servicers Need to Carefully Review the Contents of Their Consumer Communications to Insure Their Accuracy.  A number of issues were identified where consumer communications did not accurately reflect the mortgage servicer’s actions. Mortgage servicers should carefully to review their communications and loss mitigation procedures to insure they are consistent. For instance,

o   One or more servicers sent communications which represented the servicer would defer charges to the maturity date of the loan and the servicer then assessed charges after the consumer signed and returned permanent modifications;

o   One or more servicers sent loss mitigation offers with response deadlines that had passed as a result of delays in the servicer mailing the correspondence;

o   One or more servicers provided modification agreements that did not match the terms approved by underwriting software;

o   One or more servicers provided communications which were not accurate concerning conversion of trial modifications to permanent modifications; and

o     “Examiners found one or more servicers required borrowers to sign waivers agreeing that they would have no “defenses, setoffs, or counterclaims to the indebtedness of borrowers pursuant to the Loan Document” in order to enter mortgage repayment and loan modification plans.”  As noted by the CFPB, this violated Regulation Z.

·       Mortgage Servicers Need to Review their Denial Notices to Insure They Accurately Reflect the Specific Reason(s) for Denial of Loss Mitigation.  Here, the CFPB noted:

o   One or more servicer failed to accurately state the reason(s) for denial; and

o   One or more servicer failed to communicate the borrower’s right to appeal denial of loss mitigation.

·       Mortgage Servicers Need to Review Their Policies and Procedures and Insure They are reasonably Designed to Comply with Regulation X.  Specifically, the CFPB noted that one or more servicers violated Regulation X because their policies and procedures were not reasonably designed to achieve the following:

o   Provide the borrower with accurate and timely information in response to the borrower’s request for information;

o   Identify and facilitate communication with a deceased borrower’s successor in interest;

o   Identify accurately and with specificity all loss mitigation options for which a borrower may be eligible;

o   Promptly identify and provide access to all materials submitted by a borrower in support of its loss mitigation application to the appropriate mortgage servicer personnel;

o   Properly evaluate loss mitigation applications for all options available to the borrower based upon the loan owner’s requirements;

o   Insuring accurate and current information regarding the servicer’s evaluation of the loss mitigation application and the status of foreclosure is available to all appropriate service personnel, including foreclosure attorneys and similar vendors;

o   Accurately identify necessary documents or information that may not have been transferred by a predecessor servicer.

·       Servicers Need to Focus on Accurate Transfers of Accounts.  In this respect, the CFPB noted that one or more servicer incompatibilities between servicer platforms have led to transferees failing to identify and honor in-place loss mitigations.

The Bottom Line.   A number of the concerns raised by the CFPB are the result of system malfunctions and technology deficiencies.  As noted by the CFPB, “improvements and investments in servicing technology, staff training, and monitoring can be essential to achieving an adequate compliance position. However, such improvements have not been uniform across market participants.  Supervision continued to observe compliance risks, particularly in the areas of loss mitigation and servicing transfers.”  Mortgage servicers are encouraged to review their compliance management systems to insure their servicing platforms are accurately servicing their practices and should pay careful note to the concerns raised in the Supervisory Highlights as these are often the precursor to regulatory enforcement actions.

Guest Post: Ninth Circuit Expands Discovery Rule to All FDCPA Claims

By: Parker Dozier
June 15, 2016

The Ninth Circuit has expanded its application of the discovery rule to all claims made under the FDCPA.  Lyons v. Michael & Assoc., 2016 U.S. App. LEXIS 10363 (9th Cir. 2016).  The Court had previously limited its holdings on the issue to the facts of the particular case in front of it.  See Mangum v. Action Collection Serv., Inc., 575 F.3d 935 (9th Cir. 2009) (applied only to disclosure of information to third parties); Tourgeman v. Collins Fin. Serv., Inc., 755 F.3d 1109 (9th Cir. 2014)(applied to debt collection letters).    

In Lyons, the defendant debt collector filed suit in an improper venue under the FDCPA on December 7, 2011.  Lyons was served with the collection suit in mid-January 2012.  Lyons sued the defendant debt collector on January 3, 2013 for violating the FDCPA’s venue provision.  The plaintiff alleged that she did not know of the lawsuit until she was served, and the defendant did not offer any evidence to the contrary.  The District Court ruled that the FDCPA’s one year statute of limitations began to run the day the lawsuit was filed, which meant the plaintiff’s claim was time barred.  The timing in this case clearly illustrates how the application of the discovery rule can save a plaintiff’s case or the non-application can lead to summary judgment for the debt collector.  The Ninth Circuit reversed the District Court’s decision and held “that the discovery rule applies equally regardless of the nature of the FDCPA violation alleged by a plaintiff.”  Lyons, 2016 U.S. App. LEXIS 10363 at *7.  The defendant’s argument that the discovery rule should only apply to certain FDCPA claims did not resonate with the Court.  “Applying the discovery rule to some FDCPA claims but not others would be out of step with our general approach to the discovery rule, and would threaten to capriciously limit the broad, remedial scope of the FDCPA.”  Id. at *7-8.

The Court’s expansion of its application of the discovery rule only heightens the current split among the circuits.  The Fourth Circuit, like the Ninth Circuit, applies the discovery rule, however, the Eighth and Eleventh Circuits do not apply the discovery rule.  The other circuits have yet to rule on the issue. 

About the Author:  Parker Dozier is an associate with Smith Debnam and a member of the firm's Consumer Financial Services Litigation and Compliance team. 

District Court Weighs in on Article III Standing

A district court in Georgia has weighed in the issue of standing in the wake of the Supreme Court decision in Spokeo v. Robbins.  In Rogers v. Capital One Bank, C.A. No. 1:15-cv-4016 (N.D. Ga. June 7, 2016), the consumers alleged that they received numerous calls in violation of the TCPA despite their requests that the creditor quit calling.  The Bank moved to dismiss alleging that the plaintiffs did not have Article III standing because the plaintiff had not alleged a particularized and concrete injury.  The court disagreed, holding that with respect to the TCPA, the Eleventh Circuit has already held that “Congress intended to create a concrete injury where the statute was violated, meaning so long as the plaintiff had been affected personally by the conduct that violates the statute, standing exists.”   The court continued that “[b]because the Plaintiffs allege that the calls were made to their personal cell phone numbers, they have suffered particularized injuries because their cell phones were unavailable for legitimate use during the unwanted calls.”  The implications of the decision are two fold.  The bad news is that, in the Eleventh Circuit, there is a likelihood that the Spokeo decision may not impact statutory TCPA claims.  The good news is that the court’s language suggests that with respect to who has standing to bring a TCPA claim may be limited to the person who is the primary user of the cell phone versus the subscriber.

CFPB Unveils “Know Before You Owe” Tool for Auto Purchases

Last week, the CFPB unveiled its “Know Before You Owe” tool for auto lending.  The “Auto Lending Shopping Sheet” provides a step by step guide for consumers purchasing automobiles and highlights the items which are negotiable.  It is important to note that the “Know Before You Owe” tool does not involve new regulations but is instead an educational tool for consumers.  Patterned after the mortgage “Know Before You Owe” series, the CFPB tool includes a series of informational resources which walk consumers through the purchase of a car step by step. Importantly, the tool includes information regarding credit reporting (including the impact of credit inquiries), fair lending and the Servicemembers Civil Relief Act.   

Guest Post: Seventh Circuit Holds Debt Collectors “Are No Different than Any Other Plaintiff”

By: Emily Jeske


On May 18, 2016, the Seventh Circuit ruled in St. John v. CACH, LLC, Nos. 14-2760, 14-3724, & 15-1101, 2016 U.S. App. LEXIS 9117 (7th Cir. 2016), that debt collectors do not have to intend to go to trial when filing complaints in order to comply with the Fair Debt Collection Practices Act (“FDCPA”). Section 1692e(5) of the FDCPA states that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt,” and “[t]he threat to take any action that cannot legally be taken or that is not intended to be taken” is a violation of the act.


In St. John, individual consumers sued debt collection companies for violations of the FDCPA, claiming that the companies filed lawsuits with “no intention of going to trial.” Id. at *2. The companies initially filed suit to recover on credit card accounts held by the consumers, but ultimately dismissed their actions voluntarily. Id. The consumers then asserted that this voluntary dismissal prior to trial violated Section 1692e(5)’s prohibition against “[t]he threat to take any action that…is not intended to be taken.”


The Seventh Circuit disagreed and held that the consumers did not show that the companies “did not intend to keep their supposed threat of going to trial,” nor that the companies ever threatened to go to trial in the first place. Id. at *6. The court pointed out that there was no allegation (nor proof) that the companies planned or intended to go to trial; rather, the consumers merely claimed that the companies “implicitly communicated an intention to go to trial simply by filing the complaints.” Id. at *5. Ultimately, this argument was insufficient to support the consumers’ allegations and constitute a violation of the FDCPA.


In reaching its decision, the Seventh Circuit noted that “debt collectors who sue to recover a debt are no different from any other plaintiff.” Id. at *7–8. This reasoning in itself was helpful for the financial services industry because consumers and their attorneys often argue that debt collectors should essentially be held to a higher standard when they engage in litigation. Now, though—at least in the Seventh Circuit—debt collectors in the industry will not be held liable under the FDCPA “just for filing a complaint.” Id. at *8. They can “weigh the anticipated costs of trial against the potential benefits when considering how far to advance the litigation,” just like any plaintiff in any legal action. Id. Because “litigation is inherently a process,” parties may come to a resolution that is more efficient and practical than taking a case all the way through trial. Id. at *7.


In fact, the court noted, settlements and pre-trial dismissals may benefit defendants in debt collection actions as well. Id. n.2. A collector may be willing to settle a case for much less than the consumer owes to avoid the time, cost, and uncertainty of trial. Id. In St. John, there was no contention that the consumers didn’t owe the money; they did not deny that they owed the debts or claim that the debts weren’t legally enforceable. Id. at *5. Avoiding a trial may have actually benefited the consumers who brought suit.


The court also discussed the true scope and purpose of the FDCPA. Although the FDCPA was created to protect consumers from deceptive or unfair practices by debt collectors, it does not punish them for “engaging in a customary cost-benefit analysis when conducting litigation.” Id. at *8. To force debt collectors—unlike any other plaintiff—to see their cases all the way to trial would extend far beyond the requirements of Section 1692e(5).

The St. John ruling may create a continuum on which debt collection actions are enforceable. Complaints must be filed in good faith with some basis for verifying the legitimacy of debts owed; however, a debt collector is not required to go to trial in order to show that the debt is valid or risk running afoul of the FDCPA. Id. at *5, 8. The Act was not established to effectively bar debt collectors from recourse simply because it is not in the collector’s best interest to go to trial, “even when its claim is unquestionably legitimate, and even when no other recourse is left.” Id. at *8. Debt collectors, as long as their actions are in good faith, can have the same array of litigation options as any other plaintiff.

 

About the Author: Emily Jeske is a summer law clerk with Smith Debnam Narron Drake Saintsing & Myers, LLP and a rising 3L at Wake Forest University's School of Law.

 

District Court Shuts the “Back Door” on Offers of Judgment

A district court in Minnesota has shut the “back door” on a collection agency who attempted to moot a putative class action by tendering the maximum amount of damages sought to the plaintiff.  In Ung v. Universal Acceptance Corp., C.A. No. 15-127, 2016 U.S. Dist. LEXIS 72861 (D. Minn. June 3, 2016), prior to the plaintiff’s motion to certify class, the defendant tendered to the named plaintiff a check for the maximum amount of statutory TCPA damages sought on plaintiff’s individual claim, along with a letter offering to stipulate to an awards of costs and an injunction prohibiting further calls to the plaintiff’s cell phone.  When the check was returned and the offer rejected, the collection agency moved for judgment asserting that the action was mooted, relying upon the Supreme Court’s decision earlier this year in Campbell-Ewald v. Gomez.

 When the Supreme Court issued its decision in Campbell-Ewald v. Gomez earlier this year regarding offers of judgment, a glimmer of hope arose for defendants in the dissenting opinions of Chief Justice Roberts and Justice Alito.  In Campbell-Ewald, the Supreme Court held that a Rule 68 offer of full statutory relief does not moot a class action.  See Campbell-Ewald v. Gomez, __ U.S. __, 136 S. Ct. 663 (2016).  In Campbell, the majority held that a case becomes moot only “when it is impossible for a court to grant any effectual relief whatever to the prevailing party.” Id., 136 S. Ct. at 670.  The court continued its rationale by noting that since the defendant’s offer lapsed without acceptance, they retained the same stake in the litigation they had at the outset. In other words, “[a]n unaccepted settlement offer-like any unaccepted contract offer – is a legal nullity, with no operative effect.” Genesis Healthcare Corp. v. Symczyk, __ U.S. __, 133 S. Ct. 1523, 1534 (2013) (Kagan, J., dissenting). 

In the dissenting opinions of Justice Roberts and Justice Alito, however, hope was not lost.  Both noted that the majority in Campbell-Ewald did not say that payment of complete relief would lead to the same conclusion.  In fact, Justice Alito’s dissent went so far as to suggest that a defendant could moot a case by paying over the money sought by plaintiff either by handing them a certified check or by depositing the funds in an account in plaintiff’s name or with the court. Campbell-Ewald, 136 S.Ct. 663, 684.  

In what was termed by the Minnesota district court as defendant’s attempt “to shoehorn its case through Campbell-Ewald’s back door, the defendant moved to dismiss the action arguing that by tendering complete relief rather than merely offering it, the case was moot.  The court disagreed and denied the motion.  “[I]n this court’s view, there is no principled difference between a plaintiff rejecting a tender of payment and on offer of payment…Indeed, other than their labels, the two do not differ in any appreciable way once rejected: in either case, the plaintiff ends up in the exact same place he occupied before his rejection.”  Ung at *13-14.  Moreover, the court was also persuaded by the fact that the defendant’s offer required further action by the court- the entry of the stipulated injunction and the court remained troubled by the fact that mooting the case would preclude the court from entering the injunction.  The court also was disturbed by the fundamental fact that mooting the entire action based upon the individual claim being mooted would cause a fundamental failure of the class action device, noting that for the class action device to work, the court must have a reasonable opportunity to consider and decide the motion for certification.  As stated by the court, “[a]ccepting Universal’s argument would place control of a putative class action in the defendant’s hands…The law does not countenance the use of individual offers to thwart class litigation.” Ung at *21.

CFPB Arbitration Rule: What You Need to Know

Last month, the CFPB issued its much anticipated and much dreaded proposed arbitration rules. In its own words, the CFPB proposes “rules that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court.” The proposed rule includes 355 pages of justification prior to presenting the rule in a concise 10 pages. The content of the supplementary information appears to be a lengthy attempt to justify the rule as being in the “public interest” and “the protection of consumers”. The proposal bans covered entities from including arbitration clauses which ban class actions in contracts entered into 211 days after the publication of the final rule. 

The proposed rule comes as no surprise to anyone who read the CFPB’s 2015 arbitration report which was hugely critical of class action bans in arbitration clauses. The 2015 report attempted to make a case that few consumers ever bring individual actions against financial service institutions and that class actions provide a more effective means to challenge and deter prohibited financial service practices. Before publishing the proposed rule, the CFPB convened a Small Business Regulatory Enforcement Fairness Act (“SBREFA”) panel where it outlined its proposal. The proposed rule is virtually identical to the SBREFA proposal and ignores concerns raised by small entity representatives, including the concern that the proposed rule will encourage lengthy and expensive class actions over faster, less costly individual actions (a finding supported by the CFPB’s own 2015 Arbitration Report).

What You Need to Know
The Rule in a Nutshell. While the rule does not outlaw arbitration clauses in their entirety, it makes them considerably less desirable by prohibiting class action waivers and by requiring providers to report individual arbitration results to the CFPB. In a nutshell, the proposed rule has two parts. First, it prohibits covered providers of certain consumer financial products and services from using arbitration clauses to bar consumers from initiating or participating in class actions after the compliance date. Secondly, it places onerous reporting requirements on covered providers regarding their participation in arbitration proceedings and requires them to submit to the CFPB certain documentation, including: the initial claim and any counterclaim, a copy of the arbitration clause filed with the arbitrator, the judgment or award, if any, issued by the arbitrator, and certain communications with the arbitrator. The CFPB makes it clear it intends to “use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action” and that it intends to publish the information on its website in some form.

What’s Covered? Contracts entered into 211 days after the final rule is published.

Who’s Covered? Almost all service products and services regulated by the CFPB would be subject to the new rules. Proposed 12 CFR 1040.3 includes consumer financial products including broadly the “extension of consumer credit”, as well as automobile leases, deposit accounts, debt management and settlement, check cashing and payment processing services, debt collection, credit reporting, and remittance transfers subject to the Electronic Funds Transfer Act. The rules do carve out certain exceptions for certain products provided by governmental entities, tribal governments providing products to consumers who reside in the tribe’s territorial jurisdiction and merchants and retailers under certain conditions when they are not acting as creditors.

Limitations on the use of Pre-Dispute Arbitration Agreements.  

• General Rule: Providers may not seek to rely in any way on a pre-dispute arbitration agreement entered into after the compliance date (more about that later) with respect to any aspect of a class action, including seeking a stay or dismissal unless and until the court has ruled that the case may not proceed as a class action and the decision of the court is final. Proposed 12 CFR 1040.4(a)(1).
  

• Required Language: To the extent providers continue to use arbitration clauses, they must contain the following provision in new contracts: “We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.” Proposed 12 CFR 1040.4(a)(2)(i). Where the arbitration agreement covers multiple products, some of which may not be covered by the Rules, the provider may include this provision in place of the previous set forth clause: “We are providing you with more than one product or service, only some of which are covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau. We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it. This provision applies only to class action claims concerning the products or services covered by the Rules.” Proposed 12 CFR 1040.4(a)(2)(ii).

• Pre-existing Arbitration Clauses: The proposed rule only applies to agreements entered into 211 days after the publication of the final rules; however, contracts that are transferred to third parties (for instance, portfolio sales) after the effective date of the rule would be covered. Additionally, there is a limited exception for general purpose reloadable prepaid cards that are on the shelf when the rule takes effect.  

With regard to assignees/transferees of accounts, they will be covered by the rule and required to amend the arbitration clause to include the required language or a standalone notice communicating the same information as set forth specifically in the regulations. See Proposed 12 CFR 1040.4(a)(2)(iii).

With regard to general purposes reloadable prepaid cards that are on store shelves as of the compliance date, the providers are bound by the class action waiver but may not be required to provide the notice if they provider does not have a means to communicate with the consumer. See Proposed 12 CFR 1040.5(b).

Reporting Requirements. For entities that continue to use arbitration agreements for individual actions, the proposed rule subjects them to onerous reporting requirements. Proposed 12 CFR 1040.4(b).

The proposed rules require the provider to submit copies of the following documents to the CFPB: 

• The arbitration demand and any counterclaim;
• The pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator;
• The judgment or award, if any, issued by the arbitrator;
• If the arbitrator or arbitration administrator refuses to administer or dismissed the claim due to the provider’s failure to pay any required filing or administrative fees, a copy of the relevant communications received by the provider from the arbitrator or arbitration administrator;
• Any communications related to a determination that the arbitration agreement does not comply with the administrator’s fairness principles, rules or similar requirements.

Additionally, the provider is required to redact non- public personal information from the records prior to submission.

The CFPB also has indicated that it intends to use the collected information for further analysis and will publish it in some form.

Implications of the Rule.  

It is likely the rule will be challenged under Dodd Frank and early indications are that a fight may come from within Congress as well as private litigation. Section 1028(b) of Dodd Frank authorizes the CFPB to prohibit or impose conditions or limitations on the use of agreements between consumers and covered persons providing arbitration only if the CFPB finds that such a prohibition or limitation is in the public interest and for the protection of consumers. The problem for the CFPB is that its own study does not substantiate either finding. In its Report, the CFPB acknowledged that its analysis of arbitration outcomes was subject to certain limitations which “made it quite challenging to attempt to answer even the simple question of how well do consumers (or companies) fare in arbitration. See Arbitration Study: Report to Congress, pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act 1028(a), Section 5, p. 7. Moreover, the CFPB Report supported a finding that arbitration is quicker and cheaper than class actions.

What should Covered Entities Do?
Taking in account the administrative procedures required, it is unlikely that a final rule will take effect until the second or third quarter of 2017. In the meantime, covered entities should review their loan products and assess the extent they rely upon arbitration clauses and prepare for a bifurcated system where existing contracts may have arbitration clauses which include class waivers and future contracts will not. Entities relying on arbitration clauses, with or without class waivers, should begin considering a compliance management system to insure all reporting requirements are met. To the extent covered entities are not employing arbitration provisions with class waivers and desire to do so, they should consider amending their contracts prior to the effective date of the final rule since agreements entered into prior to the effective date will be grandfathered under existing law. Finally, covered entities have until August 22, 2016 to submit comments regarding the rule. To the extent entities use arbitration provisions, with or without class waivers, they should consider commenting on the rule.

 

Eleventh Circuit Sticks to its Guns: Expands Proofs of Claim Holding

The Eleventh  Circuit has made it clear: it will not back down from its decision in Crawford v. LVNV Funding, a decision it issued in 2014 and one which has been the subject of hot debate ever since.  In Crawford, the Eleventh Circuit ruled that the filing of a proof of claim was an attempt to collect a debt and that the filing of a proof of claim on time barred debt violated the FDCPA.   Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11^th Cir. 2014).  Since Crawford, the debate has raged on with several courts weighing in on the subject.  Under one rationale or another, the majority have held that the filing of a proof of claim on a time barred debt does not give rise to a claim under the FDCPA.

The Eleventh Circuit, however, is sticking to its guns and in a recent decision not only supported its position in Crawford but expanded it by addressing the issue left unanswered in Crawford: whether the Bankruptcy Code preempts the FDCPA where the debt collector files a proof of claim on a debt it knows to be time barred.    Johnson v. Midland Funding, LLC, C.A. No. 15-11240, 2016 U.S. App. LEXIS 9478 (11th Cir. May 24, 2016). 

In Johnson, the Court answered that question in the negative, finding that the Bankruptcy Code does not preempt the FDCPA.  Instead, “[t]he FDCPA easily lies over the top of the Code’s regime, so as to provide an additional lawyer of protection against a particular kind of creditor.” Johnson at *15. In its analysis, the Court found that the Bankruptcy Code and FDCPA “differ in their scopes, goals, and coverage, and can be construed together in a way that allows them to coexist.”  Johnson at *13-14. The court concluded that the two statutes could be reconciled because “they provide different protections and reach different actors.”  Johnson at *14.  While the Bankruptcy Code allows creditors to file proofs of claim even with respect to time barred debt, it does not require that they do so.  While “creditors can file proofs of claim they know to be barred by the relevant statute of limitations, those creditors are not free from all consequences of filing these claims.”  Johnson at *10.   The court read the statutes together as “providing different tiers of sanctions for creditor misbehavior in bankruptcy.”  Johnson at *15  The Court was adamant that regardless of the circumstances if a debt collector, as defined by the FDCPA, “files a proof of claim for a debt that the debt collector knows to be time-barred, that creditor must still face the consequences imposed by the FDCPA for a ‘misleading’ or ‘unfair’ claim.”  Johnson at *16. 

The Court’s decision expands the Eleventh Circuit’s view that the filing of time barred proofs of claim by debt collectors is a FDCPA violation even if the Bankruptcy Code allows the debt collectors to do so.  If there is good news to be had from the Eleventh Circuit’s opinion, it is that the court recognized that the FDCPA’s bona fide error defense may protect debt collectors who unintentionally or in good faith file time barred proofs of claim. 

Those playing in the debt buyer space should continue to watch for developments on this issue as there is a growing divide in the circuits.  See, e.g., Simmons v. Roundup Funding, LLC, 622 F.3d 93 (2d Cir. 2010); Garfield v. Ocwen Loan Servicing, 811 F.3d 86 (3d Cir. 2016); Simon v. FIA Card Servs., 732 F.3d 259 (3d Cir. 2013); Covert v. LVNV Funding, 779 F.3d 248 (4^th Cir. 2015); Gatewood v. CP Medical, LLC, Case No. 15-6008 (8^th Cir. Jul. 10, 2015); Walls v. Wells Fargo Bank, N.A., 276 F. 3d 502 (2002). While the Supreme Court refused to hear Crawford, the broader holding in Johnson and the split in the circuits make it more likely that the Supreme Court will address this issue at its next opportunity.

What to Expect in the Proposed Pay Day Lending Rules

It is anticipated that the CFPB will unveil their proposed pay day lending rules at tomorrow's field hearing in Kansas City.  The subject of the field hearing is, of course, small dollar lending.  Over a year ago, the CFPB released its proposal for pay day lending in advance of the SBREFA panel being convened on the same issue.  Here are a few things to look for when the Rule is released:

• The proposed rule is likely to require all short term loans take into account the consumer's ability to repay without defaulting or re-borrowing.  We anticipate that the Rule's ability to repay will be modeled after the mortgage rules.  One of the big talking points the CFPB pushed forward last Spring was requiring that the lender make a good faith determination at the outset of the loan to determine whether the consumer has an ability to repay the loan when due, including all associated fees and interest, without reborrowing or defaulting.  For each loan, the lender would be required to verify the consumer’s income, major monthly financial obligations and borrowing history (with the lender, its affiliates and possibly other lenders). 
• The proposed rule is likely to set limits on rollovers.  Last spring, the CFPB suggested they would require a 60 day cooling off period between loans and limit rollovers to those circumstances where the lender could document a change in the borrower's financial condition.  Don't be surprised if the proposed rule limits the number of rollovers and limits the conditions upon which rollovers may be made.
• The proposed rule may ban vehicle title loans.  As we indicated in a prior post, the CFPB recently issued a scathing report condemning title loans. Don't be surprised if the proposed rule either bans or significantly curtails vehicle title loans.
• The proposed rule is likely to curtail certain collection techniques - particularly, account drafts.  Don't be surprised if the Rule requires prior written notice to the consumer prior to the lender initiating a draft on the consumer's account.
• The proposed rule is likely to impose onerous data collection and record keeping requirements on pay day lenders.  The 2015 proposal contemplated significant record keeping requirements. In addition to requiring record retention, it would not be a surprise to see reporting requirements similar to those included in the arbitration rule requiring periodic reporting to the CFPB by small dollar lenders.