CFPB Files Amicus Brief in ECOA Case

The CFPB has filed an amicus brief in Hawkins v. Community Bank of Raymore, the ECOA case currently pending before the United States Supreme Court.  In Hawkins, the bank sought to enforce spousal guarantees provided by the wives of the primary applicants.  The wives countered by filing counterclaims under ECOA alleging that the guarantees were unenforceable and in violation of ECOA.  The district court dismissed the ECOA claims, holding that the spouses were not applicants under ECOA and therefore had no standing to sue.  The Eighth Circuit agreed, holding that a guarantor does not directly request credit and therefore does not apply for credit and is not a guarantor under the express definition of applicant provided by ECOA.  In their Petition, the guarantors contended that the Eighth Circuit’s decision did not give proper deference to the Federal Reserve Board’s broad authority to prescribe regulations to effectuate the ECOA’s purpose. 

The issues before the Court for consideration are: “(1) Whether “primarily and unconditionally liable” spousal guarantors are unambiguously excluded from being Equal Credit Opportunity Act (ECOA) “applicants” because they are not integrally part of “any aspect of a credit transaction”; and (2) whether the Federal Reserve Board has authority under the ECOA to include by regulation spousal guarantors as “applicants” to further the purposes of eliminating discrimination against married women.”  Not surprisingly, the CFPB’s brief favors the petitioner and takes the position that Regulation B is entitled to deference and that its definition of “applicant” is a permissible interpretation of ECOA’s text.

The CFPB brief makes the following arguments in support of reversal:

• For thirty years Regulation B has included guarantors with ECOA protection.  Congress has made amendments to ECOA but has not seen fit to amend the Board’s rules and therefore, the Court should give deference to the rulemaking.
• Regulation B’s inclusion of guarantors as applicants is reasonable because the CFPB believes that guarantors impliedly request the extension of credit, “are often extensively involved in the application process,” and “are commonly required to provide financial information and subjected to creditworthiness analysis comparable to that applied to principal borrowers.” (Interestingly, in most ECOA/guarantor cases, the opposite is argued in support of discrimination – that the guaranty was blindly requested without any consideration of independent creditworthiness); and
• Regulation B’s definition of applicant to include guarantors furthers the purpose of ECOA – eliminating marital status discrimination.  To its point, the CFPB notes that requiring a spousal guaranty not only discriminates against the borrower who is denied the ability to obtain individual credit but also against the guarantor who is required to assume debt by virtue of being married to the applicant.

 

Does an Offer of Judgment for Full Relief of the Individual Plaintiff’s Claims Moot a Class Action?

In advance of the Supreme Court’s consideration of the issue, the Southern District of Ohio has weighed in on whether an offer of judgment for full relief of the named plaintiff’s claims can moot a putative class action.  In Charvat v. National Holdings Corporation, a veteran pro se litigant filed a putative TCPA class action for calls made to him while he was on the National Do Not Call Registry.  The defendant served Charvat with an offer of judgment for full relief of his individual claims – specifically, $10,500.00 ($1,500.00 for each of the seven calls Charvat alleged he received) and the entry of an injunction against defendant as requested in the Complaint.  The offer of judgment also stated that its intent was to provide plaintiff with all of the individual relief sought in the Complaint.  Charvat rejected the offer and the defendant moved to dismiss asserting the offer of judgment mooted the plaintiff’s claim. 

The court gave considerable consideration to the concerns raised by Sixth Circuit precedent as to whether Rule 68 offers of judgment should be used to pick off named plaintiffs before the class can be certified.  Additionally, the court paid close attention to Justice Kagan’s dissent in the Supreme Court’s 2013 decision in Genesis Healthcare Corp v. Symjczyk, 133 S. Ct 1523 (2013) where Kagan noted that “[R]ule 68 provides no appropriate mechanism for a court to terminate a lawsuit without the plaintiff’s consent…Nor does a court have inherent authority to enter an unwanted judgment for [a hypothetical plaintiff Smith] on her individual claim, in service of wiping out her proposed collective action.  To be sure, a court has discretion to halt a lawsuit by entering judgment for the plaintiff when the defendant unconditionally surrenders and only the plaintiff’s obstinacy or madness prevents her from accepting total victory.  But the court may not take that tack when the supposed capitulation in fact fails to give the plaintiff all the law authorizes and she has sought.  And a judgment satisfying an individual claim does not give a plaintiff like Smith, exercising her right to sue on behalf of other employees, “all that [she] has…requested in the complaint.” Genesis, 133 S.Ct. at 1536.

Considering all of this, the court determined the ultimate question becomes “under what circumstances is it appropriate to enter judgment in the plaintiff’s favor over his or her objection?”    The court determined that the focus should be on plaintiff’s demand for relief.  Because the demand in the instant case included class action relief and the offer of judgment did not address class action relief, the court determined it was not compelled to enter the judgment in plaintiff’s favor over his objection and denied the motion to dismiss.

As previously noted, the Supreme Court recently granted certiorari in Campbell-Ewald Company v. Gomez,No. 14-857, to determine whether a defendant’s unaccepted offer of judgment prior to class certification renders the plaintiff’s individual and class claims moot.  That case, like Charvat, involves TCPA claims.  One of the issues courts have struggled with under this scenario, in addition to the mooting of the class claims, is that if an unaccepted Rule 68 offer of judgment moots a plaintiff’s claim and deprives the court of subject matter jurisdiction, is the court forced to dismiss the case or can it forcibly enter the judgment in favor of the plaintiff over his objection.  It is likely that Campbell-Ewald will shed some light on that issue, as well.

CFPB Continues its Focus on Loan Originator Compensation

In the span of a week, the CFPB has made it clear that it will not tolerate compensation to loan originators based upon interest rates.  These are the second and third cases resolved by the CFPB regarding loan originator compensation in the past six months and are based upon Regulation Z’s Loan Originator Compensation (“LOC”) Rules.

On June 4^th, the CFPB and RPM Mortgage entered into a proposed consent order which requires RPM to pay $18 million dollars in monetary relief and a $1 million civil money penalty.  It additionally requires RPM’s CEO to pay an additional $1 million civil money penalty.  The complaint alleged generally that RPM instituted a compensation plan which incentivized loan originators to steer consumers to higher rate mortgage loans.  Specifically, the Complaint alleged that RPM established employee expense accounts into which RPM deposited profits from an originator’s closed loans.  The Loan officers could receive bonuses from the accounts or use the accounts to offset interest rate or provide other incentives to consumers to avoid losing transactions.  The CFPB contended that by doing so, the officers were able to close and earn commissions on accounts they would have otherwise lost to competitors.  All of the actions of RPM occurred prior to January 1, 2014 and therefore fell under the prior version of the LOC Rule.

On June 5^th, the CFPB entered into a consent order with Guarantee Mortgage Corporation to resolve violations of the LOC Rules.   The consent order requires Guarantee, which is no longer in business, to pay $228,000.00 to the CFPB’s Civil Penalty Fund.  The consent order finds that Guarantee paid monthly fees to marketing services entities (“MSEs”) which were associated with Guarantee’s branch offices and set the fees based upon the profitability of the associated branch.  The owners of the MSEs drew the monthly fees as additional compensation. The Consent Order asserts that the MSE owners included in some cases loan originators.  Because of the accounting methods used by Guarantee, the fees paid to the MSEs included income from loans originated by their owners based on interest rates charged on the originated loans.  The CFPB therefore determined that in certain cases compensation was received based upon the terms of loans they originated in violation of the LOC Rule.

Debt Buyers Are not Entitled to National Banking Act Usury Preemptions

According to the Second Circuit, debt buyers are not entitled to National Banking Act (the "NBA") preemptions.  In Madden v. Midland Funding, LLC, 2015 U.S. App. LEXIS 8483 (2nd Cir. 2015), the consumers sued the debt buyer alleging that the debt buyer attempted to collect interest at a rate higher than permitted under New York law.  The debt buyer argued that it was the assignee of a national bank and therefore state law usury claims and FDCPA claims predicated on state law violations were preempted by the NBA. 


Under the NBA, national banks are expressly permitted to charge interest at the rate allowed by the laws of the state where the bank is located.  12 U.S.C. §85.  The NBA also provides the exclusive remedy for usury claims against national banks.  Therefore, there is no such thing as a state usury claim against a national bank. 


Midland purchased the account at issue from a national bank and therefore took the position that, as the national bank's assignee, it was entitled to use the national bank's home state's interest rate.  While under certain circumstances, assignees of national banks are entitled to the NBA usury preemptions, the court determined that debt buyers are not.  In doing so, the court relied heavily on last year's OCC bulletin which provides guidelines as to how national banks are to manage the risk associated with selling consumer accounts to debt buyers. The court determined that since the debt buyer was acting on its own behalf and not on behalf of the national bank or carrying out the business of the national bank, the debt buyer could not avail itself to the preemptions contained in the NBA.  The court therefore reversed the district court and remanded to the state court. 


Debt buyers should take consolation as to two key points made by the Court:

• First, the court did not rule on whether the cardmember agreement's Delaware choice of law provision precluded the New York usury claim as that issue had not been reached previously by the district court; and
• Second, the court made clear that the potential usury claim was only as to interest charged after the account was assigned to Midland. 

Lessons to be Learned from the Bank of America Consent Orders

Last week, the OCC and Bank of America entered into two consent orders arising from the bank’s practices concerning the Servicemembers Civil Relief Act (“SCRA”) and their non-home debt collection litigation practices.   The SCRA, among other things, limits the amount of interest that can be charged on credit obligations incurred prior to military service or activation. The SCRA limits the rate of interest which can be charged on credit card debt for active duty servicemembers and protects them from the entry of default judgments.  The consent orders are intended to address deficiencies in the bank’s practices and procedures relating to its SCRA-compliance program and the preparation of sworn statements used in debt collection litigation. Two separate consent orders were entered into – one providing for a civil penalty and the second providing for remediation.  The first order requires an immediate payment of $30 million by Bank of America as a civil penalty. 

While the second order does not include any admission of wrongdoing, it provides for remediation and provides more detail of the OCC’s findings. The Order requires that the bank:

• Establish a Compliance Committee to monitor and oversee the bank’s compliance with the terms of the Consent Order, as well as provide the OCC with quarterly progress reports as to the bank’s compliance;
• Create and submit for OCC approval a comprehensive action plan describing the actions and specific timeline to be taken to achieve compliance with the Consent Order;
• Create an submit for OCC approval a compliance risk management plan which implements an enterprise-wide compliance risk management program to ensure compliance “with all applicable laws, regulations and regulatory guidance”;
• Conduct a written, comprehensive assessment of the bank’s risks in SCRA compliance operations and submit a written plan to effectively manage and mitigate the identified risks;
• Submit for OCC approval a SCRA Compliance Plan and ultimately, a SCRA written training program;
• Audit all accounts (with the exception for the home lending line of business) from January 1, 2006 forward to identify SCRA-Protected servicemembers eligible for remediation;
• Submit for OCC approval a proposed remediation plan for affected SCRA-Protected servicemembers;
• Develop a comprehensive written SCRA compliance audit program;
• Submit of OCC approval policies and procedures for outsourcing SCRA compliance functions to third party providers;
• Report quarterly to the Compliance Committee as to accounts receiving SCRA benefits and the number of denials of CRA benefits requests received;
• Submit for OCC approval its Collection Litigation compliance action plan;
• Submit for OCC approval a Collections Litigation Account Review Plan designed to identify collections litigation accounts eligible for remediation;
• Provide remediation to eligible litigation account holders.

The second order shall remain in effect indefinitely.

So what are the lessons to be learned from the Bank of America Consent Orders? The language of the Consent Order gives guidance to banks of what the OCC’s expectations are for a robust SCRA Compliance and Audit Plan.

Based upon the Consent Order, the OCC expects an SCRA Compliance Plan to include:

• Uniform standards and processes for determining whether a servicemember who requests SCRA benefits is eligible for all accounts that the borrower may have;
• Policies and procedures for notifying a servicemember of the denial of SCRA benefits or protections;
• Policies and procedures for determining whether real or personal secured property is owned by a SCRA-protected servicemember before referring a loan for foreclosure or repossession and during the foreclosure or repossession process in order to determine whether a court order is required pursuant to the SCRA prior to foreclosure or repossession;
• Processes to ensure that all factual assertions in affidavits of military service are accurate, complete and reliable;
• Procedures for searching the Department of Defense Manpower Data Center database or an equivalent database before filing an affidavit in connection with a default judgment on an account, initiating the foreclosure or repossession process, or making a determination of eligibility for SCRA benefits;
• Procedures for filing an affidavit in connection with obtaining a default judgment on an account;
• Procedures for initiating and pursing a waiver of rights;
• Procedures regarding applicable state laws which may provide more benefits or protections that the SCRA;
• A record retention policy to protect records which demonstrate compliance with the SCRA (including documentation of the calculation of benefits; assessment of eligibility for benefits; correspondence with servicemembers; and method, dates and results of military status verification);
• Policies and procedures to ensure risk management, periodic audits for quality assurance, vendor management and corporate compliance with the SCRA;
• Policies and procedures for training of employees;
• Policies and procedures for compliance of third party vendors; and
• Processes for ongoing monitoring, testing and reporting.

Less is More: Second Circuit Holds that Failure to Disclose Tax Consequences of Settlement Does Not Violate FDCPA

The Second Circuit has resolved a debt collector’s obligation to disclose the tax consequences of settlement.  The Second Circuit recently ruled that a debt collector does not violate the FDCPA if it fails to advise a consumer of the potential tax consequences of a settlement.  In Altman v. J.C. Christensen & Assocs., the collection agency sent a settlement letter to the consumer which provided several options for settlement, including: “1. Settle your account now for a lump-sum payment of $3,155.43.  That is a savings of 48% on your outstanding account balance.  2. Extend your time and settle your account in three payments of $1,314.76.  This is a savings of $2,123.85 on your outstanding account balance.”  Altman v. J.C. Christensen & Assocs., 2015 U.S. App. LEXIS 7980, * 2-3 (2d Cir. May 14, 2015).  The consumer contended that J.C. Christensen violated the FDCPA by failing to advise him that the forgiven debt might be taxable under the Internal Revenue Code.  In affirming the district court’s ruling in favor of the collection agency, the Court made the following points:

• The letter plainly stated the percentage saved was on the outstanding balance.  Taken in context with the letter, the fact that the letter did not disclose the debtor might then have to pay taxes on the amount saved in not deceptive.
   
• The language of the FDCPA does not require a debt collector to make any affirmative disclosures of potential tax consequences when collecting a debt.
   
• Requiring a debt collector to disclose potential collateral consequences of a settlement is far afield from the broad mandate of the FDCPA to protect from abusive debt collectors.
  
  

In contrast, debt collectors should also be aware that the disclosure of information as to tax consequences, if not done correctly, can land them in hot water. In Good v. Nationwide Credit, 55 F. Supp. 3d 742 (E.D. Pa. 2014), a district court in the Third Circuit denied a collection agency’s motion to dismiss where the letter similarly offered to “settle his account of $613.03 for $183.90, representing a savings of $429.13.”  The letter in that case, however, went a step further and included a notice that “GE CAPITAL BANK is required to file a form 1099C with the Internal Revenue Service for any cancelled debt of $600 or more.  Please consult your tax advisor concerning any tax questions.”  The Court held that the additional language of the notice could state a claim for violation of the FDCPA because: it did not accurately reflect controlling law, could be construed as deceptive and misleading, and was a material representation.  The court stated that “the least sophisticated consumer may reasonably believe that in order not to be reported to the IRS, he or she must pay enough on the alleged debt so that a balance of less than $600.00 remains regardless of whether the event is reportable, or any exception applies.”