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Financial Services Law Insights and Observations

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  • Global Financial Innovation Network seeking cross-border testing applications

    Fintech

    On January 31, the United Kingdom’s Financial Conduct Authority (FCA) announced that the Global Financial Innovation Network (GFIN) officially launched and is now seeking cross-border testing applications. As previously covered by InfoBytes, in August 2018, the FCA announced the creation of the GFIN in collaboration with 11 other global financial regulators, including the CFPB. The network has now expanded to include 29 organizations, including financial regulators and other related entities, committed to supporting financial innovation. The GFIN has three primary functions: (i) to collaborate on innovation and to provide accessible regulatory contact information for firms; (ii) to provide a forum for joint regulation technology work; and (iii) to provide firms with an environment in which to trial cross-border solutions.

    The announcement states that the network has opened a one month application window for firms interested in joining a pilot cohort for cross-border testing for new technologies. Firms interested in participating are required to meet the application requirements of all the jurisdictions in which they would like to test. Each applicable regulator will decide whether the firm’s proposed test meets the screening criteria and ensure safeguards are in place in their jurisdiction for testing. The deadline for testing applications is February 28.

    Fintech Financial Conduct Authority CFPB Regulatory Sandbox International Of Interest to Non-US Persons

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  • D.C. act provides eviction and foreclosure relief to federal employees and contractors impacted by shutdown

    State Issues

    On February 6, the Mayor of the District of Columbia signed Act 23-5 (B23-0080) to protect federal workers, contractors, and employees of the District of Columbia Courts from eviction and foreclosure during federal government shutdowns. Among other things, the D.C. Superior Court will have the ability to grant motions to stay foreclosure and eviction proceedings for eligible impacted workers or their household members. The temporary stay would run until the earlier of “(i) 30 days after the effective date of an appropriations act or continuing resolution that funds a federal worker’s government agency; or (ii) 90 days after the date of the federal worker’s first unpaid payday” for government employees, with analogous terms for contractors. The act is effective immediately and expires on May 7.

    State Issues State Legislation Shutdown Relief Consumer Finance Foreclosure Mortgages

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  • District Court temporarily stops debt collection operation at FTC’s request

    Courts

    On February 8, the FTC announced that the U.S. District Court for the Western District of North Carolina had issued a temporary restraining order and asset freeze regarding a debt collection operation allegedly collecting phantom debts. According to the FTC, the debt collection operation deceptively claimed to be attorneys, or to be affiliated with attorneys, to pressure consumers into paying debts which they did not owe, including threatening legal action if they did not pay, in violation of the FTC Act and the FDCPA. The order names 10 companies and six individuals as defendants and temporarily prohibits the defendants from, among other things, (i) misrepresenting information as it relates to collection efforts; (ii) threatening to take unlawful action; (iii) communicating with third parties without having obtained prior consent, other than to determine a consumer’s location; and (iv) failing to provide consumers with written debt information five days after initial contact.

    Courts FTC FDCPA Debt Collection FTC Act

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  • 7th Circuit holds arithmetic does not affect a debt’s character under the FDCPA

    Courts

    On February 7, the U.S. Court of Appeals for the 7th Circuit held that arithmetic does not affect a debt’s “character” under the FDCPA, reversing the district court’s judgment against a debt collector. A debt collector reported to a credit bureau that the debtor had nine unpaid bills of $60, rather than one aggregate debt of $540. The debtor filed suit, arguing that the debt collector violated the FDCPA’s prohibition on making a “false representation” about “the character, amount, or legal status of any debt.” The district court agreed with the debtor, determining that the debt collector should have reported the amount in the aggregate and imposing a $1,000 penalty for the violation.

    On appeal, the 7th Circuit noted a lack of authoritative or persuasive guidance discussing whether aggregation of all amounts owed to a creditor “concerns the ‘character’ of a debt” under the FDCPA. The appeals court concluded that the number of specific transactions between a debtor and a creditor “does not affect the genesis, nature, or priority of the debt” and, therefore, does not concern its character. Moreover, the court noted that “‘amount’ rather than the word ‘character’ is what governs reporting the debt’s size”; otherwise, there would be no distinction in the FDCPA’s prohibition on false representations about the “character, amount, or legal status” of a debt. Because it was undisputed that the debtor incurred nine debts of $60 each to a single creditor, the debt collector did not misstate the “character” of the debt under the FDCPA.

    Courts Seventh Circuit Appellate FDCPA Debt Collection Credit Report

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  • District Court holds debt collector’s actions not harassment or abuse under FDCPA

    Courts

    On January 30, the U.S. District Court for the Eastern District of Arkansas granted a debt collector’s motion for summary judgment, finding that no reasonable jury could conclude the debt collector’s conduct gave “rise to an intent to annoy, harass, or oppress” under the FDCPA. According to the opinion, the debt collector mistakenly had assigned the plaintiff’s phone number to a debtor in its system. The collector contacted the plaintiff five times between July 2016 and May 2017, after which the plaintiff informed the collector several times that she was not the intended recipient of the calls; despite placing the plaintiff on its Do Not Call list, the collector proceeded to contact the plaintiff again. The plaintiff filed suit against the debt collector alleging violations of various state laws and the FDCPA’s prohibition on engaging in conduct to “harass, oppress, or abuse any person in connection with the collection of a debt” and from using any “unfair or unconscionable means to collect or attempt to collect any debt.”

    The debt collector moved for summary judgment, and the court determined that no reasonable jury could conclude the conduct gave rise to a violation, noting that the actions of the collector were a “far cry from the type of conduct Congress held up as harassment or abuse” in the FDCPA. Specifically, the court concluded that calling twice after being verbally asked to stop does not give rise to an intent to annoy, abuse, or harass as Congress chose to make it a per se violation to communicate after written requests to stop, but not any cease request. The court similarly rejected plaintiff’s claim that the collector’s conduct was unfair or unconscionable under the FDCPA.

    Courts Debt Collection FDCPA

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  • OCC praises CFPB’s payday rule proposal

    Federal Issues

    On February 11, the OCC released a statement from Comptroller of the Currency Joseph Otting supporting the CFPB’s proposed rule rescinding certain requirements relating to underwriting standards for short-term small-dollar loans. (Covered by InfoBytes here.) Calling the proposal “important and courageous,” Otting praised the Bureau, noting that it was “[t]he shrinking supply and steady demand” that “drove up prices and promoted much less favorable terms.” He continued to state that a framework of rules that allows responsible lenders to compete in the market will make the market “work better for everyone.”

    As previously covered by InfoBytes, in May 2018, the OCC released a Bulletin encouraging banks to meet the credit needs of consumers by offering short-term, small-dollar installment loans subject to the OCC’s core lending principles.

    Federal Issues Consumer Finance CFPB OCC Installment Loans Payday Rule Underwriting

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  • District Court: Bank originating mortgage loans is not a debt collector under FDCPA

    Courts

    On January 23, the U.S. District Court for the Middle District of Florida dismissed a putative class action suit, ruling that a national bank did not qualify as a debt collector under the FDCPA. According to the order, the three plaintiffs defaulted on loans that were originated (or acquired via merger) by the bank. The loans were ultimately satisfied by the proceeds of related short sales of the plaintiffs’ homes. Following the satisfaction of the loans, the bank sent the plaintiffs letters that stated it would not report any negative information regarding the plaintiffs’ loans to the credit bureaus or charge any late fees for a period of 90 days due to the plaintiffs’ residences being located in a FEMA-declared disaster area. The plaintiffs alleged that these letters violated the FDCPA and the Florida Consumer Collection Practices Act (FCCPA) because the bank “systematically misrepresent[ed] the status” of the plaintiffs’ satisfied loans as well as the plaintiffs’ “obligations under the loans.” The bank moved to dismiss arguing, among other things, that the FDCPA claims should be dismissed because the bank—as originator and owner of the loans—is not a debt collector under the FDCPA, and the complaint failed to contain any allegations supporting the assertion that the bank’s principal purpose as a business is the collection of debts. Moreover, the bank argued that the letters were sent purely for informational purposes, and as such, did not constitute an attempt to collect a debt under the FDCPA or FCCPA.

    The court agreed with the bank, finding that the bank was “exempt from the definition of a debt collector” due to its status as the originator of the loans, and dismissed the FDCPA claims with prejudice. The court also dismissed plaintiffs’ FCCPA claims, finding that it lacked original jurisdiction over these claims because the plaintiffs failed to file a motion for class certification within 90 days of filing the complaint, as required under local rules.

    Courts Mortgage Origination Debt Collection FDCPA State Issues

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  • DOJ settles with mortgage company for alleged SCRA violations

    Federal Issues

    On February 7, the DOJ announced a $750,000 settlement with a New Jersey-based mortgage company resolving allegations that the company violated the Servicemembers Civil Relief Act (SCRA) by foreclosing on homes owned by servicemembers without first obtaining the required court orders. The complaint, which was filed on the same day as the settlement, alleges that between 2010 and 2012 the company foreclosed on six homes of SCRA-protected servicemembers. Under the SCRA, lenders must obtain a court order before foreclosing on a servicemember’s home during, or within one year after, active military service, provided that the mortgage originated before the servicemember’s period of military service. The settlement requires the company to, among other things, (i) pay $125,000 to each affected servicemember; (ii) provide staff training to prevent unlawful foreclosures in the future; and (iii) notify the DOJ of future SCRA complaints.

    Federal Issues DOJ Foreclosure Mortgages Servicemembers Settlement SCRA

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  • NYDFS issues title insurance guidance following Appellate Division ruling on Regulation 208

    State Issues

    On January 31, NYDFS issued Supplement No. 2 to Insurance Circular Letter No. 1 (2003), which provides guidance to the title insurance industry following a January 15 unanimous decision by the Appellate Division of the New York State Supreme Court to uphold Insurance Regulation 208. The Appellate Division’s decision vacated the majority of a trial court order annulling Regulation 208, which limits title insurers’ ability to offer inducements to obtain business. (See previous InfoBytes coverage here.)

    The NYDFS supplement highlighted three critical holdings from the Appellate Division’s decision. First, the court upheld Regulation 208’s ban on inducements for future title insurance business, recognizing that NYDFS had found that lavish gifts were routinely offered to intermediaries such as lawyers in anticipation of receiving business. Second, the appellate court held that Insurance Law § 6409(d), which prohibits a commission, rebate, fee, or “other consideration or valuable thing,” is not limited to a prohibition on quid pro quo exchanges for specific business. Third, the court annulled Regulation 208’s ban on certain closer fees and fees for ancillary searches.

    State Issues Courts Appellate NYDFS Title Insurance

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  • 2nd Circuit: Bank’s suit to recover RMBS losses is untimely

    Courts

    On February 6, the U.S. Court of Appeals for the 2nd Circuit affirmed the judgment of the district court dismissing, as untimely, a trustee’s breach of contract and indemnity claims related to losses resulting from alleged defects in mortgage loans. At issue are three pools of residential home mortgages that at the time of sale had an aggregate principal balance exceeding $3.4 billion. These loans were sold by a mortgage company to Lehman Brothers Holding Inc. and Lehman Brothers Bank FSB in 2006 and subsequently securitized into three trusts. In addition to the representations and warranties made and the remedies provided in the Mortgage Loan Purchase Agreements (MLPAs) and Trust Agreements, the mortgage company, Lehman, and the depositor entered into a separate Indemnification Agreement for each trust, which contained its own representations and warranties indemnification provision. Investors, including Freddie Mac, purchased certificates in the trusts.

    According to the court, Freddie Mac conducted a forensic review of the trusts six years after the sale, which allegedly revealed that an “overwhelming percentage” of the loans in the trusts breached the mortgage company’s representations and warranties (R&W). Shortly after discovery, the trustee submitted breach notices to the mortgage company, which did not cure or repurchase the loans.

    The Federal Housing Finance Agency (FHFA), as conservator for Freddie Mac, filed a complaint against the mortgage company asserting breach of contract and indemnification claims. After the FHFA dropped out of the litigation, the trustee filed an amended complaint that included two breach of contract counts and two indemnification counts—one seeking indemnification based on the MLPAs and Trust Agreements and another seeking indemnification based on the Indemnification Agreements.

    The mortgage company moved for summary judgment on the first three claims and moved to dismiss the fourth claim. The district court granted the motion. It found that the breach of contract claims were time-barred because the FHFA filed the summons with notice more than six years after the limitations period at issue, which begins to run on the effective date of the R&Ws. The court also found the trustee’s indemnification claim based on the MLPAs and Trust Agreements to be time-barred because it was “merely a reformulation of its breach-of-contract claims.” The district court dismissed the other indemnification claim based on the Indemnification Agreements as time-barred because it involved a new set of operative facts and thus could not relate back to the original complaint filed by the FHFA.

    On review, the 2nd Circuit affirmed the lower court’s decision. As to the breach of contract claims, the 2nd Circuit relied on two New York Court of Appeals cases: Ace Securities Corp. v. DB Structured Products, which held that the six year statute of limitations begins to run on the effective date of R&Ws, and Deutsche Bank National Trust v. Flagstar Capitals Market Corporation which held that an express accrual clause in a contract cannot delay the start of a limitations period under New York law. With respect to the third cause of action for indemnification under the MLPAs and Trust Agreements, the 2nd Circuit stated that absent unmistakably clear language in an indemnification agreement that demonstrates that the parties intended this clause to cover first-party claims as opposed to third-party claims, an agreement between two parties to indemnify each other does not mean that one party’s failure to perform gives rise to an indemnification claim. In reviewing the claim at issue in count three, the court found that the claim sought payment to the trustee arising from the mortgage company’s alleged breach of R&Ws, which is a breach of contract claim. The trustee argued that the indemnification section provided an independent remedy, but the 2nd Circuit rejected that argument stating that a claim is not independent if its success directly depends on the breach of the R&Ws in the MLPAs outlined in the contract claims. Finally, with respect to the fourth clause of action for indemnification, the 2nd Circuit held that this claim filed in 2016, would only be timely if it related back to the facts of the earlier claims, but since it arose out of different contracts it therefore could not relate back.

    Courts RMBS Second Circuit Appellate Indemnification

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