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Illinois Appellate Court rules generic card agreement cannot compel arbitration
On January 4, the Illinois Appellate Court (Fifth District) handed down an opinion affirming a circuit court’s decision to deny a debt collection company’s motion to dismiss and compel arbitration. In 2015, the company filed complaints against defendants-counterplaintiffs for failing to make payments on their accounts and entering into default. In class action counterclaims, the defendants-counterplaintiffs challenged the debt collection company’s alleged practice of suing to collect debt purchased from others without “sufficient proof of ownership of the debt,” and sought damages for purported violations of the Fair Debt Collection Practices Act, among others. The debt collection company argued that because the class action counterclaims fell within the scope of a binding card agreement—which included an arbitration clause and a class action waiver provision—the class claims should be barred and dismissed. The circuit court considered whether the agreements entered into between the company and the defendants-counterplaintiffs were subject to arbitration, and determined that the company failed to demonstrate that the card agreement containing the arbitration clause was received by, agreed to, or otherwise applied to the consumers within the agreements governing the accounts in question. The appellate court affirmed and concluded that, upon review, the company’s appeal failed to “demonstrate when or how the generic [c]ard [a]greement containing the arbitration provision pertained to [defendants-counterplaintiffs] or that it was communicated . . . prior to subsequent credit card use.”
Ohio Governor Signs Residential Mortgage Lending Act
On December 22, Ohio Governor John Kasich signed legislation enacting amendments to the state’s residential mortgage lending act. HB 199, among other things, (i) updates certain definitions, such as modifying the definition of “nationwide mortgage licensing system and registry” to broadly include “persons providing non-depository financial services”; (ii) provides limits on the application of the current law to “unsecured loans and loans secured by other than residential real estate”; and (iii) updates requirements for applicants registering for mortgage loan originator licenses. The amended act takes effect March 23.
Buckley Sandler Insights: OMB releases updated and possibly outdated CFPB rulemaking agenda
OMB has released the CFPB’s Fall 2017 rulemaking agenda. Although this is the first update to the agenda since Richard Cordray left the agency in November 2017, delays in the publication of rulemaking agendas are common so the updated agenda may not reflect the views of new CFPB leadership. The updated agenda does not appear on the Bureau’s website. Further:
- HMDA & ECOA Amendments: The updated agenda states that the Bureau planned to determine by December 2018 whether to make permanent adjustments to the threshold for reporting open-end lines of credit. However, as discussed in greater detail here, the CFPB stated on December 21 that it intended to engage in a broader rulemaking to (i) re-examine the criteria determining whether institutions are required to report data; (ii) adjust the requirements related to reporting certain types of transactions; and (iii) re-evaluate the required reporting of additional information beyond the data points required by the Dodd-Frank Act.
- Prepaid Cards: The updated agenda states that the CFPB expected to finalize amendments to its rule on prepaid cards in November 2017, but no final amendments have been issued. Instead, on December 21, the CFPB announced its intent to adopt final amendments “soon after the new year” and stated that it expects to extend the April 1, 2018 effective date to allow more time for implementation.
- Debt Collection: The updated agenda states that the CFPB expects to issue a proposed rule in February 2018 “concerning FDCPA collectors’ communications practices and consumer disclosures.” However, on December 14, OMB announced that the CFPB had withdrawn its planned survey regarding debt collection disclosures because “Bureau leadership would like to reconsider the information collection in connection with its review of the ongoing related rulemaking.”
See previous InfoBytes coverage on the HMDA, Prepaid, and Debt Collection rulemaking updates.
Other noteworthy aspects of the updated agenda include:
- Regulation Reviews: The updated agenda reiterates the Bureau’s intent to review the regulations inherited from other agencies and “clarify ambiguities, address developments in the marketplace, and modernize or streamline regulatory provisions.” The updated agenda lists “pre-rule activities” as continuing through February 2018, rather than September 2017 under the prior agenda.
- “Larger Participants” in Installment Lending: Consistent with the prior agenda, the CFPB states that it is preparing a proposed rule to define the “larger participants” in the personal loan market (including consumer installment loans and vehicle title loans) that will be subject to Bureau examinations. The updated agenda also states that the Bureau is still considering “whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.” However, while the prior agenda indicated that a proposal was expected in September 2017, the new agenda lists May 2018.
- Overdrafts: The updated agenda states only that the CFPB is “continuing to engage in additional research and consumer testing initiatives relating to the opt-in process” for overdraft protection and that “pre-rule activities” will continue through this month. Under the prior agenda, pre-rule activities were scheduled to continue through June 2017.
- Small Business Lending: The agenda indicates that the long-delayed implementation of the small business data reporting provisions of the Dodd-Frank Act will be delayed even longer. The last agenda listed “pre-rule activities” as continuing through June 2017, stating that the CFPB “is focusing on outreach and research to develop its understanding of the players, products, and practices in the small business lending market and of the potential ways to implement section 1071.” The new agenda states that these activities will continue until May 2018, after which the Bureau “expects to begin developing proposed regulations concerning the data to be collected, potential ways to minimize burdens on lenders, and appropriate procedures and privacy protections needed for information-gathering and public disclosure.”
- TRID/Know Before You Owe Amendments: The updated agenda lists April 2018 as the expected release date for finalization of the July 2017 proposed rule addressing the “black hole” issue, which is discussed in a Buckley Sandler Special Alert. The prior agenda listed March 2018.
- Mortgage Servicing Amendments: In October 2017, the CFPB issued proposed amendments to the mortgage periodic statement requirements to further address circumstances in which servicers transition between modified and unmodified statements in connection with a consumer’s bankruptcy case. The updated agenda does not provide an expected release date for final amendments.
- Credit Card Agreement Submission: The agenda continues to state that the Bureau is considering rules to modernize its database of credit card agreements to reduce the submission burden on issuers and to make the database more useful for consumers and the general public. The agenda lists “pre-rule activities” as continuing through February 2018. Under the prior agenda, pre-rule activities were scheduled to continue through October 2017.
Pennsylvania Governor Signs Law Concerning Mortgage Servicing Activities
On December 22, Pennsylvania Governor Tom Wolf signed into law SB 751, an act amending Title 7 of the Pennsylvania Consolidated Statutes to regulate certain mortgage servicing activities. The amendments revise existing definitions, define new terms, establish mortgage servicing licensing requirements, create single point of contact requirements, and set forth specific steps that mortgage servicers must complete as soon as mortgage loans are paid in full. The law also requires, effective December 22, the promulgation of regulations to incorporate the CFPB’s mortgage servicing regulations. The remaining sections of SB 751 go into effect on the date that the new promulgated regulations are issued.
Arguments Heard in English Litigation; CFPB Announces Relaxed Compliance Requirements for HMDA; Other Proposed Rulemakings
On December 22, Judge Timothy Kelley heard arguments from both parties related to Leandra English’s litigation against President Trump and Mick Mulvaney. Judge Kelley did not rule on the matter at the close of the hearing. As previously covered by InfoBytes, English filed an amended complaint for declaratory and injunctive relief and a motion for preliminary injunction on December 6.
In response to English’s new arguments, the defendants filed an opposition motion on December 18. Among other things, the response counters an argument—raised by English for the first time in her amended complaint—that the Federal Vacancies Reform Act (FVRA) cannot be used to appoint an acting CFPB Director because the Director is also a member of the FDIC. Defendants responded that the FVRA provision excluding appointments to independent multi-member boards or commissions only applies to direct appointments and not to positions that serve as “ex officio” members, as the CFPB Director does on the FDIC. The defendants go on to explain that English’s interpretation would prevent the use of FVRA to fill multiple Cabinet and other high-ranking Executive Branch positions that serve as ex officio members of independent agencies. The defendants also alleged that English failed to satisfy the requirements of the federal quo warranto statute – the exclusive means, according to the defendants, for directly challenging Mulvaney’s authority to perform as Acting Director of the CFPB. English replied to the defendant’s opposition motion on December 21.
Throughout the week, the CFPB took action regarding current and future rulemakings:
HMDA. On December 21, the CFPB issued a statement regarding compliance with the Home Mortgage Disclosure Act (HMDA) final rule and amendments to the HMDA final rule. Although the Bureau did not delay the January 1, 2018 effective date as some had hoped, it acknowledged the difficulties of coming into compliance with the new requirements, stating that the Bureau “does not intend to require data resubmission unless data errors are material or assess penalties with respect to errors for data collected in 2018 and reported in 2019.” According to the CFPB, compliance with the HMDA requirements pose “significant system and operational challenges” and therefore, institutions should focus the 2018 data collection on identifying areas for improvement in their HMDA compliance management systems for future years. The Bureau further advised that it expects that supervisory examinations of 2018 HMDA data will be “diagnostic” to help “identify compliance weaknesses, and will credit good-faith compliance efforts.” However, institutions will still use the CFPB’s new HMDA Platform for data collected in 2017. The FDIC and the OCC issued similar announcements, Financial Institution Letter FIL-63-2017 and OCC Bulletin 2017-62 respectively, and other regulators are expected to do the same.
The Bureau’s stated intent to focus on “good-faith compliance efforts” and “material” errors in the early days of the new HMDA requirements is similar to the approach taken for implementation of the Ability-to-Repay/Qualified Mortgage Rule and the TILA-RESPA Integrated Disclosure Rule. While this flexible approach is generally beneficial for lenders and consumers, it does produce some uncertainty over what will be considered “good faith” or “material.”
The Bureau also announced its intent to engage in additional HMDA rulemaking that may (i) re-examine the criteria determining whether institutions are required to report data; (ii) adjust the requirements related to reporting certain types of transactions; and (iii) re-evaluate the required reporting of additional information beyond the data points required in HMDA, as amended by the Dodd-Frank Act.
Prepaid Accounts. On December 21, the CFPB also issued a statement on the final rule covering prepaid accounts and the proposed amendments to that rule. In the statement, the CFPB announced that it intends to adopt final amendments “soon after the new year” and that it expects to further extend the April 1, 2018 effective date to allow more time for implementation. The Bureau did not give details on the nature of the amendments or the length of the expected extension.
Debt Collection. On December 14, OMB released a Notice of Action, which reflected that the CFPB withdrew its plan to conduct a survey related to debt collection disclosures of 8,000 individuals. According to OMB’s notice, the CFPB withdrew the plan because “Bureau leadership would like to reconsider the information collection in connection with its review of the ongoing related rulemaking.”
Fifth Circuit Claims Loan Modification Communications Are Not Debt Collection Activities Under TDCA
On December 11, the U.S. Court of Appeals for the Fifth Circuit ruled that a mortgage servicer’s communications about a potential loan modification do not constitute “debt collection activity” under the Texas Debt Collection Act (TDCA). The servicer had initially told borrowers that they could apply for a loan modification but later informed them that they were not eligible. The borrowers unsuccessfully appealed the determination with the servicer, yet prior to a final determination on the appeal, the servicer sent a statement reflecting a new monthly payment in the amount that the borrowers had been requesting. The borrowers made one payment in that amount, which the servicer accepted, but weeks later the servicer sent a letter stating that the mortgage was still in default. In affirming the district court’s judgment in favor of the mortgage servicer, the three-judge panel determined that while “modification discussions may constitute debt collection activities under the TDCA when those discussions are used as a ruse to collect debt,” the borrowers failed to make such a showing, and instead the servicer’s misrepresentations were “merely poor customer service.”
FTC Announces Settlement With Debt Collection Operation
This week, the FTC obtained a court order banning a Florida-based debt collection operation and its managing member from the debt collection business. The defendants were accused of violations of the FTC Act and the Fair Debt Collections Practices Act for, among other things, allegedly posing as lawyers and threating individuals with lawsuits or prison time if they failed to pay debt they did not actually owe. The order resolves a complaint filed by the FTC in July against defendants. (See previous InfoBytes coverage here.) Under the terms of the settlement, the defendants are prohibited from, among other things, (i) engaging in debt collection activities; (ii) misrepresenting material facts regarding financial-related products or services; (iii) disclosing, using, or benefiting from consumers’ personal information; and (iv) improperly disposing such information when appropriate. Finally, the order assessed a $702,059 judgment for equitable monetary relief.
Second Circuit Ruling May Expose Debt Collection Law Firms to Increased FDCPA Claims
On November 14, the U.S. Court of Appeals for the Second Circuit reversed a Southern District of New York dismissal of a lawsuit against a debt collection law firm regarding actions taken during state court collection proceedings. Concluding that the plaintiff had stated a claim against the law firm under two sections of the Fair Debt Collection Practices Act (FDCPA), a three-judge panel vacated the dismissal and remanded for further proceedings consistent with its decision.
The appeal stems from the law firm’s actions in attempting to collect on a default judgment entered against the plaintiff. After receiving a restraining notice from the law firm, the plaintiff’s bank placed a restraint on his checking account and the law firm told plaintiff that, unless he made a payment, he would have to get a court order to lift the restraint. The plaintiff sought such an order on the grounds that all the money in his checking account was Social Security Retirement Income (SSRI) and, therefore, exempt from restraint. The plaintiff claimed that the law firm’s objection to his request contained false statements in violation of the FDCPA and New York law because the plaintiff had earlier provided the law firm with documents supporting his exemption claim.
In finding the complaint states a claim under FDCPA section 1692e, the Court rejected, among other arguments made by the law firm, the notion that FDCPA liability cannot be imposed based on conduct in litigation; the opinion contrasts bankruptcy court proceedings—where the Second Circuit has found the filing of false statements of claim does not violate the FDCPA—with those of state courts, “where . . . the consumer, often unfamiliar with the law governing garnishment of bank accounts, has the benefit of neither counsel nor a bankruptcy trustee.” The Court also held that “a debt collector engages in unfair or unconscionable litigation conduct in violation of [FDCPA] section 1692f when . . . it in bad faith unduly prolongs legal proceedings or requires a consumer to appear at an unnecessary hearing.”
CFPB Initiates Complaint Against Company for Deceptive, Unfair, and Abusive Loan Collection Practices
On November 15, the CFPB announced it had filed a complaint against a Texas-based service provider, alleging that it had assisted in the collection of loans that were, in whole or in part, void under state law. The complaint filed in the U.S. District Court for the District of Montana alleges that the service provider, which provided services to three tribal lending entities engaged in the business of extending online installment loans and lines of credit, along with two companies responsible for the collection process (collectively defendants), assisted in the collection of loans that consumers were not legally obligated to pay based on identified states’ usury laws or licensing requirements. Although the specific claims vary by defendant, the complaint alleges that the defendants engaged in deceptive, unfair, and abusive acts and practices in violation of the Consumer Financial Protection Act (CFPA) by:
- misrepresenting that consumers were responsible for money owed on loans that were void in whole or in part, or did not exist, because the loans were void under state licensing or usury laws (voided loans);
- demanding repayment from consumers on voided loans by issuing “demand letters,” electronically debiting funds from consumer bank accounts, and placing phone calls to consumers;
- failing to disclose to consumers that defendants had no legal right to collect on certain voided loans and that consumers were not legally obligated to repay the loans;
- causing injury to consumers by servicing and collecting on the voided loans;
- taking advantage of consumers’ “lack of understanding” regarding the voided loans; and
- providing assistance in, or administering, the origination and collection of the voided loans.
The CFPB is seeking monetary relief, civil money penalties, injunctive relief, and a prohibition of the service provider’s ability to commit future violations of the CFPA.
FTC Files Complaint Against Debt Collection Business for Alleged Violations of FTC Act, FDCPA
On November 8, the FTC issued a press release announcing charges against a Georgia-based debt collection business for allegedly violating the FTC Act by making false, unsubstantiated, or misleading claims to trick consumers into paying debt they did not actually owe. In the complaint, the FTC alleged defendants threatened legal action, garnishment, and imprisonment if the purported debt was not paid, and in other instances, attempted to collect debts after consumers provided proof the debt was paid off. Additionally, the defendants allegedly violated the Fair Debt Collection Practice Act (FDCPA) by (i) making false, deceptive, or misleading representations, including withholding the true status of the debt, threatening legal action or imprisonment, and failing to disclose they were debt collectors; (ii) engaging in unlawful third-party communications without obtaining prior consumer consent; and (iii) failing to provide consumers written verification of their debt within the required time frame. According to the FTC, defendants have collected more than $3.4 million from consumers since January 2015. A federal judge in the U.S. District Court for the Northern District of Georgia has temporarily restrained and enjoined the defendants’ alleged illegal practices and frozen their assets.