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Financial Services Law Insights and Observations


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  • Banking Regulator Admits to Flaws in Supervision of Community Banking Sales Practices

    Federal Issues

    On April 19, the OCC released a report detailing the results of an internal review that concedes the regulator’s oversight of a national bank’s consumer complaints and whistleblower cases was “untimely and ineffective” and that OCC supervisors missed or failed to address warning signs throughout the course of the bank regulator’s recent investigation. The objective of the internal review was to, among other things, “identify gaps in supervision,” and “[d]etermine if there are lessons learned that can result in improved supervision process.” The report—which was prepared by the OCC’s Office of Enterprise Governance (OEG) and the Ombudsman—concluded, among other things, that OCC supervisors had “focused too heavily on bank processes versus what those processes were actually reporting,” and notes that the OCC’s internal review “found no evidence that supervisory activities included in-depth review and testing of monitoring systems and controls” over incentives-based sales compensation or sales integrity. In addition to identifying “lessons learned” and “missed opportunities,” the report also sets forth general recommendations that it believes the OCC’s large bank supervision division should consider in order to improve their practices going forward, including that the regulator “[d]evelop an enterprise-wide whistleblower process and update external-facing interfaces . . . to inform the public or other governmental agencies how to communicate whistleblower information to the OCC,” and that it also “[e]nsure issues or concerns are followed through to effective corrective action.”

    Federal Issues Consumer Finance OCC Consumer Complaints

  • House Financial Services Committee to Discuss the “Financial CHOICE Act” at April 26 Hearing

    Federal Issues

    On April 19, House Financial Services Committee Chairman Jeb Hensarling (R-TX) announced that the Committee will hold a hearing to discuss the Financial CHOICE Act next Wednesday, April 26. Touted as a potential replacement for the Dodd-Frank Act, the proposed new law—which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs—was unveiled last June by Chairman Hensarling in a speech to the Economic Club of New York and was subsequently approved by the Committee last September. The hearing will focus on an updated discussion draft of the bill at next Wednesday’s hearing.

    If enacted, the Financial CHOICE Act would, among other things, tailor a bank’s supervision to its risk profile/business model and provide for an independent exam appeals process, while also providing for and imposing more stringent penalties in cases of fraud or deception. Other provisions of the bill would repeal the Volcker Rule, strip the CFPB of its examination powers, and “UDAAP” enforcement authority and also discontinue small business loan data collection.  And, finally, the Act would bring the CFPB, FDIC, OCC, FHFA, NCUA, and the Fed’s supervisory functions under the congressional appropriations process, thereby mandating a cost-benefit analysis and, in some cases, congressional approval prior to the release of any new regulations.

    According to a press release from GOP Committee members, the proposed new law is based upon two central principles: (i) “all banks need to be well-capitalized” but (ii) “Dodd-Frank’s one-size-fits-all regulations . . . make[] no sense and hurt[] smaller, hometown banks and credit unions that did nothing to cause the last financial crisis.” To this end, the Financial CHOICE Act seeks to ease capital standards for community banks and credit unions that “elect to maintain enough capital to ensure that if they get in trouble, taxpayers won’t be forced to bail them out.” Meanwhile, offering a very different response to the release of an updated draft of the bill, Maxine Waters (D-CA), the Ranking Member of the Financial Services Committee, released a statement reiterating numerous objections to what she terms “the Wrong Choice Act.” Among other things, Rep. Waters argues that the proposed law “prioritize[s] the needs of Wall Street over the needs of hard-working Americans,” and “would take away much needed protections and put our economic security at risk.”

    Federal Issues Consumer Finance Dodd-Frank House Financial Services Committee

  • Supreme Court Hears Arguments on Whether a Debt Collector Who Purchases the Debt is Liable Under the FDCPA


    On April 18, the United States Supreme Court heard oral argument in Henson v. Santander Consumer USA, Inc., Dkt. No. 16-349, on the question of “[w]hether a company that regularly attempts to collect debts it purchased after the debts had fallen into default is a ‘debt collector’ subject to the Fair Debt Collection Practices Act [FDCPA].” The case arose out of a class action filed by four consumers who had defaulted on automobile loans made by an auto lending affiliate of a major bank. The originator hired Respondent to collect the loans on behalf of the lender and Respondent later purchased the delinquent loans as part of a pool. Though Petitioners did not allege that debt collection was the principal purpose of the Respondent’s business, the consumer-plaintiffs had claimed that the Respondent regularly buys and attempts to collect defaulted debts, and that, in this instance, the Respondent engaged in conduct that violated the FDCPA after it bought the loans. The Petitioner needed to establish, among other things, that the Respondent was a debt collector under the FDCPA and that the loans were in default when they were acquired.

    In March 2016, the U.S. Court of Appeals for the Fourth Circuit rejected the consumers’ arguments, concluding that the FDCPA “generally does not regulate creditors when they collect debt on their own account and that, on the facts alleged by the plaintiffs, [the defendant] became a creditor when it purchased the loans before engaging in the challenged practices.” Accordingly, the Fourth Circuit noted that the originator of the loans was irrelevant. In September 2016, the consumer-plaintiffs filed a cert petition with the Supreme Court, which was subsequently granted on January 13. Attorneys general from 28 states and the District of Columbia also joined in an amicus brief supporting the consumers’ argument.

    At oral argument before the Supreme Court, the Petitioners cited 15 U.S.C. §1692a(6)(F) and argued that the debts are "owed" to the original lender, but are "due" to the debt buyer. As such, argued Petitioner, a debt buyer should be considered to be collecting debts “owed or due another,” and thus fall within the FDCPA definition of a “debt collector”. Respondent countered that “owed or due another” could only mean that the debt is currently owed to another person. However, Respondent argued, as a debt buyer, it was collecting debts owed to itself, and thus would not be  a “debt collector” under the FDCPA. Both sides also presented policy-based arguments. Petitioner suggested that because Respondent was considered a “debt collector” before purchasing the loan, it could not remove itself from the scope of the FDCPA by purchasing the debts. Conversely, Respondent noted that, by purchasing essentially all of the original lender’s loans it had “stepped into [the lender]’s shoes.” Counsel emphasized that Respondent therefore fit the FDCPA definition of “creditor,” and, as a creditor, it had an incentive to maintain a positive relationship with consumers.

    Courts Consumer Finance Debt Collection FDCPA Class Action Lending U.S. Supreme Court

  • CFPB Takes Action Against Law Firm for Alleged FDCPA Violations Concerning Claims of Attorney Involvement in Debt Collection

    Consumer Finance

    On April 17, the CFPB announced that it was seeking a permanent injunction and fines against a law firm for allegedly engaging in illegal debt collection practices by making false representations regarding attorney involvement in debt collection calls and in “millions of collection letters sent to consumers.” In a complaint filed in the United States District Court for the Northern District of Ohio, the Bureau claims, among other things, that the firm violated the Fair Debt Collection Practices Act and Dodd-Frank by sending “demand letters” and making collection calls to consumers falsely implying that the consumer’s account files had been reviewed by an attorney. The complaint alleges that a majority of the demand letters were created through an automated process and, in most cases, no attorney had reviewed the account file to determine whether sending such a letter was accurate and appropriate. These letters included payment coupons through which consumers made millions of dollars in debt payments to the law firm. The complaint also alleges that a majority of the collection calls made to consumers were handled by non-attorney collectors who conveyed the impression that the matters had been reviewed by attorneys even though no attorney had in fact reviewed the account files. The complaint seeks a permanent injunction prohibiting the firm from committing future violations as well as other legal and equitable relief including restitution to affected consumers, disgorgement of ill-gotten revenue, and civil money penalties.

    Consumer Finance Courts CFPB FDCPA UDAAP Debt Collection

  • California Joins 49 States and the District of Columbia in Settlement with Global Money Services Business

    Consumer Finance

    On April 12, California Attorney General Xavier Becerra announced that California has joined a multistate settlement between state attorneys general from 49 states and the District of Columbia and a global money services business to resolve allegations that scammers used the company’s wire transfer services to defraud consumers (see previous InfoBytes post). Under the terms of the settlement, California consumers who made a wire transfer during the period of January 1, 2004 through January 19, 2017, may be eligible for a share of more than $65 million in refunds. As previously covered in InfoBytes, on January 19 of this year, the global money services business entered into a Deferred Prosecution Agreement with the DOJ and FTC requiring, among other things, the business to pay $586 million in refunds to consumers to settle allegations that the company had failed to maintain an effective anti-money laundering program and aided and abetted wire fraud.

    Consumer Finance State Attorney General Enforcement DOJ FTC

  • Cordray Discusses Consumer Credit Reporting at Operation HOPE Global Forums Annual Meeting

    Consumer Finance

    On April 11, CFPB Director Richard Cordray delivered prepared remarks at the Operation HOPE Global Forums Annual Meeting in Atlanta addressing, among other things, financial challenges facing the “economically vulnerable”—most notably with respect to credit reporting and the handling of consumer disputes. As previously covered in InfoBytes, credit reporting was one of the top three consumer complaint categories for 2016. In his speech, Cordray cited a FTC study that found that “millions of people had an error on at least one of their credit reports that was serious enough to materially affect their credit score” and outlined the Bureau’s position for addressing these concerns such as (i) requiring credit reporting companies to improve quality control systems; (ii) creating easier access for consumer to dispute errors; and (iii) cleaning up information initially provided to the credit reporting companies by examining the ways in which banks and financial companies furnish the information.

    Consumer Finance CFPB Cordray Consumer Complaints Credit Scores Consumer Reporting Agency

  • PHH Submits Reply Brief in Case Against CFPB; DOJ Allocated 10 Minutes at May 24 Oral Argument


    As recently covered by InfoBytes, on March 31 the CFPB and seven amicus curiae respondents each filed briefing in PHH Corp. v CFPB urging the D.C. Circuit to uphold the constitutionality of the Bureau’s single-director, independent-agency structure. On April 10, PHH filed a reply brief responding to the arguments raised by the CFPB and other respondents, and reiterating its position that, among other things, the en banc court should declare that the Dodd-Frank Act’s creation of the CFPB violated constitutional separation of powers requirements and that the only satisfactory remedy is the complete invalidation of the Bureau.

    Citing Myers v. United States, 272 U.S. 52 (1926), PHH contends that, “the Constitution does not permit Congress to assign any portion of the executive power to an ’independent’ officer who is not accountable to, and removable by, the President.” Id. at 113. Moreover, in addressing comparisons between the CFPB and the FTC, the mortgage lender’s reply argues that “[t]he CFPB’s broad executive, legislative, and adjudicative authority further refutes its claim that it is functionally ‘indistinguishable’ from the FTC in 1935” because, among other reasons, “[i]n 1935, the FTC had no substantive rulemaking powers—the FTC disclaimed that authority until 1962.” In support of this claim, PHH highlights the fact that “the CFPB has all the authority—and more—of a cabinet department such as Treasury or Justice” but “unlike most cabinet positions, the Director may unilaterally appoint every subordinate official in the agency, as well as hire and compensate all CFPB employees outside the normal competitive-service requirements” (emphasis added). In addition to addressing the constitutional issue, PHH’s reply brief also notes that the CFPB has offered no support for its effort to enforce a reinterpretation of the Real Estate Settlement Procedures Act against the companies.

    Oral argument is scheduled for May 24. As provided in a Per Curiam Order issued on April 11, the Court has allocated 30 minutes per side for the argument and an additional ten minutes of argument for the United States as amicus curiae. For additional background, please see our recent PHH Corp. v CFPB Case Update.

    Courts PHH v. CFPB Consumer Finance CFPB Dodd-Frank FTC RESPA Mortgages Litigation Single-Director Structure

  • Case Update: PHH Corp. v CFPB


    March 31 marked the deadline for the CFPB to file its brief in response to PHH Corporation in the U.S. Court of Appeals for the District of Columbia Circuit’s en banc review of the CFPB’s enforcement action against PHH for alleged violations of the Real Estate Settlement Procedures Act (RESPA). As previously covered by InfoBytes, the PHH case began as a challenge to a 2015 penalty the CFPB levied against PHH, which was collected as part of what the CFPB deemed – a “captive reinsurance arrangement.” In fighting the penalty, PHH called into question the Bureau’s constitutionality and in October 2016, a panel of the D.C. Circuit concluded both that the CFPB misinterpreted RESPA, and also that its single-Director structure violated the constitutional separation of powers. On February 16 of this year, however, the D.C. Circuit granted the CFPB’s petition for rehearing en banc of the October 2015 panel decision. In granting en banc review, the court sought guidance from the parties on three specific questions: 

    • Is the Bureau’s structure unconstitutional because its Director may be removed only for cause, and if so, is the appropriate remedy to sever the for-cause removal provision from the Consumer Financial Protection Act?; 
    • May the Court avoid addressing the constitutionality of the Bureau’s structure if it adopts the panel’s holdings as to PHH’s liability under RESPA (and should it adopt those holdings)?; and
    • What is the appropriate disposition of this case if this Court concludes that the SEC’s administrative law judges are “inferior officers” under Lucia v. SEC? 

    Oral argument is scheduled for May 24. This Court has allocated 30 minutes per side for the argument and, as discussed further below, the Department of Justice (DOJ) has filed an unopposed motion seeking ten minutes of argument time for the United States at the May 24 en banc hearing.

    CFPB’s Brief. On March 31, the CFPB filed its brief for the en banc rehearing in PHH Corp. v CFPB urging the D.C. Circuit  to uphold the constitutionality of the Bureau’s single-director, independent-agency structure. According to the CFPB, neither the Bureau’s current single-director arrangement, nor the “for-cause” restriction on the President’s removal powers prevents the Executive branch from ensuring that the nation’s laws are implemented. Specifically, the brief explains that “[t]he President has no less control over a single-director agency than he does over a multi-member commission.” The brief also sets forth the Bureau’s position that, even “[i]f this Court determines that the Bureau’s structure is unconstitutional,” the appropriate remedy is not to invalidate the agency in its entirety, but rather to “sever the for-cause removal provision” of the Dodd-Frank Act (the Act), thereby allowing the President to remove the Bureau’s director for any reason. In addition to addressing the constitutional question, the CFPB also reiterated its argument that its RESPA interpretation is correct, that PHH and its affiliates violated RESPA, and that the Act’s statute of limitations does not apply to the Bureau’s administrative enforcement authority. And, at the direction of the court, the brief also addressed the potential effect of a decision in Lucia v. SEC that a SEC administrative law judge (ALJ) was an inferior officer under the Constitution. The ALJ used by the CFPB in the PHH enforcement proceeding was, in fact, borrowed from the SEC. Notably, Lucia v. SEC is scheduled to be argued immediately before PHH Corp. v. CFPB, on May 24, 2017.

    Amicus Curiae in Support of the CFPB. Also filed on March 31 were seven amicus curiae briefs, each of which offered arguments, both legal and non-legal, in favor of the CFPB’s continued existence as an independent regulator:

    PHH’s Brief. Briefing for PHH and amicus curiae briefs in support of the mortgage lender were due on March 17. In its opening brief and addendum, PHH focused on the separation-of-powers and remedy issues, raising the RESPA interpretation issue principally in support of the claim that the CFPB’s unconstitutional structure rendered the Bureau dangerously unaccountable. The New Jersey mortgage lender noted, among other things, that Congress has no ability to cut the agency’s budget and the President cannot remove its director without cause. As a general matter, the mortgage lender has argued that the Bureau’s creation “placed massive, unchecked federal power in the hands of a single, unaccountable director” and that “[t]he director alone rules over large swaths of the field of consumer finance, subject to virtually no restraints from the representative branches.”

    DOJ BriefAs previously covered by InfoBytes, the DOJ filed its own brief in the case on March 17, arguing in support of the D.C. Circuit panel’s initial ruling and proposed remedy. The DOJ brief stated, among other things, that, “[w]hile we do not agree with all of the reasoning in the panel’s opinion,” the DOJ agrees with the panel’s conclusion that “a removal restriction for the Director of the CFPB is an unwarranted limitation on the President’s executive power” and that “the panel correctly concluded … that the proposed remedy for the constitutional violation is to sever the provision limiting the President’s authority to remove the CFPB’s Director, not to declare the entire agency and its operations unconstitutional.”  As  covered recently on InfoBytes, the DOJ presented arguments that differed both from the CFPB and from the positions previously presented by the Obama Administration in briefing submitted on behalf of the United States back in December. 

    Also, as mentioned above, on April 3, the DOJ filed an unopposed motion seeking ten minutes of argument time for the United States at the May 24 en banc hearing.

    Amicus Curiae in Support of PHH. The March 10 deadline in the en banc proceeding also brought about the filing of seven amicus curiae briefs in support of PHH’s claims and/or defenses. Six of these filings took the position that the Bureau’s current structure violates separation-of-powers principles:

    A seventh—filed by a combined group of 13 banking and residential real estate-related organizations—argued in support of the company’s interpretation of the RESPA. According to this brief, the CFPB incorrectly changed a long-standing RESPA interpretation that permitted the use of captive reinsurance companies under appropriate circumstances. The changed interpretation was contrary to the Act and to the CFPB’s own regulation. The brief also argued that the Bureau improperly changed the interpretation and applied the new interpretation in an enforcement action without proper notice.

    Courts PHH v. CFPB Consumer Finance Federal Issues RESPA DOJ Mortgages Litigation Single-Director Structure

  • CFPB Issues Annual Consumer Complaint Report

    Consumer Finance

    On April 3, the CFPB published its Consumer Response Annual Report, providing a review of the CFPB’s complaint process and a description of complaints received during January 1 through December 31, 2016. According to the report, the Bureau handled 291,400 consumer complaints—a 7 percent increase from the total number of complaints in 2015. The top three categories, representing about 67 percent of complaints, were debt collection, credit reporting, and mortgages. The Bureau also received complaints related to bank services; credit and prepaid cards; consumer, student, and payday loans; and money transfers. Five years ago, the Bureau began accepting consumer complaints, and since then has handled, according to the CFPB, approximately 1,136,000 complaints.

    Consumer Finance Consumer Complaints CFPB

  • Supreme Court Remands Texas Credit Card Surcharge Case


    On April 3, the U.S. Supreme Court granted certiorari in a case challenging a Texas law that bars retailers from imposing credit card surcharges, and remanded the case to the Fifth Circuit in light of its ruling last week in Expressions Hair Design, that a similar statute in New York regulated merchants’ First Amendment rights. In Rowell, a landscaping business, a computer networking company, a self-storage facility, and an event design and production company sought to challenge a Texas law allowing merchants to charge different prices to customers who pay with cash and customers who pay with a credit card, but barring merchants from describing the price difference as a surcharge for credit cards, leaving them to describe it instead as a discount for using cash. The Fifth Circuit held that the Texas law did not violate the retailers’ free speech rights, aligning it with the Second Circuit in its September 2015 ruling in the Expressions Hair Design litigation against New York State.

    As previously reported on InfoBytes, the Supreme Court last week in the Expressions case unanimously rejected the Second Circuit’s conclusion that the New York credit card law regulates conduct alone, rather than speech. As explained in the Supreme Court’s opinion, the law at issue “is not like a typical price regulation,” which regulates a seller’s conduct by dictating how much to charge for an item. Rather, the Court explained, the law regulates “how sellers may communicate their prices.” (emphasis added). The Supreme Court, however, did not address the question of whether the law unconstitutionally restricts speech.

    Courts U.S. Supreme Court State Issues Consumer Finance Payment Processors Credit Cards


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