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District Court grants final approval of a $500 million tribal lending settlement
On May 12, the U.S. District Court for the Eastern District of Virginia granted final approval of a nearly $500 million class action settlement resolving allegations that tribal online lending companies charged usurious interest rates. Plaintiffs’ filings outline their class action against tribal entities, as well as several of the entities’ non-tribal business partners (individual defendants), for making and collecting on high-interest loans.
The U.S. Court of Appeals for the Fourth Circuit previously upheld a district court’s denial of defendants’ bid to dismiss or compel arbitration in the case (covered by InfoBytes here). The 4th Circuit concluded that the arbitration clauses in the loan agreements impermissibly forced borrowers to waive their federal substantive rights under federal consumer protection laws, and contained an unenforceable tribal choice-of-law provision because Virginia law caps general interest rates at 12 percent. As such, the appellate court stated that the entire arbitration provision was unenforceable. “The [t]ribal [l]enders drafted an invalid contract that strips borrowers of their substantive federal statutory rights,” the appellate court wrote. “[W]e cannot save that contract by revising it on appeal.”
The 4th Circuit also declined to extend tribal sovereign immunity to the tribal officials, determining that while “the tribe itself retains sovereign immunity, it cannot shroud its officials with immunity in federal court when those officials violate applicable state law.” The appellate court further noted that the “Supreme Court has explicitly blessed suits against tribal officials to enjoin violations of federal and state law.”
Following more than three years of litigation, the parties eventually reached a settlement that will include tribal officials canceling approximately $450 million in debt. As part of the settlement, the tribal officials will eliminate the balance on any outstanding loans on the basis that the debts are disputed, cease all collection activity, and will not sell, transfer, or assign any outstanding loans for collection. Tribal officials will also request deletion of any negative tradelines for loans in the name of tribal officials or tribal corporations, and will pay an additional $1 million to cover the costs of notice and administration for the settlement and $75,000 to go towards service awards. Additionally, the individual defendants will create a $39 million common fund that will go to class members who repaid unlawful amounts on their loans. Class counsel is also seeking attorneys’ fees and costs totaling around $13 million.
District Court says defendant’s request for default judgment was more than "procedural mishap"
On May 11, the U.S. District Court for the Eastern District of Kentucky partially granted and partially denied a defendant collection attorney’s (defendant’s) motion to dismiss a FDCPA suit. According to the memorandum opinion and order, the plaintiff defaulted on a loan and the defendant was hired to file a collection lawsuit on behalf of the creditor. Though the plaintiff responded to the suit, the defendant filed a motion for default judgment and motion for attorney’s fees, which was not served for the plaintiff. The defendant attempted to have the plaintiff’s employer garnish his wages, but the plaintiff challenged the garnishment. After reviewing the case, the state court vacated the default judgment and ordered the sides to arbitration. The collection suit was ultimately dismissed with prejudice. The current stage of the suit involves the plaintiff suing the defendant, alleging he violated the FDCPA by improperly seeking default judgment, failing to serve the motion for default judgment, opposing his wage garnishment challenge, and requesting disingenuous attorney’s fees. The district court granted the defendant’s motion to dismiss on the attorney’s fees and the provisions related to the wage garnishment. However, in respect to the allegations related to the filing for default judgment and failure to serve, the district court denied the motion to dismiss. The district court noted that the defendant’s “request for default judgment was more than ‘procedural mishap’—it was a ‘false, deceptive, or misleading representation [] in connection with the collection of any debt’ that seemingly caused faulty default judgment to be entered.”
CFPB seeks consistent enforcement of consumer financial law
On May 16, the CFPB launched a new system for providing transparent guidance on how the agency intends to administer and enforce federal consumer financial laws. Consumer Financial Protection Circular 2022-01 discusses the broad variety of agencies responsible for enforcing federal consumer financial law, including the CFPA’s prohibition on unfair, deceptive, and abusive acts or practices, and 18 other “enumerated consumer laws” (some of which provide for private enforcement). The circulars will serve as policy statements under the Administrative Procedure Act for other agencies with consumer financial protection responsibilities such as the FDIC, OCC, Federal Reserve Board, and NCUA. Because other federal agencies, including the DOJ, the FTC, the Farm Credit Administration, and the Departments of Transportation and Agriculture, also have certain enforcement responsibilities, the Bureau stressed the importance of ensuring entities subject to the jurisdiction of multiple agencies receive consistent expectations regardless of a company’s status. Specifically, the circulars “will provide background information about applicable law, articulate considerations relevant to the CFPB’s exercise of its authorities, and advise other parties with authority to enforce federal consumer financial law.” The Bureau announced it has identified several issues that would benefit from clear and consistent enforcement and strongly encouraged other agencies to reach out to the Bureau with suggestions for new circulars. Circulars will be authorized by CFPB Director Rohit Chopra and published on the Bureau’s website and in the Federal Register. The Bureau also welcomes feedback on any issued circulars.
White House plan aims to increase housing supply, ease housing costs
On May 16, President Biden released a plan intended to “help close” the housing supply gap and lower housing costs. The White House’s Housing Supply Action Plan is structured to ease the burden of housing costs over five years by increasing the supply of quality, affordable housing units in the next three years. “When aligned with other policies to reduce housing costs and ensure affordability, such as rental assistance and down payment assistance, closing the gap will mean more affordable rents and more attainable homeownership for Americans in every community,” the Administration said in a statement. “This is the most comprehensive all of government effort to close the housing supply shortfall in history.”
Under the Plan, the Administration would:
- Reward jurisdictions that have reformed zoning and land-use policies with higher scores in certain federal grant processes, including by immediately leveraging transportation funding to encourage state and local governments to boost housing supply (where consistent with current statutory requirements), integrating affordable housing into Department of Transportation programs, and including land use within the U.S. Economic Development Administration’s investment priorities. These actions build on strategies that the Administration has called on Congress to pass such as establishing a grant program to “help states and localities eliminate needless barriers to affordable housing production” and creating a mandatory spending proposal to provide billions of dollars in grants to reward states and localities that have taken action to reduce affordable housing barriers.
- Pilot new financing mechanisms for housing production and preservation where financing gaps currently exist. Immediate action will include supporting production and availability of manufactured housing (including with chattel loans that the majority of manufactured housing purchasers rely on), accessory dwelling units, 2-4 unit properties, and smaller multifamily buildings.
- Expand and improve existing forms of federal financing, including for affordable multifamily development and preservation. Immediate actions include strengthening Fannie Mae and Freddie Mac financing for multifamily development and rehabilitation by “making Construction to Permanent loans (where one loan finances the construction but is also a long-term mortgage) more widely available by exploring the feasibility of Fannie Mae purchase of these loans.” The Administration also plans to promote the use of state, local, and Tribal government American Rescue Plan recovery funds to increase affordable housing supply; finalize the Low Income Housing Tax Credit “Income Averaging” proposed rule, whereby developers commit to creating affordable housing for households that meet specific income thresholds; reauthorize and update guidance for the HOME Investment Partnerships Program, which provides grants to states and localities that communities use to fund a range of housing activities; and improve “the alignment of federal funds to reduce transaction costs and duplications and accelerate development” by having the White House, HUD, Treasury, and USDA “convene state housing agencies to discuss best practices on the alignment of applications, reviews, and funding.”
- Preserve the availability of affordable single-family homes for owner-occupants by ensuring that more government-owned homes and other housing goes to owners who will live in them or mission-driven entities instead of large investors. The Administration will also encourage the use of CDBG for local acquisition and local sales to owner-occupants and mission-driven entities.
- Address supply chain disruptions by working with the private sector to address challenges. The Administration will also promote modular, panelized, and manufactured housing, as well as construction research and development to increase housing productivity and supply.
“Rising housing costs have burdened families of all incomes, with a particular impact on low- and moderate-income families, and people and communities of color,” the Administration stressed, noting that it has urged Congress to pass investments in housing production and preservation. The Administration’s 2023 budget includes investments that would lead to production or rehabilitation of another 500,000 homes.
CFPB report finds variance in mortgage servicers’ pandemic response
On May 16, the CFPB released a report examining data collected across 16 large mortgage servicers from May through December 2021 on the servicers’ responses to the Covid-19 pandemic. According to the Bureau, there is significant variation in how servicers collected information on borrowers’ language preference, stating that “the substantial lack of information about borrowers’ language preference and varying data quality made it challenging to make any comparison between servicers.” However, the report also found that “the number of non-[limited English proficiency] borrowers who were delinquent without a loss mitigation option after forbearance declined over time, with the greatest decrease between October and November 2021, while the number of unknown and limited English proficiency (LEP) borrowers did not reflect the same decrease.” The report noted that servicer response to the Bureau’s requests for borrower demographics, including “a breakdown of the total loans they service by race, and race information for forbearances, delinquencies, and forbearance exits” was limited, precluding comparisons. The report encouraged "servicers to ensure that they are preventing discrimination in the provision of loss mitigation assistance.” Other key findings from the report included: (i) by the end of 2021, more than 330,000 borrowers’ loans remained delinquent – with no loss mitigation solution in place; (ii) the average hold times of more than ten minutes and call abandonment rates exceed 30 percent for certain servicers; (iii) the percentage of borrowers in delinquency and who had a non-English language preference increased during the reviewed period, but the percentage decreased for borrowers in delinquency and who identified English as their preferred language; (iv) more than half of the borrowers in the data received are categorized as race “unknown”; and (v) most borrowers exiting Covid forbearance exited with a loan modification (27 percent), while 15.2 percent exited in a state of delinquency.
9th Circuit: Incomplete loan modification application bars plaintiff's CA Homeowner Bill of Rights claims
On May 11, the U.S. Court of Appeals for the Ninth Circuit affirmed dismissal of a plaintiff’s allegations that a lender violated RESPA and the California Homeowner Bill of Rights (HBOR), breached its contract, and breached the implied covenant of good faith and fair dealing. The court also dismissed the plaintiff’s request for promissory estoppel. In affirming the district court, the appellate court determined that the plaintiff’s HBOR claims failed, specifically because the plaintiff insufficiently showed that she incurred actual damages because of a RESPA violation. The appellate court also agreed that the plaintiff’s HBOR claims failed because she did not submit a complete application. Under HBOR, mortgage servicers are prohibited from reporting a notice of default if a lender’s “complete application for a first lien loan modification” is pending. The appellate court concluded that the plaintiff failed to sufficiently show that she had submitted a complete loan modification application, and did not demonstrate that she took follow-up action in response to a letter stating her loan modification application was incomplete, meaning her claim failed.
With respect to the plaintiff’s remaining claims, the 9th Circuit held, among other things, that the lender’s “alleged promise to consider plaintiff’s loan modification application upon dismissal of her lawsuit was neither sufficiently definite to create a contract nor sufficiently ‘clear and unambiguous to support a promissory estoppel.’” Moreover, the plaintiff’s claim for breach of the covenant of good faith and fair dealing also failed because she could not prove breach of contract. Specifically, she did not state a claim for breach of the deed of trust because, as the plaintiff herself noted, “she failed to perform under the deed of trust when she did not make loan payments, and performance under the contract is a necessary element of a breach of contract claim.”
The dissenting judge disagreed with the majority in two key respects. First, the judge argued the majority wrongfully rejected the plaintiff’s HBOR claim because the complaint contended that the lender “would send out such boilerplate letters so that it did not have to comply with the requirement that it cease foreclosure activities once an application is complete,” and that “a lender’s bad faith conduct does not render a borrower’s application incomplete.” Regarding the plaintiff’s good faith and fair dealing claim, the judge argued that the plaintiff plausibly alleged that she submitted a complete application to the lender. According to the complaint, the plaintiff submitted the necessary documents and was allegedly informed by the lender’s lawyer that “her application was ‘in review, which meant that plaintiff’s application was complete.’”
Arizona obtains $1.6 million in restitution from debt collection operation
On May 10, the Arizona attorney general announced it filed a stipulated consent judgment in the Superior Court of Arizona against a defendant, the owner and manager of a debt collection operation. The AG’s original action was part of the FTC’s “Operation Corrupt Collection”—a nationwide enforcement and outreach effort established by the FTC, CFPB, and more than 50 federal and state law enforcement partners to target illegal debt collection practices (covered by InfoBytes here).
According to the AG’s press release announcing the consent judgment, the defendant’s debt collection operation allegedly called consumers and made false claims and threats to convince people to pay debts the operation had no authority to collect. The complaint contended that employees frequently used spoofing software to reinforce claims that they were law enforcement officers, government officials, process servers, and law firm personnel to intimidate consumers into paying the alleged debts, and told consumers to immediately respond or be held in contempt of court. Employees also allegedly threatened to file lawsuits, garnish wages and tax returns, place liens on homes and car titles, freeze bank accounts, send law enforcement to consumers’ homes and/or places of employment, and arrest consumers.
Under the terms of the consent judgment, the defendant is required to pay more than $1.6 million in consumer restitution and up to $900,000 in civil penalties, and is permanently enjoined, restrained and prohibited from participating in the debt collection industry. Court approval of the stipulated judgment is pending.
District Court: Emotional distress did not cause injury-in-fact
On May 10, the U.S. District Court for the Western District of New York granted a defendant’s motion for summary judgment in a FDCPA class action suit. According to the order, the defendant sent the plaintiff a letter seeking to collect $9,700. The collections letter identified the name of the original creditor and the name of the current creditor to whom the debt was owed. The plaintiff filed suit, claiming he suffered emotional distress, and alleging that the debt was not owed to the defendants, and that the letter “erroneously” claimed that the current creditor to whom the debt was owed was not the owner of the debt, in violation of the FDCPA. The court granted the defendant’s summary judgment, dismissing the claims and finding that the case “is at the summary judgment stage,” which “requires proof of injury-in-fact beyond the sufficiency of Plaintiff’s allegations of an injury.” The court further stated that the “[p]laintiff states in his responding Declaration that his stress came from not knowing how his personal information was learned by Defendant,” but that the “[p]laintiff did not seek medical attention for the emotional distress he suffered.” The court continued that “failure to seek medical treatment is material in establishing the extent of Plaintiff’s injury (in [sic] any) from the emotional distress.” The court found that the plaintiff did “not establish[] that he suffered an injury-in-fact from his emotional distress arising from the dunning letter.”
Hsu discusses expanding diversity and inclusion
On May 12, acting Comptroller of the Currency Michael J. Hsu spoke before the Asian Real Estate Association of America Diversity and Fair Housing Summit focusing on the agency’s efforts to decrease barriers to homeownership and promote financial inclusion. In his remarks, Hsu described the agency’s commitment to expanding diversity and inclusion by “encouraging banks to expand their financing of affordable housing and other community needs, especially in low- and moderate-income (LMI) areas.” He further discussed the interagency Community Reinvestment Act (CRA) notice of proposed rulemaking (NPR) on new regulations updating how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. (Covered by InfoBytes here.) Hsu noted that the provisions of the NPR “are intended to expand access to credit, investment, and basic banking services in LMI areas where they are most needed,” and that it “significantly update[s] regulations intended to encourage banks to meet the credit needs of the entire communities they serve.” Hsu also stated that the agency will “continue to diversify its staff, and train and promote a diverse leadership team.” Hsu explained that through Project REACh (Roundtable for Economic Access and Change), the agency “is harnessing the energy and ideas of concerned civil rights, community, banking, business, and other industry leaders across the nation” and that progress has been made through its various workstreams. As previously covered by InfoBytes, Project REACh brings together leaders from the banking industry, national civil rights organizations, and various businesses and technology organizations to identify and reduce barriers to accessing capital and credit. Finally, Hsu mentioned that he is “concerned by the hype and the risk consumers face” regarding the growing interest in cryptocurrency investments and other digital assets. He believes that “better financial education and information will benefit all consumers and help reduce our nation’s broad racial wealth gap.”
CFPB, FTC weigh in on consumer reporting obligations under the FCRA
On May 5, the CFPB and FTC filed a joint amicus brief with the U.S. Court of Appeals for the Second Circuit, seeking the reversal of a district court’s decision which determined that a consumer reporting agency (CRA) was not liable under Section 1681e(b) of the FCRA for allegedly failing to investigate inaccurate information because the inaccuracy was “legal” and not “factual” in nature. The agencies countered that the FCRA, which requires credit reporting companies to follow reasonable procedures to assure maximum possible accuracy of the information included in consumer reports, “does not contain an exception for legal inaccuracies.”
The plaintiff noticed that the CRA reported that she owed a balloon payment on an auto lease that she was not obligated to pay under the terms of the lease. After the plaintiff confirmed she did not owe a balloon payment, she filed a putative class action against the CRA contending that it violated the FCRA by inaccurately reporting the debt. The CRA countered that it could not be held liable because “it is not obligated to resolve a legal challenge to the validity of the balloon payment obligation reported by” the furnisher “and that it reasonably relied on [the furnisher] to report accurate information.” Moreover, the CRA argued that even if it did violate the FCRA, the plaintiff was not entitled to damages because the violation was neither willful nor negligent. The district court sided with the CRA, drawing a distinction between factual and legal inaccuracies and holding that whether the plaintiff actually owed the balloon payment was a “legal dispute” requiring “a legal interpretation of the loan’s terms.” According to the district court, “CRAs cannot be held liable when the accuracy at issue requires a legal determination as to the validity of the debt the agency reported.” The court further concluded that since the plaintiff had not met the “threshold showing” of inaccuracy, the information in the consumer report “was accurate,” and therefore the CRA was “entitled to summary judgment because ‘reporting accurate information absolves a CRA of liability.’”
In urging the appellate court to overturn the decision, the agencies argued that the exemption for legal inaccuracies created by the district court is unsupported by statutory text and is not workable in practice. This invited defense, the FTC warned in its press release, “invites [CRAs] and furnishers to skirt their legal obligations by arguing that inaccurate information is only legally, and not factually, inaccurate.” The FTC further cautioned that a CRA might begin manufacturing “some supposed legal interpretation to insulate itself from liability,” thus increasing the number of inaccurate credit reports.
Whether the plaintiff owed a balloon payment and how much she owed “are straightforward questions about the nature of her debt obligations,” the agencies stated, urging the appellate court to “clarify that any incorrect information in a consumer report, whether ‘legal’ or ‘factual’ in character, constitutes an inaccuracy that triggers reasonable-procedures liability under the FCRA.” The agencies also pressed the appellate court to “clarify that a CRA’s reliance on information provided by even a reputable furnisher does not categorically insulate the CRA from reasonable-procedures liability under the FCRA.”
The Bureau noted that it also filed an amicus brief on April 7 in an action in the U.S. Court of Appeals for the Eleventh Circuit involving the responsibility of furnishers to reasonably investigate the accuracy of furnished information after it is disputed by a consumer. In this case, a district court found that the plaintiff, who reported several fraudulent credit card accounts, did not identify any particular procedural deficiencies in the bank’s investigation of her indirect disputes and granted summary judgment in favor of the bank on the grounds that the “investigation duties FCRA imposes on furnishers [are] ‘procedural’ and ‘far afield’ from legal ‘questions of liability under state-law principles of negligence, apparent authority, and related inquiries.’ Moreover, the district court concluded that there was no genuine dispute as to whether the bank conducted a reasonable investigation as statutorily required. The Bureau noted in its press release, however, that the bank “had the same duty to reasonably investigate the disputed information, regardless of whether the underlying dispute could be characterized as “legal” or “factual.” In its brief, the Bureau urged the appellate court to, among other things, reverse the district court’s ruling and clarify that the “FCRA does not categorically exempt disputes presenting legal questions from the investigation furnishers must conduct.” Importing this exemption would run counter to the purposes of FCRA, would create an unworkable standard that would be difficult to implement, and could encourage furnishers to evade their statutory obligations any time they construe the disputes as “legal.” The brief also argued that each time a furnisher fails to reasonably investigate a dispute results in a new statutory violation, with its own statute of limitations.