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CFPB Publishes Small Entity Compliance Guide on Arbitration Rule
On September 15, the CFPB published a small entity compliance guide concerning the Bureau’s final arbitration rule that became effective this month. Compliance is required for “pre-dispute arbitration agreements” entered into on or after March 19, 2018. This guide provides a summary of the rule and highlights the parties and consumer financial products and services covered by the rule, as well as exclusions from the rule’s requirements. In addition, the guide includes descriptions of provisions to be included in pre-dispute arbitration agreements, clarifies the rule’s prohibition on relying on pre-dispute arbitration agreements to block class actions, and explains the record submission requirements under the rule.
However, as previously discussed in InfoBytes, while the arbitration rule went into effect September 18, the House earlier passed a disapproval resolution, in July, to repeal the rule, with a similar measure set for discussion in the Senate.
District Court Grants Preliminary Settlement Approval in SCRA Class Action Suit
On September 13, the U.S. District Court for the Eastern District of North Carolina granted preliminary approval to settle a class-action suit resolving allegations that a national bank overcharged military families on interest and fees related primarily to mortgage and credit card accounts in violation of the Servicemembers Civil Relief Act (SCRA). The order also, in the context of the proposed settlement only, preliminarily certifies the class, which is comprised of members who—after September 11, 2001—were entitled to “additional compensation related to military reduced interest rate benefits from [the bank].” The plaintiffs filed the complaint against the bank in 2015 claiming alleged violations of the SCRA, TILA, and the North Carolina Unfair and Deceptive Trade Practices Act. In May 2016, the court denied the defendants’ motion to dismiss the first amended complaint, and at the end of 2016, the parties agreed to mediation. A second amended complaint—now the operative complaint—was filed just prior to the motion for preliminary approval. While the bank has not admitted any wrongdoing, it has agreed to refrain from using an “interest subsidy method for interest benefits calculations for a five-year period,” which, plaintiffs pleaded, can lead to higher costs.
According to the terms of the memorandum in support of the motion for preliminary approval, class members will receive payments based on the strength of their individual claims, considering such factors as: (i) loan type; (ii) whether they previously received remediation from the bank, and how much; and (iii) the eligible period for interest rate refunds. The memorandum further stipulates that approximately $15.4 million of the nearly $42 million overall settlement will be provide to class members who have not received or deposited any payments from the bank. Unclaimed amounts from the first round will be pooled with the remainder of the settlement to be allocated as outlined in the distribution plan. A final approval hearing is scheduled for February of next year.
Legislators, State Attorneys General, and Consumers React to Credit Reporting Agency Data Breach
As previously reported in InfoBytes, a major credit reporting agency suffered a data breach from mid-May through the end of July that impacted approximately 143 million U.S. consumers. Shortly after the agency disclosed the breach, several Republican and Democratic lawmakers promised legislative action. Senator Brian Schatz (D-Haw.) reintroduced the Stop Errors in Credit Use and Reporting (SECURE) Act to address these issues. In addition, two committees—the House Financial Services Committee and the House Energy and Commerce Committee—both announced plans to hold hearings on the breach (dates still to be released). Separately, Representative Ted Lieu (D-Cal.) sent a letter to the House Judiciary Committee requesting a hearing to investigate how and why the data breach occurred, and what measures can be taken to prevent future incidents.
At least two class action lawsuits have been filed—in Georgia and Oregon—as a result of the breach, and several state attorneys general, including New York Attorney General Eric T. Schneiderman, have launched investigations into the matter. The CFPB also released a blog post for consumers on ways to identify signs of fraud or identity theft.
Notably, on September 11, the agency issued an update for consumers announcing that “in response to consumer inquiries,” the arbitration clause and class action waiver included in its terms of use will not “apply to this cybersecurity incident.” The CFPB’s final arbitration rule, which prohibits the use of mandatory pre-disputer arbitration clauses, has been a point of considerable debate this summer, with the House voting to repeal the proposed rule and the Senate introducing a similar measure (see InfoBytes post here), while a coalition of state attorneys general have issued support for the proposed rule (see InfoBytes post here).
District Court Denies Class Certification for Lack of Temporal Constraint on Proposed Class Definition
On August 30, the U.S. District Court for the Southern District of New York issued an opinion and order denying the certification of a proposed class of investors alleging that a bank failed in its responsibilities as trustee of five residential mortgage-backed securities. The court found that “the proposed class cannot be certified because it is not ‘defined using objective criteria that establish a membership with definite boundaries’ . . . [such as] a fixed date, a window of acquisition, or length or continuity of ownership.” The judge ruled that the lack of a “temporal constraint on the proposed class definition” meant investors who bought and sold the securities before and after the alleged violations occurred could be included in the suit, despite the fact that any losses incurred by these groups would not necessarily be associated with the bank’s alleged misconduct. However, the court ruled that the plaintiff may file an amended motion proposing an alternative class construction within 45 days.
Mortgage Company, Real Estate Services Companies Reach $17 Million Class Action Settlement for Alleged RESPA Violations
On August 25, a national mortgage company and a real estate services family of companies (Defendants) together entered into a $17 million settlement to end a putative class action lawsuit accusing them of arranging kickbacks for unlawful referrals of title services in violation of the Real Estate Settlement Procedures Act (RESPA). The complaint, filed in 2015 in the U.S. District Court for the Central District of California, accused Defendants—along with various affiliates—of violating RESPA by allegedly facilitating the exchange of unlawful referral fees and kickbacks through an affiliated business arrangement, while also directing various banks to refer title insurance and other settlement services to a subsidiary in the real estate services family of companies without informing customers of the relationship between the entities. According to a memorandum in support of the motion seeking preliminary approval of the settlement, the real estate services family of companies was “obligated to refer their customers exclusively to [the mortgage company] for mortgage loans, and, in return, [the mortgage company] was required to refer all settlement services back to [the real estate services enterprise’s] subsidiaries.” While a federal judge dismissed the first and second amended complaints “on the basis that Plaintiffs failed to plead sufficient facts for equitable tolling of RESPA’s one-year statute of limitations,” the same judge denied Defendants’ motion to dismiss a third amended complaint because “Defendants’ contention regarding equitable tolling for the statute of limitations was ‘better resolved in either a motion for summary judgment or trial.’” A fourth amended complaint, filed in July 2017, amended certain claims and added additional class plaintiffs, well after settlement discussions had started.
A stipulation of settlement was filed alongside the motion for preliminary approval, in which Defendants continued “to deny each and all of the claims and contentions alleged in the [a]ction . . . [but] have concluded that the further conduct of the [a]ction against them would be protracted and expensive.” Furthermore, the stipulation noted that “substantial amounts of time, energy and resources have been and, unless this [s]ettlement is made, will continue to be devoted to the defense of the claims asserted in the [a]ction.” The proposed settlement class consists of more than 32,000 transactions related to borrowers who closed on mortgage loans originated by the mortgage company between approximately November 2014 through November 2015, and who paid any title, escrow or closing related charges to the real estate services companies. The proposed settlement stipulates that Defendants must pay $17 million into a settlement fund to be used to provide cash payments to class members, as well as a portion that will go towards class counsel attorney fees and litigation expenses pending court approval.
National Bank, Debt Collection Agency Reach $4.3 Million Class Action Settlement for Alleged FDCPA Violations
On August 21, a national bank and a debt collection agency (Defendants) together entered a $4.3 million settlement in a Fair Debt Collection Practices Act (FDCPA) class action lawsuit brought by borrowers who alleged the Defendants unlawfully attempted to collect certain mortgage payments. The July 2015 complaint, filed in the U.S. District Court for the Southern District of California, accused Defendants of violating the FDCPA, California’s Rosenthal Fair Debt Collection Practices Act, and California’s Unfair Competition Law, Business and Professions Code when they sent more than 20,000 allegedly misleading, unenforceable payment notices to borrowers after the bank had released the liens on the properties securing the mortgage loans.
According to a memorandum in support of the motion seeking preliminary approval of the settlement, approximately three percent of the 23,376 members of the settlement class members made payments on unenforceable loans. The rest of the class did not make any payments. After three mediation sessions and a series of negotiations, Defendants agreed to award class members amounts based on their placement into one of three tranches: (i) tranche 1: borrowers who made at least one “challenged payment” on a purchase money mortgage; (ii) tranche 2: borrowers who made at least one challenged payment on a non-purchase money mortgage; and (iii) tranche 3: borrowers who received an “allegedly deceptive payment communication” but did not make any challenged payments. The settlement terms stipulate that class members in tranche 1 will receive an initial payment worth 76 percent of the total challenged payments they made, and members in tranche 2 will receive an initial distribution of 38 percent of what they paid. Class members from Tranche 1 and Tranche 2 will be eligible for a second distribution if sufficient funds remain available. An approximately $22 payment will be sent to the majority of the class members (who fall into tranche 3), which will be paid from the $500,000 maximum statutory civil penalty available under the Rosenthal Act. Class members are not required to do anything to receive their award.
District Court Cites Spokeo, Refuses to Certify TCPA Class Action Suit
On August 15, a federal judge in the U.S. District Court for the Northern District of Illinois Eastern Division granted a pet health insurance company’s (defendants) motion to strike class allegations in a Telephone Consumer Protection Act (TCPA) lawsuit over alleged robocalls. Citing a recent Supreme Court ruling in Spokeo v. Robins, the judge opined that because evidence proved some of the class members agreed to receive calls, plaintiffs failed to establish a lack of consent and could therefore not claim to have suffered a concrete injury. In 2014, plaintiffs filed a suit against the defendants proposing certification of two classes—“advertisement” and “robocall”—alleging that calls were made to individuals’ cell phones without specific consent and arguing that these calls were a form of “advertising,” which, pursuant to FTC rules, requires express written consent. However, the defendants’ position—for which the judge ruled in favor—was that because affidavits signed by individuals during the pet adoption process show that some of the class members consented to receive calls about special offers (electing not to opt-out), these individuals would not be able to prove injury under the Spokeo standard. Thus, issues of individualized consent would predominate, making it impossible for plaintiffs to “establish a lack of consent with generalized evidence.” Furthermore, the court stated that if plaintiffs agreed to receive calls—as defendants claim a significant number did, just not in writing—a lack of written evidence does not make the calls unsolicited.
Class Action Complaint Filed Against National Bank Related to Auto Insurance Coverage
On July 30, consumers accused a national bank of requiring them to pay for unnecessary auto insurance in a class action complaint filed in the Northern District of California. See Hancock v. Wells Fargo & Co., Case No. 17-cv-04324 (N.D. Cal. Jul. 30, 2017). The consumers allege that they paid for protection against vehicle loss or damage while making monthly loan payments, even though many drivers allege that they already had their own policies. According to the complaint, the bank allegedly received kickbacks from an auto insurance company through shared commissions on policies for more than 800,000 auto loans, which resulted in nearly 250,000 loans becoming delinquent and nearly 25,000 “unlawful vehicle repossessions.” The consumers allege that when they took out auto loans, both the bank and the insurance company failed to check whether the consumer already had coverage or ignored the information, and then created Collateral Protection Insurance (CPI) policies which were “secretly” added to the auto loan bills and the costs automatically deducted from consumer bank accounts.
In addition to the costs incurred for the unlawful forced-placed insurance policies, consumers also claim to have experienced financial harm in the form of (i) inflated premiums and interest rates; (ii) delinquency charges and late fees; and (iii) repossession costs and damage to credit reports. Consumers seek restitution, disgorgement of revenues and/or profits, and compensatory damages.
Notably, before the class action complaint was filed, the bank issued a press release on July 27, announcing plans to remediate approximately 570,000 consumers who may have been financially harmed—less than the 800,000 cited in the complaint. The bank stated that it had conducted a review of CPI policies placed between 2012 and 2017 and stated, ““We take full responsibility for our failure to appropriately manage the CPI program and are extremely sorry for any harm this caused our customers, who expect and deserve better from us. . . . Upon our discovery, we acted swiftly to discontinue the program and immediately develop a plan to make impacted customers whole.”
Senate and House Committees File Separate Resolutions Disapproving of CFPB Arbitration Rule
On July 20, the Senate Committee on Banking, Housing and Urban Affairs and the House Financial Services Committee each announced Congressional Review Act Joint Resolutions of Disapproval against the CFPB’s Arbitration Agreements final rule issued July 10. In a press release issued by the Senate Committee, 24 Republican senators—including Chairman Mike Crapo (R-Idaho)—expressed concern that the anti-arbitration measure will discourage cost-effective dispute resolution and push consumers into class action lawsuits causing more harm than good. House Republicans outlined similar concerns in a press release issued the same day. H.J. Res. 111, co-sponsored by all 34 Republican members of the House Financial Services Committee, will seek to nullify the rule, which they believe “punish[es] consumers with decreased access to financial products, increased costs for such products, or both.”
The Congressional Review Act allows Congress to overturn agency rules by a simple majority if moved within 60 days from the rule’s publication.
Pennsylvania-Based Bank Settles Overdraft Class Action for $1M
On June 12, a Pennsylvania-based bank resolved a class action lawsuit over claims the bank charged its customers improper overdraft fees by agreeing to a proposed $975,000 settlement. According to plaintiff’s unopposed motion for approval of the settlement, the bank had a “practice of assessing overdraft fees even when a customer has sufficient funds in their account to cover all merchant requests for payment.” The plaintiff further alleged that the bank incorrectly charged the fees “to maximize its overdraft fee revenue.” Transactions triggering an overdraft fee using the available balance, but which would not trigger an overdraft fee using the ledger balance, are included in the settlement. The proceeds of the proposed settlement will be distributed to eligible class members within 20 days of the effective date of the settlement.
A preliminary issue in this case was the bank’s belief that the suit was subject to arbitration. The bank claimed the dispute was governed by an agreement to arbitrate contained in plaintiff’s 2008 account agreement, and not, as plaintiff contended, by plaintiff’s 2010 account agreement, which did not contain an arbitration agreement. The trial court disagreed with the bank. In fact, the Pennsylvania Superior Court affirmed the trial court’s decision that there was no agreement to arbitrate the action, after which the Pennsylvania Supreme Court denied the bank’s petition to appeal that decision.