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Special Alert: Second Circuit Decision Threatens to Upset Secondary Credit Markets
The Second Circuit Court of Appeals’ recent decision in Madden v. Midland Funding, LLC held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act (“NBA”) from state-law usury claims. In reaching this conclusion, the Court appears to have not considered the “Valid-When-Made Doctrine”—a longstanding principle of usury law that if a loan is not usurious when made, then it does not become usurious when assigned to another party. If left undisturbed, the Court’s decision may well have broad and alarming ramifications. The decision could significantly disrupt secondary markets for consumer and commercial credit, impacting a broad cross-section of financial services providers and other businesses that rely on the availability and post-sale validity of loans originated by national or state-chartered depository institutions.
Click here to view the full special alert.
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Walter E. Zalenski, (202) 461-2910, wzalenski@buckleyfirm.com
- Jeffrey P. Naimon, (202) 349-8030, jnaimon@buckleyfirm.com
- John P. Kromer, (202) 349-8040, jkromer@buckleyfirm.com
Special Alert: CFPB Finalizes Rule To Oversee Nonbank Auto Lenders
On June 10, the CFPB issued its final rule to oversee “larger participant” nonbank auto finance companies. Although the CFPB received significant feedback during the comment period, the final rule is nearly identical to that proposed in September 2014. Under the final rule, the CFPB will have supervisory authority over nonbank auto finance companies with at least 10,000 aggregate annual originations. These originations include making, purchasing, acquiring, or refinancing extensions of credit for the purchase or lease of an automobile. The CFPB estimates this threshold will bring about 34 entities and their affiliates under its supervisory authority, which represents roughly seven percent of all nonbank auto finance companies, and approximately 91% of the nonbank automobile financing market. In addition to the final rule, the CFPB also published updated automobile finance examination procedures to include industry specific guidance for covered persons.
The rule will take effect 60 days after publication in the Federal Register. Although the CFPB has not determined when and in what order examinations will begin, some industry insiders have predicted they could start in late 2015.
In the months since the CFPB released its proposed rule, auto finance industry trade associations and market participants submitted a number of comments to the CFPB addressing: (i) the threshold for defining “larger participant;” (ii) the definition of “lease” for purposes of the larger participant threshold; and (iii) exceptions for securitizations.
Number of Originations
With respect to the 10,000 originations threshold, although the CFPB received comments recommending the CFPB both increase and decrease the number, most appeared in favor of increasing the threshold. As industry commenters noted, the low threshold results in participants with less than one percent market share and small businesses being deemed larger participants. Commenters recommended an alternative threshold of 50,000 originations, which would capture approximately 86% of market participants. Ultimately, the CFPB adopted the original 10,000 originations threshold, noting it allowed the CFPB to “supervise market participants that represent a substantial portion of the automobile financing market and that have a significant impact on consumers.”
Leases
The final rule also extended the application of the term “lease” under Dodd-Frank to include automobile leasing. The Dodd-Frank Act includes certain leases that are, among other things, the “functional equivalent of purchase finance arrangements. 12 U.S.C. § 5481(15)(A)(ii). As detailed in the comments submitted to the CFPB, prudential regulators and other statutory schemes such as TILA have traditionally applied this idea of “functional equivalent” to leases where the monthly payments total a sum substantially equivalent to or in excess of the value of the property, resulting in the lessee becoming the owner of the property for little or no consideration at the end of the least term. Nonetheless, the CFPB noted that, in light of its purpose and objectives, “functional equivalent of purchase finance agreements” should be interpreted from the perspective of the consumer. In arriving at this conclusion, the CFPB noted that, from a customer’s point of view, lease transactions provide an identical experience to a purchase transactions because leasing requires an application process that involves providing basic financial information and credit history, an ongoing contractual obligation, and the option to purchase the vehicle at the end of the lease term for a pre-determined amount.
Securitizations
While the proposed rule excluded investments in asset-backed securities from the definition of “aggregate annual originations”, the CFPB expanded the securitization exception as part of the final rule. As a result, the exemption will also apply to purchases or acquisitions of obligations by securitization trusts and other special purpose entities created to facilitate securitization transactions.
Timing
The rule will become effective 60-days after publication in the Federal Register
Examination Focus
In its press release announcing the final rule, the CFPB identified a number of areas its examiners will focus on when conducting examinations of auto finance companies. Those areas include (i) the marketing and disclosure of terms in auto finance, (ii) credit reporting practices and accuracy, (iii) treatment of consumers when collecting debts both directly by the finance company and through its vendors, and (iv) fair lending under the Equal Credit Opportunity Act. In light of the CFPB’s continued focus on these areas, all market participants would be well served to review policies, procedures and practices occurring within their business.
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Questions regarding the matters discussed in this Alert may be directed to the lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Benjamin B. Klubes, (202) 349-8002
- John P. Kromer, (202) 349-8040
- John C. Redding, (310) 424-3916
- Marshall T. Bell, (202) 461-2997
- Mitchell M. Grod, (310) 424-3907
- Jessica L. Pollet, (310) 424-3905
Agencies Finalize Diversity Policy Statement
On June 9, six federal agencies – the Federal Reserve, CFPB, FDIC, NCUA, OCC, and the SEC – issued a final interagency policy statement creating guidelines for assessing the diversity policies and practices of the entities they regulate. Mandated by Section 342 of the Dodd-Frank Act, the final policy statement requires the establishment of an Office of Minority and Women Inclusion at each of the agencies and includes standards for the agencies to assess an entity’s organizational commitment to diversity, workforce and employment practices, procurement and business practices, and practices to promote transparency of diversity and inclusion within the organization. The final interagency guidance incorporates over 200 comments received from financial institutions, industry trade groups, consumer advocates, and community leaders on the proposed standards issued in October 2013. The final policy statement will be effective upon publication in the Federal Register. The six agencies also are requesting public comment, due within 60 days following publication in the Federal Register, on the information collection aspects of the interagency guidance.
FTC Provides Annual Financial Acts Enforcement Report to CFPB and Federal Reserve
On June 9, the FTC announced that it has provided to the CFPB its 2014 Annual Financial Acts Enforcement Report. The report highlights the FTC’s enforcement, research, rulemaking, and policy development activities with respect to the Truth in Lending Act (Regulation Z), the Consumer Leasing Act (Regulation M), and the Electronic Fund Transfer Act (Regulation E). Areas detailed within the report include enforcement actions related to non-mortgage credit, including auto finance and payday lending, mortgage loan advertising, and forensic audit scams; and consumer and business outreach related to truth in lending requirements. The report, submitted on May 29, will be used to prepare the CFPB’s Annual Report to Congress. The FTC also submitted a copy of the report to the Federal Reserve Board.
FCC Chairman Circulates Proposal to Strengthen Consumer Protection Under the TCPA; Open Meeting Scheduled For June 18
On May 27, the FCC released a fact sheet outlining Chairman Wheeler’s proposal for a series of rulings under the Telephone Consumer Protection Act (TCPA) that he asserts will better protect American consumers from unsolicited robocalls, spam text messages, and telemarketing calls. If adopted, the proposal would, among other things: (i) give consumers the right to revoke their consent to receive robocalls and robotexts at any reasonable time and in any reasonable way; (ii) authorize carriers to offer robocall-blocking or “Do Not Disturb” technologies to consumers; and (iii) require robocallers to stop calling a number when it has been reassigned to a new subscriber. Responding to multiple petitions that “sought clarity on how the Commission enforces” the TCPA, the proposal aims to “close loopholes and strengthen consumer protections already on the books.” The Chairman’s proposal is scheduled to be voted on at the Open Commission Meeting on June 18.
South Carolina Passes Legislation to Create the Guaranteed Asset Protection Act, Effective Immediately
On June 1, Governor Nikki Haley (R-SC) signed into law Senate Bill 441, enacting the Guaranteed Asset Protection Act and instituting a framework under which guaranteed asset protection (GAP) waivers may be offered in South Carolina. As outlined in SB 441, a GAP waiver is “a contractual agreement in which a creditor agrees for a separate charge to cancel or waive all or part of amounts due on a borrower’s finance agreement in the event of a total physical damage loss or unrecovered theft of the motor vehicle.” Effective June 5, SB 441 prohibits the creditor from conditioning the terms of an extension of credit upon the borrower’s purchase of a GAP waiver and requires the creditor to disclose the terms of the GAP waiver “in easily understandable language,” including the purchase price, the procedures for obtaining GAP waiver benefits, and a statement that the purchase of a GAP waiver is optional.
Special Alert: CFPB Consent Order Applies Loan Originator Compensation Rule to Marketing Services Agreements
On June 5, the CFPB announced a consent order against Guarantee Mortgage Corporation, resolving allegations that the company paid loan originators based on the terms of their mortgage loans in violation of the Loan Originator Compensation Rule (the “LO Comp Rule”). Since inheriting responsibility for the LO Comp Rule in 2011, the CFPB has devoted substantial resources to revising the rule and enforcing its provisions. During that same period, the CFPB brought several actions enforcing the prohibition on referral fees in the Real Estate Settlement Procedures Act (“RESPA”), including an action against Lighthouse Title, Inc. that created considerable uncertainty about the Bureau’s view of marketing services agreements (“MSAs”).
Click here to view the full Special Alert.
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- John P. Kromer, (202) 349-8040
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
CFPB Director Issues Decision on First Appeal of an Administrative Enforcement Proceeding
On June 4, CFPB Director Richard Cordray issued a decision on a mortgage lender’s appeal of an administrative law judge’s (ALJ) order concerning alleged RESPA violations with respect to the lender’s mortgage reinsurance business. In his decision, Cordray largely affirmed the ALJ decision and ordered the lender to pay $109 million in disgorgement. Notably, because most of the conduct alleged occurred prior to the CFPB assuming jurisdiction over enforcement of RESPA, Cordray declined to impose a civil money penalty. In addition, Cordray agreed with the ALJ that no statute of limitations applies when the CFPB challenges a RESPA violation in an administrative proceeding, declaring that the statute of limitations applies only to judicial proceedings. Cordray also held that the lender committed a separate violation of RESPA every time it accepted a reinsurance payment from a mortgage insurer, even if the loan with which the payment was associated had already been consummated. This was the first appeal of an administrative enforcement proceeding before the CFPB.
CFPB and Florida AG Obtain Judgment Against Law Group and Corporate Affiliates for "Mass-Joinder" Foreclosure Relief Scam
On May 29, a final order was entered against a law group and its corporate affiliates in an action brought by the CFPB and the State of Florida. The July 2014 complaint alleged that the law group and its affiliates violated Regulation O, or the Mortgage Assistance Relief Services Rule, and Florida state law by convincing consumers to participate in “mass-joinder” lawsuits against their mortgage lenders with the false promise that the suits would result in mortgage modifications or foreclosure relief. More specifically, the defendants’ Regulation O violations included: (i) charging consumers advance fees before obtaining loan modifications for them; (ii) misrepresenting success rates of receiving a loan modification; (iii) deceiving consumers into believing that they would receive legal representation; and (iv) discouraging consumers from making their loan payments and/or communicating with their lenders or servicers. The final order, which follows a temporary restraining order and an asset freeze against the defendants, requires that the defendants pay redress to victims and a total of $16 million in civil and state penalties and cease all business operations. Final orders were issued against the three named individuals in the suit as well.
U.S. House Passes Amendment To Ban DOJ's Use of Disparate Impact Claims
On June 3, the U.S. House of Representatives passed an amendment to H.R. 2578, the Fiscal Year 2016 Commerce, Justice, and Science Appropriations Act. The amendment, passed in a 232-196 vote, would prohibit the DOJ from using funds to prosecute and obtain legal settlements from lenders, landlords, and insurers in discrimination suits based on the disparate impact legal theory. This legislative development comes as the U.S. Supreme Court is expected to rule later this summer in Texas Dept. of Housing v. Inclusive Communities Project, which challenges the disparate impact theory in mortgage lending under the Fair Housing Act