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CFPB Puts Consumer Lenders on Notice Regarding Discriminatory Practices
The CFPB today put consumer lenders on notice that it “will use all available legal avenues, including disparate impact, to pursue lenders whose practices discriminate against consumers.” The CFPB intends to employ disparate impact when examining auto lenders, credit card issuers , student lenders, mortgage lenders, and other providers of consumer credit, allowing the CFPB to claim an institution has engaged in discriminatory lending based on the effects and not the intent of the lending practices. In remarks to the National Community Reinvestment Coalition today, CFPB Director Richard Cordray stated that “[t]he consequences of ‘disparate impact’ discrimination are very real and they affect consumers just as significantly as other forms of discrimination.” To help consumers identify and avoid credit discrimination, the CFPB also compiled and released new lending discrimination “tips and warning signs.”
Concurrent with the announcement, the CFPB published Bulletin 2012-04 to specifically reaffirm its commitment to applying disparate impact when conducting supervision and examination under the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B. In support of this application, the CFPB cites what it refers to as the “consensus approach” outlined by a 1994 interagency Policy Statement on Discrimination in Lending, which notes court findings that discriminatory lending in violation of ECOA can be established through (i) overt evidence of discrimination, (ii) evidence of disparate treatment, and (iii) evidence of disparate impact. The CFPB also argues that the ECOA legislative history, as characterized in the original Regulation B adopted by the Federal Reserve Board, supports application of the disparate impact doctrine.
How to Respond to a Subpoena: 10 Things You Should Do Immediately
Responding to a subpoena can be a daunting task and early missteps can have severe repercussions. Here is a short list of critical steps you can take in the early stages of the subpoena response to protect your company.
- Preserve. Preserve. Preserve. Immediately upon receipt of a subpoena, you should inform all necessary employees of the need to retain documents, including electronic documents, with a document hold memo that replaces standard document retention policies for potentially responsive materials. Destroying or removing documents in the context of a government investigationwhether done affirmatively or by failing to suspend automated document retention protocolsmay be viewed as obstruction of justice. At the very least, it will create the appearance of an unwillingness to cooperate with the investigation.
- Establish a dialogue with the appropriate enforcement authorities. Communication is critical to understanding the scope of the investigation and establishing a working relationship with the government. You should initiate contact quickly to discuss the scope of the subpoena and develop a feasible production schedule.
- Inform the companys key executives. Receiving a subpoena is no small matter and, depending on the nature of the subpoena and potential enforcement action, the key executives and even the board of directors need to be made aware immediately. This is especially important if your company is publicly traded as there may be disclosure obligations.
- Determine whether the subpoena was properly served. Not all subpoenas are properly served and improper service may provide valid grounds to get the subpoena quashed. You should quickly evaluate the basis upon which the subpoena was issued and served to determine whether to object or take other action.
- Advise employees of their rights and responsibilities, including access to counsel. Either at the time the subpoena is initially served or in follow up activities, agents may attempt to interview employees. It is important to remind employees immediately of their responsibility to be truthful when speaking with agents of the government, but that they may choose to have an attorney present if they do decide to be interviewed. You should also reiterate your companys policy on cooperating with investigations and request that employees inform the legal department of any discussions or contacts with the government.
- Evaluate your insurance policys notice requirements. Under many insurance policies, a subpoena is a triggering event. Putting your policy holder on notice early on increases your chances of having insurance pay for some or all of the investigation and/or litigation costs.
- Identify key company individuals. Identifying which individuals within the company are key to the subpoena response will help determine and potentially limit the overall scope of documents you are required to produce. Seeking to narrow or tailor the scope of a subpoena is an important early step in the response process.
- Narrow file search parameters. Once the key individuals are identified, you can then identify electronic and paper files that must be collected and searched. Fulfilling the governments request but not producing irrelevant or privileged documents requires a precisely-tailored search protocol.
- Protect and defend privileged materials. Protecting and defending privileged materials is a cornerstone responsibility of corporate counsel. Documents subject to privileges or protections should be isolated, logged, and preserved. While there are remedies available for inadvertently-produced privileged materials, no one wants to be in the position of having to seek return of a privileged document.
- Construct a formal, defensible review process. You should construct a formal review process that can be defended in court, with a focus on e-discovery issues. It is advisable to have your response protocol evaluated by outside legal counsel early in the process to ensure that all potential sources of electronic data have been identified and searched.
This post adapted from the article, 10 Steps Your Company Should Take When Responding to a Subpoena by Ben Klubes, James Parkinson, and John Kromer, originally published in Bloomberg Law Reports: Banking & Finance, Vol. 4, No. 8, August 1, 2011.
CFPB Previews Mortgage Servicing Rules
On April 9, the CFPB previewed its upcoming mortgage servicing rules, which likely will be proposed this summer and finalized in January 2013. The key aspects of the proposal relate broadly to (i) monthly mortgage statements, (ii) ARM adjustment disclosures, (iii) force-placed insurance, (iv) payment crediting, (v) error resolution and borrower inquiries, and (vi) borrower outreach and borrower information. The majority of the details were provided in an outline prepared for a Small Business Regulatory Enforcement Fairness Act (SBREFA) panel, which will consider the potential impact of the planned rules on small businesses. The outline includes model forms related to periodic statements, ARM reset notices, and force-placed insurance notices, which the CFPB has been testing in recent months. The CFPB release also included questions directed to the small entity representatives in order to assist the SBREFA panel in understanding the potential economic impacts of the particular proposals under consideration by the CFPB. Generally, the servicing proposals incorporate statutory changes imposed by the Dodd-Frank Act, which would go into effect in January 2013 unless final rules are issued on or before that date. The concepts in the proposal that do not address specific Dodd-Frank requirements are consistent with servicing requirements imposed by recent mortgage servicing consent orders and/or recent requirements for servicing delinquent loans owned by or serviced on behalf of Fannie Mae or Freddie Mac (see, e.g., Federal Reserve Board Consent Orders and Fannie Mae Ann. SVC 2011-08R).
CFPB Issues Bulletin Regarding Supervision of Vendors
On April 13, the CFPB issued Bulletin 2012-3, which states the CFPB's expectation that supervised banks and nonbanks have an effective process for managing the risks of service provider relationships. In a press release announcing the Bulletin, the CFPB promised to “take a close look at service providers’ interactions with consumers” and “hold all appropriate companies accountable when legal violations occur.” According to the Bulletin, the CFPB expects supervised institutions to (i) conduct thorough due diligence to verify that a service provider understands and is capable of complying with the law, (ii) request and review a service provider’s policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities, (iii) include in the contract with a service provider clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities; (iv) establish internal controls and on-going monitoring to determine whether a service provider is complying with the law, and (v) take prompt action to address fully any problems identified through the monitoring process.
CFPB Proposes Narrowing Application of Credit Card Fee Limit
On April 12, the CFPB published a proposed rule that would lift the current limit on credit card fees charged prior to account opening. Under the current rule, as adopted by the Federal Reserve Board (FRB) in April 2011, card issuers are limited to charging fees up to 25 percent of the credit limit in effect when the account is opened. The FRB rule applies this fee limit prior to account opening and during the first year after account opening. The CFPB proposal would limit the application of this fee restriction to only during the first year after account opening. This proposal addresses a legal challenge to restricting the amount of fees charged prior to account opening, which resulted in a court issuing a preliminary injunction to halt the implementation of the FRBs broader application of the fee limit. The CFPB is accepting comments on the proposal through June 11, 2012.
Fourth Circuit Holds State Debt Collection Law Not Preempted by National Banking Act
On April 5, the Fourth Circuit held that the National Bank Act (NBA) did not preempt the Maryland Credit Grantor Closed End Credit Provisions (CLEC). Epps v. JP Morgan Chase Bank, No. 10-2444, 2012 WL 1134065 (4th Cir. Apr. 5, 2012). In Epps, the plaintiff purchased a car through a retail sales installment contract subject to the CLEC. The contract was later assigned to Chase which repossessed the vehicle after the plaintiff defaulted. The plaintiff brought a putative class action alleging in part that Chases notices regarding the sale of the vehicle failed to comply with the CLEC. Relying on OCC regulations implementing the NBA, 12 C.F.R. § 7.4008(d)-(e), the Fourth Circuit reversed the District Court for the District of Maryland and held that the CLEC was not preempted. The court explained that because the CLEC provisions at issue related exclusively to repossession and not to the extension of credit, they were not preempted by the NBA and excluded from preemption by the OCCs regulations. The court further found that the notices required under CLEC, which only related to debt collection upon default under an existing loan, were not disclosures within the meaning of the NBA and OCC regulations.
Florida Appeals Court Holds Servicer's Verified Allegation Insufficient to Establish Standing in Foreclosure Suit
On April 4, the District Court of Appeal for the Fourth District of Florida reversed a trial court decision requiring a commercial borrower to make payments to the servicer of a securitized trust pending a foreclosure action because the servicer did not properly plead standing. Elston/Leetsdale, LLC v. CWCapital Asset Management LLC, No. 4D11-3151, 2012 WL 1108531 (Fla. 4th DCA Apr. 4, 2012). In this case, the borrower executed a promissory note as evidence of a loan, and secured payment by executing a mortgage, security agreement, and an assignment of lease and rents. The lender assigned its rights to a trust company, which in turn assigned the rights to another trust, who is now the owner and holder of all the loan documents. The servicer for the trust filed a foreclosure action in its own name, alleging in the verified complaint that it was duly authorized by the trust to take all action to protect the interests of the trust. The servicer also sought continued payment pending the foreclosure action, which the trial court granted. The borrower challenged the servicer’s standing to bring suit on behalf of the trust, which the trial court rejected. The appeals court found that the servicer’s evidence in support of its standing, which was nothing more than its own allegations and affidavit, was insufficient. Instead the court noted that in other cases in which courts found that a servicer had established standing, the trustee joined the action or ratified the servicer’s commencement of the lawsuit through an affidavit. The appellate court reversed the trial court payment order and remanded for further proceedings.
Federal Reserve Offers Policy Guidance for REO Rental Programs
On April 5, the FRB released a policy statement that reiterates its general policy that banking organizations should make good faith efforts to dispose of foreclosed properties, also known as REO properties, as soon as practicable. However, under current market conditions, the FRB explains that banking organizations may hold and rent residential REO properties within legal holding-period limits without demonstrating continuous active marketing of the property for sale provided suitable policies and procedures are followed. The guidance offers risk management and compliance considerations for renting REO properties, as well as specific expectations for large-scale REO rental programs. The FRB release also points out that REO rental properties may meet the definition of community development under the Community Revitalization Act (CRA), and, if so, a banking organization would receive favorable CRA consideration.
Federal Reserve Publishes Rules to Simplify Administration of Reserve Requirements
On April 12, the FRB published two final rules designed to simplify the administration of reserve requirements and reduce administrative and operational costs for depository institutions and the Federal Reserve Banks. The FRB amended Regulation D to (i) create a common two-week maintenance period, (ii) create a penalty-free band around reserve balance requirements in place of using carryover and routine penalty waivers, (iii) discontinue “as-of adjustments” related to deposit report revisions and replace all other such adjustments with direct compensation, and (iv) eliminate the contractual clearing balance program. These changes will be phased in, with the latter two taking effect on July 12, 2012, and the first two taking effect on January 24, 2013. A second rule amends Regulation J to make it consistent with the Regulation D amendments by eliminating references to “as-of adjustments.” The rule also clarifies the handling of checks sent to the Federal Reserve Banks and the application of funds transfer rules to remittance transfers. These changes will take effect on July 12, 2012. Finally, with these rule changes, the FRB also announced modifications to its overnight overdraft policy, which also will take effect on July 12, 2012.
Ohio Creates Supplier Right to Cure Under State's Consumer Sales Practices Act
On April 2, Ohio enacted a law that permits a supplier to provide a consumer a cure offer no later than 30 days after the consumer files an action against the supplier alleging a violation of the Consumer Sales Practices Act. House Bill 275, which takes effect July 3, 2012, establishes the timeline and procedures for an offer and details the allowable limits of the offer. A consumer who chooses not to accept a cure offer is prohibited from recovering treble damages, court costs, and attorney fees following any successful legal action if a court or arbitrator awards the consumer actual economic damages that are not greater than the value of the remedy included in the cure offer. The new law also establishes procedures for determining and disputing attorney fees during the cure offer process.