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Financial Services Law Insights and Observations


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  • Connecticut “Debt Negotiation” License Required For Certain Activities Performed on Behalf of Connecticut Debtors

    State Issues

    Effective October 1, the Connecticut Department of Banking will require licensure for “debt negotiation” - including loan modification, short sales or foreclosure rescue activities - performed on behalf of Connecticut debtors. Persons triggering debt negotiation licensure must license a corporate or “main office,” as well as all branch locations where debt negotiation will occur. The application process requires, among other things, the submission of forms as drafted by the Department, licensing fees, and surety bond and personal forms for “control persons.” Connecticut law exempts from the debt negotiation licensing requirements (i) an attorney admitted to practice in Connecticut, when engaged in such practice, (ii) certain banks and credit unions (however, subsidiaries of such institutions other than operating subsidiaries of federal banks and federally-chartered out-of-state banks are not exempt from licensure), (iii) licensed Connecticut debt adjusters, while performing debt adjuster services, (iv) individuals performing “debt negotiation” under court order, and (v) a “bona fide nonprofit organization.”

  • Texas Federal Court Finds FCRA Does Not Completely Preempt State Law

    State Issues

    On September 29, the U.S. District Court for the Southern District of Texas held that the Fair Credit Reporting Act (FCRA) did not completely preempt a borrower’s state law claims against a mortgage servicer. Ortiz v. National City Home Loan Services Inc., Civ. No. H-09-2033, 2009 WL 3255088 (S.D. Tex. Sept. 29, 2009). In this case, the defendant servicer deducted a portion of the borrower’s monthly mortgage payment to cover required insurance on the borrower’s property, thereby resulting in a shortage in the borrower’s Promissory Note obligation. As a result of the shortage, the servicer filed foreclosure proceedings against the borrower. Subsequently, the borrower alleged that the servicer damaged his credit by wrongfully reporting to credit reporting agencies that there was a delinquency in the mortgage payments and claimed violations of the Texas Deceptive Trade Practices – Consumer Protection Act, as well as claims of slander of credit and wrongful foreclosure. The defendant servicer attempted to remove the proceedings to federal court by arguing that the borrower’s state law claims were totally preempted by FCRA and, thus, gave rise to federal question jurisdiction. The court held that (i) FCRA only preempts state law claims when the relevant state law conflicts with FCRA and that no such conflict exists between FCRA and the relevant Texas law, and (ii) in any event, preemption is merely an affirmative defense that is not a basis for removal. 

  • Connecticut State Banking Commissioner Sets Maximum Fees for Debt Negotiators

    State Issues

    On September 28, the Connecticut State Banking Commissioner issued a maximum fee schedule for “debt negotiation” - including loan modification, short sales or foreclosure rescue activities - performed on behalf of Connecticut debtors (the licensure requirement for debt negotiators was reported in InfoBytes, Sept. 25, 2009). Under the schedule, a debt negotiator may charge as much as $50 for an initial or set-up fee and as much as $8 for monthly service fees for each creditor listed on a debt negotiation contract; the total service fee chargeable to a debtor cannot exceed $40. The aggregate fees, including the initial and service fees, charged by a debt negotiator cannot exceed 10 percent of the amount by which the consumer’s debt is reduced. Finally, a debt negotiator of secured debt, including Short Sales and Foreclosure Rescue Services, cannot charge more than $500 for debt negotiation services involving secured debt, and such a fee is collectable only upon the successful completion of the debt negotiation services (i.e., the fee cannot be collected up-front).

  • Maine Federal Court Finds Maine Data Collection Law Likely Violates First Amendment

    State Issues

    On September 9, the U.S. District Court for the District of Maine held that a recently passed Maine Act requiring parental consent for the collection of health-related information from a minor is likely overbroad and thus could violate the First Amendment. Maine Independent Colleges Ass’n v. Baldacci, No. CV-09-396 (D. Me. Sept. 9, 2009). As reported in InfoBytes, Aug. 7, 2009, the Act makes it an illegal and unfair trade practice for a person or company “to knowingly collect or receive health-related information or personal information for marketing purposes from a minor without first obtaining verifiable parental consent of that minor’s parent or legal guardian.” On August 26, four plaintiffs, including the Maine Independent Colleges Association, challenged the constitutionality of the law, scheduled to take effect on September 12, 2009. On September 9, the court issued a stipulated order of dismissal by both parties. According to the dismissal order, the Maine Attorney General “has committed not to enforce” the Act, and the Maine legislature will reconsider the statute. The dismissal order further notes that the private right of action availed under the Act “could suffer from the same constitutional infirmities.”

  • California Bill Proposes Prohibition of Advance Fees for Loan Modification Consultant

    State Issues

    On September 9, A.B. 764, a bill to prohibit certain loan modification consultants from receiving fees in advance of modifying a loan, was enacted by the California legislature and is currently pending approval by Governor Arnold Schwarzenegger. The proposed bill would prohibit any person performing loan modification services from claiming, demanding, charging, receiving, collecting or contracting for a fee from a borrower under a loan modification agreement until the terms of the loan have been modified. However, real estate brokers would be exempt from the fee prohibition to the extent that they comply with the provisions of the law. In addition, the bill would further exempt licensed residential mortgage lenders and servicers from the fee prohibition. Among other things, the bill would also prohibit certain advertisements that may be deemed misleading to prospective borrowers. Under the bill, violations of the statute would carry the following penalties: (i) for individuals, a maximum fine of $20,000 and/or imprisonment for up to 12 months; and (ii) for corporations, a maximum fine of $60,000. The bill includes a sunset provision of January 1, 2013.

  • North Carolina Law to Increase Requirements for Collection Agencies, Debt Buyers in Foreclosure Actions

    State Issues

    On September 9, North Carolina Governor Bev Perdue signed SB 974, the “North Carolina Consumer Economic Protection Act,” (the Act) which pertains to debt collection and mortgage foreclosure practices. Under the Act, the Clerk of Court who presides over foreclosure hearings has the authority to continue hearings regarding a foreclosure for up to 60 days. In making this determination, the Clerk of Court may consider (i) whether the debtor was offered an opportunity to resolve the foreclosure through forbearance, loan modification, or other commonly accepted resolution plan, (ii) whether there was actual responsive communication with the debtor (e.g., telephone conferences or in-person meetings), (iii) whether the debtor has indicated that he or she has the intent and ability to make payments under a foreclosure resolution plan, and (iv) whether there were “good faith voluntary resolution efforts” to avoid a foreclosure. Further, under the Act, a collection agency that is or is acting on behalf of a “debt buyer,” as defined by the Act, cannot attempt to collect on a debt (e.g., bring suit or initiate an arbitration proceedings) (i) if such actions would be barred by the statute of limitations, (ii) without first giving the debtor written notice of the intent to file a legal action at least 30 days in advance of filing, and (iii) without valid documentation that the debt buyer is the owner of debt and that there has been “reasonable verification” of the amount of the debt. The Act also amends requirements for (i) materials that must be part of and attached to complaints against certain debt collection entities, (ii) prerequisites to entering a default or summary judgment against a debtor, (iii) materials required for setting forth a party’s obligation to pay attorneys’ fees for services rendered to an assignee or a debt buyer, and (iv) the percentage of the principal balance of the loan which must be posted by an appealing party opposing a foreclosure. Finally, the Act increases certain civil penalty amounts that may be imposed against debt collection agencies from $100-$2,000 to $500-$4,000 per incident. The Act becomes effective October 1, 2009 and applies to foreclosures initiated, debt collection activities undertaken, and actions filed on or after October 1, 2009.

  • California Court Enjoins Lender From Continuing Allegedly Predatory Lending Practices

    State Issues

    On August 24, CashCall, Inc. - an Anaheim, California based lender that makes small, unsecured cash loans to consumers at high interest rates - consented to the entry of a final judgment and permanent injunction in connection with allegations by the California Attorney General regarding its lending and collection activities. According to the complaint, CashCall allegedly misled customers with deceptive television, radio and online advertising, in violation of California Business and Professions Code Section 17500. For example, while CashCall’s advertisements suggested that low interest rate loans were available to all borrowers, the advertised rates were only offered to some borrowers. The complaint further alleged that CashCall used illegal and abusive debt collection practices (e.g., making excessive and verbally abusive telephone calls at all hours of the day and night and/or threatening to initiate law enforcement and wage garnishment proceedings against borrowers without any basis for doing so) in violation of California Business and Professions Code Section 17200. The court order requires CashCall to (i) cease making excessive and verbally abusive telephone calls, (ii) pay $1 million in civil penalties and expenses related to the investigation and resolution of the case, (iii) train its employees within 30 days, and not fewer than four times per year thereafter, to ensure compliance with the judgment, (iv) terminate any officer, director or employee who violates the terms of the judgment, (v) record all telephone calls made to, or received from, prospective and current borrowers, and (vi) maintain a detailed log of all consumer complaints.

  • Florida Attorney General Sues Mortgage Foreclosure Rescue Services Company

    State Issues

    On August 21, Florida Attorney General Bill McCollum sued a mortgage foreclosure rescue services company, JPB Consulting, Inc. (of Kissimmee, FL), and its president for allegedly charging illegal up-front fees for foreclosure relief services that the company allegedly did not actually provide. The lawsuit seeks (i) the dissolution of the company, (ii) a permanent injunction against the defendants from charging illegal up-front fees and failing to provide advertised services, and (iii) civil penalties of $15,000 per violation, full victim restitution, and reimbursement for the cost of the investigation and litigation.

  • Massachusetts Regulator Issues Cease-Activity Directives to Payday Lenders

    State Issues

    On August 18, the Massachusetts Division of Banks (the Division) announced that it has issued cease-activity directives to 95 companies allegedly making illegal payday loans to Massachusetts consumers. According to the Division, many of the companies it identified were charging annual percentage rates averaging over 500% and fees averaging $40-60, in violation of the Massachusetts small-loan licensing law.

  • New Hampshire Enacts Bills Relating to Health Data Privacy

    State Issues

    On August 7, New Hampshire Governor John Lynch signed into law H.B. 542, which primarily addresses health privacy issues. The new law (i) authorizes health care providers to disclose an individual’s protected health information to health information exchanges, and (ii) allows individuals to opt out of sharing their protected health care information through health information exchanges. The operative provisions of the new law become effective January 1, 2010.


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