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California District Court says payday lender’s arbitration provision is unconscionable
On June 10, the U.S. District Court for the Southern District of California denied a national payday lender’s motion to compel arbitration, agreeing with plaintiffs that the arbitration provision in their loan agreement was unenforceable because it was procedurally and substantively unconscionable. According to the opinion, plaintiffs filed a putative class action suit against the payday lender alleging the lender sells loans with usurious interest rates, which are prohibited under California’s Unfair Competition Law and Consumer Legal Remedies Act. The lender moved to compel arbitration asserting that the consumers’ loan agreements contain prohibitions on class actions in court or in arbitration, require arbitration of any claims arising from a dispute related to the agreement, and disallow consumers from acting as a “private attorney general.”
The court first determined that California law applied. It concluded that, while the lender was headquartered in Kansas, the consumers obtained their loans in California, and California “has a materially greater interest than Kansas in employing its laws to resolve the instant dispute,” based on its “material and fundamental interest in maintaining a pathway to public injunctive relief in unfair competition cases.”
The court then determined that the arbitration provision was procedurally unconscionable because, even though the consumers had a 30-day opt-out window, it required them to waive statutory causes of action “before they knew any such claims existed.” Finally, because the provision contained a waiver of public injunctive relief, the court determined it was substantively unconscionable based on the California Supreme Court decision in McGill v. Citibank, N.A (covered by a Buckley Special Alert here). The court rejected the lender’s arguments that McGill was preempted under the Federal Arbitration Act (FAA), noting a 2015 decision by the U.S. Court of Appeals for the 9th Circuit, “effectively controls” the dispute and the 9th Circuit reasoned that a similar state-law rule against waivers was not preempted by the FAA. Lastly, the court held that the unconscionable public injunctive relief waiver provision was not severable from the entire arbitration provision, because the agreement contained “poison pill” language that would invalidate the entirety of the arbitration provision.
6th Circuit: Merchant indemnified against card breach costs
On June 7, the U.S. Court of Appeals for the 6th Circuit affirmed a lower court’s ruling that an agreement between a Texas-based merchant and a payment processor did not require the merchant to pay millions of dollars in damage-control costs related to two card system data breaches. After the data breaches, the payment processor withheld routine payment card transaction proceeds from the merchant, asserting that the merchant was responsible for reimbursing the amount that the issuing banks paid to cardholders affected by the breaches. However, the merchant refused to pay the payment processor, relying on a “consequential damages waiver” contained in the agreement.
The payment processor argued that, under the agreement’s indemnification clause and provision covering third-party fees and charges, the merchant retained liability for assessments passed down from the card brands’ acquiring bank. The district court, however, granted summary judgment to the merchant, finding that the merchant was not liable for the card brands’ assessments. The court further ruled that the payment processor materially breached the agreement when it diverted funds to reimburse itself.
On review, the 6th Circuit agreed with the lower court that the assessments “constituted consequential damages” and that the agreement exempted consequential damages from liability under a “conspicuous limitation” to the indemnification clause. According to the 6th Circuit, the “data breaches, resulting reimbursement to cardholders, and levying of assessments, though natural results” of the merchant’s failure to comply with the Payment Card Industry's Data Security Standards, “did not necessarily follow from it.” In addition, the appellate court agreed with the district court’s holding that third-party fees and charges in the contract refer to routine charges associated with card processing services rather than liability for a data breach. The appellate court also concurred that the payment processor’s decision to withhold routine payment card transactions, constituted a material breach of the agreement.
CFPB symposium on “abusive” standard set for June 25
On June 11, the CFPB announced that its first symposium, regarding the meaning of “abusive acts or practices” under Section 1031 of the Dodd-Frank Act, will be held on June 25. As previously covered by InfoBytes, the CFPB announced a symposia series that will convene to discuss consumer protections in “today’s dynamic financial services marketplace.” The June 25 symposium will be a public forum with two panels of experts discussing unfair, deceptive, or abusive acts and practices (UDAAP). The first panel will be a policy discussion, moderated by Tom Pahl, CFPB’s Policy Associate Director, Research, Markets and Regulation. The second panel will examine how the “abusive” standard has been used in practice in the field and will be moderated by David Bleicken, CFPB Deputy Associate Director, Supervision, Enforcement and Fair Lending.
In addition to the June 25 symposium, the series will have future events discussing behavioral law and economics, small business loan data collection, disparate impact and the Equal Credit Opportunity Act, cost-benefit analysis, and consumer authorized financial data sharing.
FTC settles with software provider over data security failures
On June 12, the FTC announced a settlement under which a software provider agreed to better protect the data it collects, resolving allegations that the company failed to implement reasonable data security measures and exposed personal consumer information obtained from its auto dealer clients in violation of the FTC Act and the Standards for Safeguarding Customer Information Rule, issued pursuant to the Gramm-Leach-Bliley Act.
In its complaint, the FTC alleged the company’s failure to, among other things, (i) implement an organization information security policy; (ii) implement reasonable guidance or training for employees; (iii) use readily available security measures to monitor systems; and (iv) impose reasonable data access controls, resulted in a hacker gaining unauthorized access to the company’s database containing the personal information of approximately 12.5 million consumers. The proposed consent order requires the company to, among other things, implement and maintain a comprehensive information security program designed to protect the personal information it collects, including implementing specific safeguards related to the FTC’s allegations. Additionally, the proposed consent order requires the company to obtain third-party assessments of its information security program every two years and have a senior manager certify compliance with the order every year.
Calabria requests chartering authority, increase in FHFA powers
On June 11, the Federal Housing Finance Agency (FHFA) issued its 2018 Report to Congress, which, in part, provides information regarding FHFA's oversight of Fannie Mae and Freddie Mac (the GSEs) and describes FHFA actions as conservator the GSEs.
Most notably, in his letter to Congress introducing the report, FHFA Director Mark Calabria urged Congress to act on housing finance reform, noting that the conservatorship over the GSEs was “established as a short-term measure to address instability” during the financial crisis and now is of “unprecedented duration and scope.” Calabria encouraged Congress to work with the FHFA and the Administration to enact housing finance reform to ensure the GSEs are “well-capitalized, well-regulated, and well-managed to withstand any future downturn in the economy.” Additionally, Calabria requested that Congress provide FHFA with chartering authority similar to that of the OCC to increase competition in the secondary mortgage market. (As previously covered by InfoBytes here and here, Calabria and the Administration have encouraged housing finance reform that would end the GSE conservatorships and increase private sector participation in the mortgage market.) Lastly, Calabria argued for strengthening FHFA’s powers, similar to that of other federal financial safety and soundness regulators, including by granting the agency the authority to oversee third parties that do business with the GSEs, such as nonbank mortgage servicers.
Democratic Representatives demand rescission of CFPB’s permanent HMDA threshold proposal
On June 11, House Financial Services Committee Chairwoman Maxine Waters and 64 other Democratic House members sent a letter to the CFPB urging rescission of its May proposal to permanently raise the coverage thresholds for collecting and reporting HMDA data and to retire its HMDA Explorer tool. (Covered by InfoBytes here.) In the letter, members argue that recent data “showed widespread discrimination in bank lending” and that redlining continues to be a pervasive problem. They note that HMDA data is an important tool for public officials to understand access to credit in their communities, and that the Bureau’s proposal would exempt “about half of lending institutions from reporting data about closed-end mortgages … [and] sacrifice information that can make a difference in the lives of creditworthy, lower-income consumers.” The members also ask for information regarding the new Federal Financial Institutions Examination Council (FFIEC) query tool that is to be used as a replacement for the HMDA Explorer tool and Public Data Platform API that the Bureau plans to retire, as previously covered by InfoBytes here.
National bank settles alleged SCRA violations
Recently, the U.S. District Court for the District of Kansas granted a plaintiff’s motion for final approval of a class action settlement resolving allegations that a national bank violated the Servicemembers Civil Relief Act by incorrectly repossessing vehicles owned by certain servicemembers. The bank, which denied all claims and allegations of wrongdoing, entered into the settlement agreement to avoid further uncertainties and expenses. The approximately $5.1 million settlement fund will go to affected servicemembers who have not, as of the effective date, already accepted payments in accordance with settlement agreements reached between the bank and the DOJ and OCC in 2016. (Covered by InfoBytes here.)
Supreme Court holds that creditor may be held in civil contempt for violation of bankruptcy discharge injunction
On June 3, the U.S. Supreme Court unanimously held that a creditor may be held in civil contempt for violating a bankruptcy court’s discharge order “if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.” At issue was Section 524(a)(2) of the Bankruptcy Code, which specifies that a discharge order triggers an automatic injunction against any creditor that attempts to collect a pre-bankruptcy discharged debt. In the case before the Court, a defendant to a lawsuit proceeding in state court filed for Chapter 7 bankruptcy during the course of that litigation. After the bankruptcy court entered a discharge order, the state court ordered the debtor to pay the plaintiffs’ attorneys’ fees. While the monetary judgment would have ordinarily violated the discharge, the state court concluded that it was permissible under a lower-court doctrine holding that the discharge no longer applies when a debtor “return[s] to the fray” of litigation after filing for bankruptcy. The bankruptcy court appellate panel vacated the bankruptcy court’s decision and the 9th Circuit affirmed, concluding that a creditor may not be held in contempt for violating a discharge order if the creditor held a subjective good faith belief—even if “unreasonable”—that its actions did not violate the injunction.
Upon review, the Supreme Court reversed the 9th Circuit’s opinion, noting that the standard for civil contempt “is generally an objective one,” and nothing about a bankruptcy court discharge order should modify that principle. The Supreme Court emphasized that “a party’s subjective belief that [the party] was complying with an order ordinarily will not insulate [the party] from civil contempt if that belief was objectively unreasonable,” and that civil contempt “may be appropriate when the creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.” The -debtor’s argument for a standard that would operate like a “strict-liability” standard—where creditors who are unsure of whether a debt has been discharged can obtain an advance determination from the bankruptcy court prior to attempting to collect the debt—was also rejected. The Supreme Court stated that because “there will often be at least some doubt as to the scope of such orders,” a preclearance requirement may “lead to frequent use of the advance determination procedure,” as well as additional costs and delays.
7th Circuit: Detailed creditor information does not violate FDCPA
On June 6, the U.S. Court of Appeals for the 7th Circuit, in a consolidated appeal, affirmed summary judgment in favor of a debt collector in actions alleging that the debt collector violated the FDCPA by naming the “original creditor” and the “client” in its collection letters, but declining to identify the current owner of the debt. According to the opinion, two consumers received collection letters naming an online payment processor as the “client” and a bank as the “original creditor,” and stating that, “upon the debtor’s request, [the collector] will provide ‘the name and address of the original creditor, if different from the current creditor.’” The consumers filed class actions against the debt collector, alleging that it violated, among other things, Section 1692g(a)(2) of the FDCPA by failing to disclose the current creditor or owner of the debt in the initial collection letters. In both cases, the respective district court granted summary judgment for the debt collector, concluding that the letter not only includes the original creditor—the bank—but also provides additional information for the unsophisticated consumer by including the online payment processor so that the consumer could better recognize the debt.
On appeal, the 7th Circuit agreed with the lower courts and concluded that the letters did not violate the FDCPA. The appellate court noted that “the letter identifies a single ‘creditor,’ as well as the commercial name to which the debtors had been exposed, allowing the debtors to easily recognize the nature of the debt.” The appellate court rejected the consumers’ argument that calling the bank the “original creditor” instead of the “current creditor” creates confusion, because the letter contained language that notified consumers that the original and current creditors may be one and the same. Because the letter “provides a whole picture of the debt for the consumer,” the court concluded it is not abusive or unfair and does not violate Section 1692g(a)(2) of the FDCPA.
Democratic Senators ask CFPB to reconsider debt collection rulemaking
On June 6, twenty six Democratic Senators sent a letter to the CFPB requesting that the Bureau reconsider the recent debt collection rulemaking proposal to “pursue more meaningful reforms that put consumers . . . first.” As previously covered by InfoBytes, in May, the CFPB released its highly anticipated debt collection rulemaking, which regulates debt collection communications and disclosures and addresses related practices by debt collectors. Among other things, the proposed rule would (i) require debt collectors to provide consumers with a validation notice containing specific information regarding the debt; (ii) restrict debt collectors from calling consumers regarding a particular debt more than seven times within a seven-day-period and prohibit telephone contact for seven days after the debt collector has had a conversation with the consumer; (iii) allow for consumers to unsubscribe from various communication channels with debt collectors, including text or email; and (iv) prevent debt collectors from contacting consumers on their workplace email addresses or through public-facing social media platforms.
In the letter, the Senators argue that the proposed rule as currently written “will only exacerbate and increase troubling harassment tactics” by debt collectors. The Senators note that the Bureau received 81,500 consumer debt collection complaints, and the FTC received nearly 458,000 such complaints in 2018, and argue that the proposed rule does not do enough to address the particular abusive practices that those complaints raised. The Senators allege that the proposed rule “permits collectors to overwhelm consumers with intrusive communications” because it allows for unlimited text messages and emails and allows for collectors to call consumers seven times per week, per debt. Additionally, the Senators argue that the proposed rule “could encourage collectors to practice willful ignorance about the status of the debt they collect,” as it only “prohibits filing or threatening to file a lawsuit if the collector ‘knows or should know’ that the debt is not enforceable.” Lastly, the Senators assert that the Bureau should hold attorneys who engage in debt collection to a “higher standard, [they should] not be granted a safe harbor to engage in abusive and deceptive practices.”