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OCC to clarify OREO regulations
On April 24, the OCC published a notice of proposed rulemaking (NPRM) and request for comment on a proposal to clarify and to streamline its other real estate owned (OREO) regulations for supervised national banks and to apply the same regulatory framework to federal savings associations. Specifically, the OCC seeks public comment on questions relating to its proposals regarding OREO holding periods, OREO disposition, and permissible OREO expenditures. The NPRM also addresses OREO appraisal requirements. Finally, the NPRM proposes technical amendments to remove certain outdated capital rules for national banks and federal savings associations, including provisions relating to treatment of OREO held by Federal savings associations that are no longer in effect. According to the OCC, this proposal would be the first significant revision to OREO regulations in more than 20 years. Comments on the NPRM are due by June 24.
4th Circuit: TCPA debt collection exemption is unconstitutional
On April 24, the U.S. Court of Appeals for the 4th Circuit vacated a district court’s decision to grant summary judgment in favor of the FCC, concluding that an exemption under the TCPA that allows debt collectors to use an autodialer to contact individuals on their cell phones when collecting debts guaranteed by the federal government violates the First Amendment’s Free Speech Clause. According to the opinion, several political consultant groups (plaintiffs) argued that a statutory exemption enacted by Congress as a means of allowing automated calls to be placed to individuals’ cell phones “that relate to the collection of debts owed to or guaranteed by the federal government” is “facially unconstitutional under the Free Speech Clause” of the First Amendment. The plaintiffs argued that the debt-collection exemption to the automated call ban contravenes their free speech rights. Moreover, the plaintiffs claimed that “the free speech infirmity of the debt-collection exemption is not severable from the automated call ban and renders the entire ban unconstitutional.” The FCC, however, argued that the applicability of the exemption depended on the relationship between the government and the debtor and not on the content. The district court awarded summary judgment in favor of the FCC after applying a “strict scrutiny review,” ruling that the exemption does not violate the Free Speech Clause.
On appeal the 4th Circuit agreed with the plaintiffs that the exemption contravenes the Free Speech Clause, and found that the challenged exemption was a content-based restriction on free speech that did not hold up to strict scrutiny review. “Under the debt-collection exemption, the relationship between the federal government and the debtor is only relevant to the subject matter of the call. In other words, the debt-collection exemption applies to a phone call made to the debtor because the call is about the debt, not because of any relationship between the federal government and the debtor.” And because the exemption is a content-based restriction on speech, it must satisfy strict scrutiny review to be constitutional, which it fails to do, the 4th Circuit opined. “The exemption thus cannot be said to advance the purpose of privacy protection, in that it actually authorizes a broad swath of intrusive calls. . . [and] therefore erodes the privacy protections that the automated call ban was intended to further.” However, the appellate court sided with the FCC to sever the debt collection exemption from the automated call ban. “First and foremost, the explicit directives of the Supreme Court and Congress strongly support a severance of the debt-collection exemption from the automated call ban,” the panel stated. “Furthermore, the ban can operate effectively in the absence of the debt-collection exemption, which is clearly an outlier among the statutory exemptions.”
Divided Supreme Court says class arbitration is invalid without explicit permission
On April 24, the U.S. Supreme Court in a 5-4 vote held that because an arbitration agreement did not explicitly permit class arbitrations, only individual arbitrations are allowed. The case began when an employee of a lighting retailer (petitioner) filed a class-action suit against the company after a hacker—who posed as a company official—persuaded an employee at the company to disclose the tax information of roughly 1,300 workers and then file a fraudulent tax report in the petitioner’s name. The company moved to dismiss the case, arguing that the petitioner was required to bring his claims in individual arbitration under the Supreme Court’s 2010 ruling in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., which bars class arbitration when there is no “contractual basis for concluding” that the parties agreed to it. The district court granted the motion to compel arbitration but rejected the company’s request for individual arbitration and authorized arbitration on a classwide basis. On appeal, the 9th Circuit affirmed the district court’s decision—agreeing that the ambiguous agreement permitted class arbitration—and “followed California law to construe the ambiguity against the drafter”—in this instance, the company who drafted the agreement.
The company petitioned the Supreme Court to consider, consistent with the Federal Arbitration Act (FAA), whether an ambiguous agreement can provide the “contractual basis” required for compelling class arbitration. The majority deferred to the 9th Circuit’s conclusion that the arbitration agreement in question was ambiguous as to whether class arbitration was an option, and wrote that the lack of clarity cannot provide the “contractual basis” required under Stolt-Nielsen to compel class arbitration. Notably, the majority highlighted that “shifting from individual to class arbitration is a ‘fundamental’ change. . .that ‘sacrifices the principal advantage of arbitration’ and ‘greatly increases risks to defendants.” Citing to “crucial differences” between individual and class arbitration, the majority wrote that “courts may not infer consent to participate in class arbitration absent an affirmative ‘contractual basis for concluding that the party agreed to do so.’” The majority also stated that the 9th Circuit's decision to rely upon California’s contra proferentem doctrine to interpret contractual ambiguities against the drafter is “flatly inconsistent with ‘the foundational FAA principle that arbitration is a matter of consent.’”
The four justices who voted against the decision all wrote dissents. Among other things, Justice Kagan wrote that the FAA stipulates that state law governs the interpretation of arbitration agreements, provided the law handles other types of contracts in the same way. “Today’s opinion is rooted instead in the majority’s belief that class arbitration ‘undermine[s] the central benefits of arbitration itself. [] But that policy view—of a piece with the majority's ideas about class litigation—cannot justify displacing generally applicable state law about how to interpret ambiguous contracts,” Justice Kagan stated. Justice Breyer, who joined Justices Ginsburg’s and Kagan’s dissents in full, also wrote that the 9th Circuit lacked jurisdiction over the company’s appeal, and consequently, the Supreme Court lacks jurisdiction as well.
8th Circuit: Letter did not violate FDCPA's “unsophisticated consumer” standard
On April 22, the U.S. Court of Appeals for the 8th Circuit affirmed a district court’s dismissal of a consumer’s FDCPA action. The plaintiff alleged that the credit collections bureau violated the FDCPA’s prohibition against false, misleading, or deceptive representations when it sent a collection letter that included, among other things, the words “PROFESSIONAL DEBT COLLECTORS” along with an acronym for the company, which the plaintiff claimed violated the FDCPA’s provision which states that a debt collection may not use “any business, company, or organization name other than the true name. . . .” The plaintiff further alleged that the defendant violated the FDCPA and Minnesota law by (i) representing that she could submit payments on-line or correspond with the company through a designated website; (ii) stating it may seek pre-judgment interest; and (iii) including the signature of an individual who was not licensed to engage in debt collection activities in the state. The district court dismissed the claims, concluding that the use of the aforementioned language was not false or misleading under the “unsophisticated consumer” standard, and that neither the signature nor the pre-judgment interest statement violated the FDCPA.
On appeal, the 8th Circuit affirmed the dismissal of the claims, holding that the collection letter did not violate the FDCPA, Minnesota law did not prohibit the defendant from seeking pre-judgment interest, and the Minnesota Supreme Court has yet to determine whether the law “allows for the recovery of pre-judgment interest in a case such as this.” Furthermore, the FDCPA “was not meant to convert every violation of a state debt collection law into a federal violation,” the appellate court wrote, and that even if one of the signatories was not licensed in the state to collect debt, the defendant was legally licensed and did not engage in unfair or unconscionable conduct under the statute.
Federal Reserve proposes new structure for determining bank control
On April 23, the Federal Reserve Board issued a notice of proposed rulemaking (NPRM) and request for comment to simplify and increase transparency of existing rules for determining if a company has control over a banking organization under the Bank Holding Company Act and the Home Owners’ Loan Act. Among other things, the NPRM will “provide a series of presumptions of control for use by the Board in control proceedings and other control determinations,” and will create a tiered structure premised on the level of voting ownership—5 percent, 10 percent, and 15 percent—of one company in another company. The Board noted it will also consider several additional factors, such as (i) the size of a company’s voting and total equity investment; (ii) rights to director and committee representation; (iii) use of proxy solicitations; (iv) individuals serving as management, employees, and directors at both companies; (v) agreements permitting influence or restrictions on management or operational decisions; and (vi) the scope of business relationships between the companies. The NPRM also contains a new proposed presumption of “noncontrol,” which will apply in instances where a company owns less than 10 percent of the voting securities of a second company and does not trigger any of the presumptions of control. According to a statement issued by Vice Chairman for Supervision Randal Quarles, the NPRM is designed to address concerns that “it has been difficult for banking firms and investors in banking firms to determine whether a particular proposed investment could give rise to control.” Comments on the NPRM are due 60 days after publication in the Federal Register.
Department of Defense updating data-sharing agreement with Department of Education to preserve servicemember benefit
On April 16, the Department of Defense (DoD) published a proposal in the Federal Register to amend its routine use policy to accommodate a new data-sharing agreement between DoD and the Department of Education (ED). The new agreement ensures that servicemembers with student loans under Part D, Title IV of the Higher Education Act of 1965 receive the “no interest accrual benefit” on eligible loans during the period in which they received imminent danger or hostile fire pay. Through the proposal and the new agreement, ED will be able to access information in the Defense Manpower Data Center Data Base to identify servicemembers eligible for “no interest accrual benefit.” The proposal will take effect after the comment period ends on May 16 “unless comments are received which result in a contrary determination.”
Texas Court of Appeals affirms summary judgment for loan servicer and bank
On April 15, the Texas Court of Appeals affirmed a grant of summary judgment in favor of appellees, a loan servicer and a national bank acting as a trustee, concluding, among other things, that the appellant homeowner failed to provide sufficient evidence to support her claims that the appellees violated the Texas Debt Collection Act (TDCA) and Texas Deceptive Trade Practices and Consumer Protection Act (DTPA). According to the opinion, the homeowner—who defaulted on a loan that was referred to foreclosure—filed a lawsuit to stop the foreclosure sale, alleging that the defendants made “fraudulent, deceptive, or misleading representations” under the TDCA by allegedly failing to (i) provide an accurate accounting of received payments and credits; (ii) apply received payments; (iii) clearly disclose “the name of the person to whom the debt had been assigned or was owed when making a demand for money”; (iv) provide requested documentation regarding the assignment of the promissory note; and (v) provide proper prior notice to the appellant concerning the foreclosure proceedings. Additionally, the appellant further alleged that the appellees violated the DTPA by using fraudulent, deceptive, or misleading representations in the collection of appellant’s debt. The trial court granted summary judgment in favor of the defendants, and the appellate court affirmed the trial court’s decision. With respect to the appellant’s TDCA claims, the appellate court held, among other things, that first, the homeowner failed to show that the appellees made affirmative misrepresentations concerning the loan’s character or amount; second, failure to apply payments is not specifically a “‘prohibited misleading practice’” under the TDCA; and third, the appellees provided evidence showing the homeowner was “appropriately notified” of her default, and that under the TDCA, “service is completed upon deposit in the mail, not actual receipt.” With respect to the appellant’s DTPA claim, the appellate court held that the DTPA only applies to the acquisition of goods and services by lease or purchase and that loan servicing, foreclosure, and loan modification activities are not goods or services under the DTPA.
Maryland approves bills on debt settlement services, mortgage lenders, and credit service businesses
On April 18, the Maryland governor approved several bills concerning debt settlement service providers, mortgage lenders, and credit service businesses.
Under HB 59, registrants providing debt settlement services are required to apply for a license or renewal and obtain a valid unique identifier issued by the Nationwide Multistate Licensing System and Registry (NMLS) on or after July 1. HB 59 also requires the Office of the Commissioner of Financial Regulation (OCFR) to establish a time period of at least two months within which registrants must transfer licensing information to NMLS. Additionally, registration fees are decreased to $400 from $1,000 for the issuance or renewal of a registration.
HB 61 amends the Annotated Code of Maryland related to mortgage lenders, loan servicers, and loan originators to, among other things, (i) alter and clarify certain tangible net worth requirements and criteria for mortgage lenders, servicers, and originators; (ii) repeal a provision that requires licensees to reapply for a license should a location change request not be filed in a timely manner with the OCFR; (iii) extend examination cycle periods; and (iv) amend certain expiration provisions related to mortgage loan originator licensees. The amendments take effect October 1.
Finally, SB 68 amends the definition of a “credit service business” to mean, among other things, any person who represents the ability to provide advice or assistance to consumers concerning improving a consumer’s credit record, establishing a new credit file, or obtaining credit extensions. SB 68 also exempts certain credit services businesses from certain information statement requirements when engaged to obtain an extension of credit for a consumer. Credit services businesses that qualify for an exemption must provide the consumer with certain information concerning the right to file a complaint as well as a copy of the contract before the consumer executes the contract. SB 68 takes effect October 1.
Online lending platform settles with SEC for $3 million
On April 19, the SEC announced that an online lending platform will pay a $3 million penalty to resolve allegations it miscalculated and materially overstated annualized net returns (ANR) to investors. According to the order, between 2015 and 2017, the company allegedly excluded securities linked to certain charged-off consumer loans from its calculation of ANR and allegedly failed to identify and correct the error, despite knowing that employees misunderstood the code underlying the ANR calculation and despite alleged complaints by investors. As a result, the company allegedly materially overstated the ANR to a total of more than 30,000 investors. After a large institutional investor complained to the company in April 2017, it notified investors of the misstatements and corrected the ANR in May 2017. In agreeing to a settlement, the company did not admit or deny the SEC’s findings, and the order acknowledges that the company has since instituted “a number of controls designed to prevent and detect similar errors in the future,” including new management supervision, quarterly reviews, and semi-annual testing.
Maryland charges title company with making unlicensed, usurious consumer loans
On April 11, the Maryland Attorney General announced an administrative proceeding taken against a title company, its owner, and related businesses for allegedly making unlicensed and usurious title loans secured by consumers’ motor vehicles. According to the AG’s charges, the defendants, among other things, allegedly engaged in unfair or deceptive trade practices by offering consumers high-interest, short-term title loans with typical annual interest rates of 360 percent. The AG contends that the loans offered by the defendants qualify as consumer loans under Maryland law and therefore are subject to state interest rate caps. Furthermore, the AG alleges that the defendants were never licensed by the Maryland Commissioner of Financial Regulation to make consumer loans in the state. The AG seeks an order compelling the defendants “to permanently cease and desist from making unlicensed and usurious consumer loans in Maryland, to pay restitution to all affected consumers, and to pay civil penalties.”