State Law Claims Based on Student Loan Servicer’s Loss Mitigation Representations Not Preempted by the HEA, Seventh Circuit Court of Appeals Holds

By Grant A. Premo and R. Aaron Chastain on Posted in Loss Mitigation, Student Loan Servicing

State Law Claims Based on Student Loan Servicer’s Loss Mitigation Representations Not Preempted by the HEA, Seventh Circuit Court of Appeals HoldsThe Seventh Circuit Court of Appeals struck a blow to student loan servicers’ arguments that certain state law claims brought by borrowers are preempted under the Higher Education Act (HEA). In a lengthy opinion issued on June 27, 2019, in Nelson v. Great Lakes Educations Loan Services, Inc., the court held that a borrower’s state law claims based on alleged misrepresentations made by the servicer about the borrower’s repayment options could proceed.

In Nelson, a student loan borrower financed her education with loans under the Federal Family Education Loan Program (FFELP). The borrower later contacted the servicer of her student loans to discuss her repayment options after she suffered a decline in income. The borrower alleges that her servicer steered her away from a more beneficial income-driven repayment plan and into forbearance and deferment plans, repayment options she contends are more lucrative for the servicer but more burdensome for the borrower.

The borrower then filed a putative class action, asserting state law claims for fraud, negligent misrepresentation, and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The borrower specifically alleged that the servicer misrepresented that it was an “expert” working in the borrower’s best interest and then recommended forbearance as the best option for the borrower’s financial trouble.

The servicer filed a motion to dismiss, arguing that the borrower’s claims are preempted under § 1098g of the HEA, which states: “Loans made, insured, or guaranteed pursuant to a program authorized by title IV [of the HEA] shall not be subject to any disclosure requirements of any State Law.” The servicer argued that, since the HEA requires the servicer to make certain disclosures during repayment regarding the repayment options available to a borrower, the borrower’s claims were preempted. The district court agreed that preemption applied and dismissed the borrower’s complaint.

The Seventh Circuit Court of Appeals, however, reversed the district court’s ruling, finding a distinction between a failure to disclose information and an affirmative misrepresentation. The court noted that the borrower alleged “false and misleading statements that [the servicer] made voluntarily, not required by federal law,” including the servicer’s recommendation of forbearance as the best option for the borrower’s financial trouble. In other words, the court found that the servicer’s representations at issue in the lawsuit were not mere failures to disclose certain information or representations that the servicer was required to make under federal law, but instead were “affirmative misrepresentations in counseling.” The court thus found that express preemption did not apply under § 1098g of the HEA. The court also held that field and conflict preemption did not apply.

Among the voluntary affirmative misrepresentations that the court identified were statements on the servicer’s website about its expertise and devotion to borrowers’ best interests. Student loan servicers should take note. While servicers may provide information to borrowers dispelling myths about third-party “debt relief” companies that often prey on distressed borrowers, the Nelson opinion shows the need for servicers to use discretion when communicating with borrowers about the servicer’s role and capabilities, particularly when it comes to repayment options.

Georgia Exempts Manufactured Home Retailers/Brokers from Mortgage Broker Licensing

By Erika J. Sonstroem and Jason R. Bushby on Posted in Licensing, Manufactured Housing, State Law Developments

Georgia Exempts Manufactured Home Retailers/Brokers from Mortgage Broker Licensing Effective July 1, 2019, Georgia House Bill 212 will affirmatively exempt retailers or retail brokers of manufactured or mobile homes from the state’s “mortgage broker” definition under Ga. Code Ann. § 7-1-1000. The bill specifically exempts manufactured housing retailers from mortgage broker licensing requirements, and the oversight that comes with licensure, provided the retailer or retail broker meets certain requirements, as detailed below.

Under the current definition, a “mortgage broker” means “any person who directly or indirectly solicits, processes, places, or negotiates mortgage loans for others, or offers to solicit, process, place, or negotiate mortgage loans for others or who closes mortgage loans which may be in the mortgage broker’s own name with funds provided by others and which loans are assigned within 24 hours of the funding of the loans to the mortgage lenders providing the funding of such loans” (Ga. Code Ann. § 7-1-1000(19)).

Beginning July 1, 2019, the “mortgage broker” definition will exempt a retailer or retail broker of a manufactured or mobile home or a residential industrialized building provided:

  1. The residential mortgage loan activities are limited to compiling and transmitting residential mortgage loan applications along with related supporting documentation to licensed or exempt mortgage lenders or communicating with residential mortgage loan applicants as necessary to obtain such documents; and
  2. The retailer or retail broker does not receive any payment or fee from any person (presumably including both the prospective borrower and the mortgage lender) for assisting the applicant to apply for or obtain financing to purchase the manufactured home, mobile home, or residential industrialized building.

Additionally, the definition will exclude exclusive employees of retailers or retail brokers, provided the employee: (A) is acting within the scope of employment and under the supervision of the retailer or retail broker and not as an independent contractor, and (B) has not faced certain disciplinary action under the Georgia Mortgage Lenders and Mortgage Brokers Article in the past five years.

This change will allow retailers and retail brokers of manufactured homes to assist customers with obtaining financing without worrying about triggering licensing and additional oversight requirements. In streamlining the process, Georgia House Bill 212 should make it easier for customers to obtain the financing required to enter into manufactured housing ownership.

California’s Bot Transparency Law Goes into Effect on July 1, 2019

By Daniel Paulson and Erin Jane Illman on Posted in Cybersecurity, Data Privacy, FinTech, Mobile Devices

California’s Bot Transparency Law Goes into Effect on July 1, 2019California wants to ensure that consumers know what they are talking to.

On July 1, 2019, California’s new bot disclosure law will take effect, requiring bots to be upfront about their inhumanity.  The law prohibits bots from communicating with a person in California with the intent to mislead as to their artificial identity for the purpose of knowingly deceiving the person about the content of the communication in order to incentivize the sale of goods or services in a commercial transaction, or to influence a vote (Cal. Bus. & Prof. Code § 17940).

Although the law’s “intent to mislead” requirement suggests that bad actors are the target here, the law’s broad language likely sweeps in legitimate, honest businesses as well.   For example, if a business website automatically displays a “How May I Help You?” chat tab on the bottom of the webpage, displaying a human name or picture but using a bot to field or direct initial customer queries, a Court could find intent to mislead.

The law’s broad language may eventually be clarified through litigation, but companies should not be too eager to test the law’s limits.  With a maximum fine of $2,500 per violation, a labor-saving bot could quickly become a company’s most costly employee.

Helpfully, the law provides that “[a] person using a bot shall not be liable under this section if the person discloses that it is a bot.” Cal. Bus. & Prof. Code § 17940.  This disclosure must be clear and conspicuous, and must be reasonably designed to inform the person on the other end of the conversation that they are communicating with a bot.

Businesses that interact with users in California, via a website, an app, or social media, need to make sure that any bots—automated online accounts where substantially all of the actions or posts are not the result of a person—are forthcoming about their non-humanity.

California Latest State to Consider Lead Generation Licensing

By Erika J. Sonstroem and Haydn J. Richards Jr. on Posted in Installment Lending, Lead Generation, Licensing, Payday Lending, Small-Dollar Lending, Title Loans, Unsecured Lending

California Latest State to Consider Lead Generation LicensingOn Wednesday, June 26, 2019, the California Senate Banking Committee will take up AB 642, which would add certain lead generation activities to the definition of “broker” under the California Financing Law (Cal. Fin. Code § 22004 et seq.). If passed, companies that engage in lead generation (“lead generators”) would be required to obtain a California Finance Lenders Law license, unless otherwise exempt, and brokers or lenders that knowingly work with unlicensed lead generators could become subject to penalty.

Under the current bill, the definition of “broker” would include the following additional activities:

  • Transmitting confidential data about a prospective borrower to a finance lender with the expectation of compensation in connection with making a referral;
  • Making a referral under an agreement with a finance lender that meets certain requirements;
  • Participating in any loan negotiation between a finance lender and a prospective borrower;
  • Participating in the preparation of loan documents;
  • Counseling, advising, or making recommendations to a perspective borrower about a loan based on the prospective borrower’s confidential data;
  • Communicating a finance lender’s loan approval to a borrower; or
  • Charging a fee to a prospective borrower for any services related to an application for a loan from a finance lender.

Certain exemptions from licensure would exist under AB 642, including for Native American Indian tribes with sovereign immunity from state law. Persons that only perform licensable activities less than five times a year and persons that perform administrative or clerical tasks in support of the performance of a licensed broker would also be exempt.

In addition to licensing requirements, AB 642 would also make changes to the existing disclosure requirements for California brokers and would define permissible fees related to lead generation under the California Finance Law.

California is the latest in a series of state regulators to add oversight provisions to lead generators. We anticipate that additional state regulators may take up licensing provisions for companies in the lead generation space and continue to monitor such requirements.

Private Flood Insurance Mandatory Acceptance Begins July 1, 2019

By Heather Howell Wright on Posted in Banking, Compliance, Flood Insurance Regulation, Insurance, Mortgage Loan Originators

Private Flood Insurance Mandatory Acceptance Begins July 1, 2019In February 2019, the Board of Governors of the Federal Reserve System, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency (the interagency regulators) issued a final rule implementing the portion of the Biggert-Waters Flood Insurance Reform Act mandating acceptance of private insurance policies in certain circumstances. The rule goes into effect on July 1, 2019. Is your institution ready to implement the final private flood rule?

The Biggert-Waters Flood Insurance Reform Act of 2012 obligated the interagency regulators to issue a final rule requiring financial institutions to accept private flood insurance. On February 13, 2019, the interagency regulators announced the issuance of this joint final rule. In general, the final rule requires institutions to accept flood insurance policies that meet the Biggert-Waters Act statutory definition of “private flood insurance” through four primary components: (1) mandatory acceptance of private flood insurance; (2) mandatory acceptance of compliance aid; (3) discretionary acceptance of private flood insurance; and (4) flood coverage provided by mutual aid societies. In a June 18, 2019, webinar, representatives from the interagency regulators discussed the final private flood rule and participated in a question-and-answer session regarding implementation of the rule. The information provided here incorporates information from the webinar.

Mandatory Acceptance

The final rule mandates that regulated institutions must accept private flood insurance policies that satisfy the statutory definition of “private flood insurance.” Generally, a private flood insurance policy:

  • Is issued by a duly licensed or approved insurance company;
  • Provides coverage that is “at least as broad as” the coverage provided under a standard flood insurance policy (SFIP) issued under the National Flood Insurance Program (NFIP);
  • Includes a requirement that the insurer must give 45-day notice to the borrower and lender (servicer) prior to cancellation or non-renewal;
  • Includes information about the availability of coverage under the NFIP;
  • Includes a mortgagee clause similar to the clause in an SFIP;
  • Includes a limitation provision that the insured must file suit not later than one year after the date of a written denial of a claim under the policy; and
  • Contains cancellation provisions that are as restrictive as an SFIP.

To determine whether a private policy is “at least as broad as” an SFIP, the final rule requires institutions to conduct a substantive review of specific provisions in a private flood policy, including the coverage grant, deductible amounts, conditions, and exclusions. In the June 18 webinar, the interagency regulators articulated their expectation that lenders will conduct such substantive reviews. If a private policy satisfies all these requirements, the lender must accept the policy for purposes of complying with its flood insurance obligations.

Compliance Aid

The final rule includes a “compliance aid” provision to assist institutions with evaluating policies. As set forth in the final rule, the compliance aid language is as follows: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.” If a private policy contains this precise compliance aid language, then the lender need not conduct any further review of the policy.  In the June 18 webinar, the interagency regulators explained that only this specific language would relieve the lender of any obligation to conduct a substantive review of the private policy. In addition, the interagency regulators cautioned that while the compliance aid language is sufficient to satisfy the private flood rule, it is not necessary; a lender may not reject a private flood policy because this compliance aid language is not included.

Discretionary Acceptance 

The final rule also provides that institutions may accept private flood insurance policies that do not meet the statutory definition of “private flood insurance,” which mandates acceptance, so long as other certain conditions are met.  The final rule permits institutions to accept flood insurance policies issued by private insurers that do not meet the statutory and regulatory definition of private flood insurance so long as the private policy:

  • Provides coverage in the amount required by the flood insurance purchase requirement;
  • Is issued by an insurer that is licensed, admitted, or not disapproved by a state insurance regulator (including recognized surplus lines insurers)
  • Provides coverage for both the mortgagor and the mortgagee, with exceptions for a condominium association, cooperative, homeowners association, or other group; and
  • Provides sufficient protection of the designated loan, consistent with general safety and soundness principles and the institution must document this conclusion in writing.

In the June 18 webinar, the interagency regulators explained that regulated institutions could approve a private policy on the basis of this discretionary acceptance analysis without determining that the private policy would constitute a “private flood policy” as defined by the Biggert-Watters Act. Thus, an institution may conduct the discretionary acceptance analysis as an alternative to conducting the mandatory acceptance analysis.

Coverage by Mutual Aid Societies 

Finally, the final rule allows institutions to accept certain flood plans provided by mutual aid societies, such as an Amish Aid Plan, when certain conditions are met. The analysis for mutual aid society plans is substantially similar to the discretionary acceptance analysis described above with one important exception. In order to accept a plan provided by a mutual aid society, the institution’s federal regulator must have issued a determination that mutual aid society plans will qualify as flood insurance.

The statement from the interagency regulators that they expect lenders to conduct substantive reviews to determine if a private flood insurance policy is “at least as broad as” an SFIP is a signal that lenders must be ready to implement the final rule on July 1, 2019. Substantive review of a private insurance policy is a time intensive and resource heavy process.  Your institution will benefit greatly by implementing policies and procedures aimed at creating the most efficient private flood insurance policy review process while still ensuring compliance with the new rule.

Student Loans in Bankruptcy: What’s on the Horizon?

By Keith S. Anderson, Alexandra Dugan, Christopher L. Hawkins and Erin Malone-Smolla on Posted in Bankruptcy, Compliance, Student Loan Servicing

Student Loans in Bankruptcy: What’s on the Horizon?Federal law has long excepted student loans from discharge in bankruptcy in all but the rarest instances, recognizing the problems (and costs) associated with allowing borrowers to wipe out defaulted debts through a bankruptcy filing. However, as the issues of access to college and affordability become frequent topics in political discourse, new ideas for radical changes to the treatment of student loan debt in bankruptcy have been proposed. Lenders and servicers need to be up to speed on those proposals and ready to adjust their operations if any become law.

The American Bankruptcy Institute’s Commission on Consumer Bankruptcy Law released its Final Report and recommendations on April 12, 2019. The commission was created in 2016 to research and develop recommendations to improve the consumer bankruptcy system. The Final Report included the following recommendations regarding student loans:

  • Return to the Seven-year Rule: The commission recommends that the Bankruptcy Code return to the pre-1998 rule that allowed student loans to be discharged after seven years from the time the loan first became payable. Before the seven-year mark, student loans would be dischargeable only upon a finding of undue hardship. The commission reasoned that if a debtor has not been able to find lucrative employment to repay the loan by year seven, it is unlikely the debtor’s circumstances will change.
  • No Protection for Non-Governmental Loans: The commission recommends that private student  loans–any loan that is not made by a government entity or guaranteed or insured by the government–may be discharged. The commission explained that allowing debtors to discharge government loans could threaten the financial viability of government student loan programs. This recommendation to allow private loans to be discharged returns Section 523 of the Bankruptcy Code to its pre-2005 state.
  • Protecting Non-Student Debtors: The commission recommends that § 523(a)(8) should limit non-dischargeability to the student who benefited from the loan—not third-parties, such as parents that have guaranteed the student loan debt. The commission reasoned that these third parties did not benefit from the loans, and, therefore, should not have their discharge impaired.
  • Priority for Student Loan Debt and Treatment in Chapter 13: The commission believes that non-dischargeable student loans should be entitled to a priority status under § 507. Specifically, the commission recommends that loans should be treated as a new 11th priority, which would become the lowest bankruptcy priority. This would cause student loans excepted from discharge to be paid after all other priority claims. The commissioned reasoned that giving non-dischargeable student loans a priority will improve their treatment in a Chapter 13 plan.
  • The Brunner Test: Due to the open-ended nature of the Brunner test, the commission recommends that the third factor of Brunner (i.e., that the debtor has made good faith efforts to repay the loans) incorporate bad faith. Courts should deny the discharge of student loan debt in situations where the debtor has acted in bad faith in failing to make payments before filing for bankruptcy.
  • Brightline Rules: The commission recommends that the government employ a more cost-effective and efficient approach for collection from student loan borrowers who have filed for bankruptcy. Specifically, the commission believes that the Department of Education should not oppose the dischargeability of student loans for those (1) who are eligible for Social Security or veterans’ disability benefits or (2) who fall below certain poverty-level thresholds.
  • Avoiding Unnecessary Costs: Student loan collectors often litigate student loan discharge proceedings regardless of costs. Therefore, the commission recommends that informal litigation processes be used to lower costs for both the borrower and the creditor. For example, formal litigation discovery processes should be a last resort. If the borrower is able to provide satisfactory evidence of undue hardship, the creditor should agree that the debtor is entitled to a discharge of the student loan debt.
  • Alternative Repayment Plans: Statutory amendments should be created to address how Chapter 13 bankruptcy interacts with student loan repayment programs. Additionally, § 1322(b)(5) should be interpreted to apply to the cure and maintenance of student loan payments, and the Department of Education should accept this treatment under Chapter 13 plans. The commission reasoned that this would increase student loan payments and avoid unnecessary collection costs.

Congress has responded to the student loan bankruptcy debate, as it has in the past, with proposed legislation. On May 9, 2019, U.S. Sens. Elizabeth Warren (D-MA) and Dick Durbin (D-IL) and U.S. Reps. Jerrold Nadler (D-NY-01) and John Katko (R-NY-24) introduced a bicameral bill titled Student Borrower Bankruptcy Relief Act of 2019, which would eliminate the section of the Bankruptcy Code that makes federal and private student loans non-dischargeable. This would cause student loans to be treated like almost all other types of consumer debt under the Bankruptcy Code. The Senate bill has 15 additional Democratic co-sponsors, and the House bill has 12 additional Democratic co-sponsors.

We will continue to report developments in this area. Solutions have been proffered but a feasible framework remains elusive.

Upcoming Webinar

If these are areas you would like to learn more about, we encourage you to join us for our “Student Loans in Bankruptcy: What’s on the Horizon?” webinar, which is scheduled for Thursday, June 20, from 11:30 a.m. to 12:30 p.m. CT. This webinar will provide an overview of the debate on student loans and the ability to discharge such debts in bankruptcy. In particular, we will focus on the recently issued Final Report and recommendations from the American Bankruptcy Institute’s Commission on Consumer Bankruptcy, as well as the recently introduced legislation on the subject.

Does the New Debt Collection Rule Apply to First-Party Creditors?

By Andrew J. Narod, Lee Gilley, J. Riley Key and Jonathan R. Kolodziej on Posted in Automobile Finance, CFPB, Debt Collection, FDCPA, Payment Systems, UDAAP

Last November, Bradley’s Financial Services Perspectives team predicted that the Consumer Financial Protection Bureau’s (CFPB) then upcoming Notice of Proposed Rulemaking (NPRM) for the Does the New Debt Collection Rule Apply to First-Party Creditors? Fair Debt Collection Practices Act (FDCPA) might cause concern for first-party creditors. By way of background, the statutory scope of the FDCPA does not reach first-party creditors, instead applying only to entities collecting “debts owed or due … another.” We explained that the CFPB might attempt to use its unfair, deceptive, or abusive acts and practices (UDAAP) authority to apply the standards set forth in its NPRM industry-wide in light of the CFPB’s October 2018 Consent Order with Cash Express LLC, where the CFPB used its UDAAP authority to apply provisions of the FDCPA to a non-debt collection company.

Six months later, in May, the CFPB finally published its long-awaited NPRM. Sure enough, certain provisions in this NPRM imply that it might apply to first-party creditors, which should raise concerns for auto lenders, installment lenders, mortgage servicers, card issuers, and other first-party creditors.

Possible Application to First-Party Creditors via UDAAP

The NPRM’s scope is extensive; it includes proposed rules concerning limited-content voice messages to avoid third-party disclosures, controversial limits on frequency of contact by debt collectors, and a variety of other proposed rules. At the outset of the NPRM, the CFPB explains it relies primarily on its authority to issue rules implementing the FDCPA; and, therefore, the proposed rules would “impose requirements on debt collectors, as that term is defined in the FDCPA” (NPRM at 4). Such language would suggest no extension of rules to first-party creditors, who are generally not “debt collectors” under the FDCPA. But, passages embedded within the NPRM suggest otherwise.

On page 30 of the NPRM, the CFPB proposes to expand upon the FDCPA’s non-exhaustive list of examples of unlawful conduct to outline additional unlawful acts for debt collectors. While those additions would seem to apply only to debt collectors as currently defined by the FDCPA, footnote 69 states:

Where the Bureau proposes requirements pursuant only to its authority to implement and interpret sections 806 through 808 of the FDCPA, the Bureau does not take a position on whether such practices also would constitute an unfair, deceptive, or abusive act or practice under section 1031 of the Dodd-Frank Act. Where the Bureau proposes an intervention both pursuant to its authority to implement and interpret FDCPA sections 806 through 808 and pursuant to its authority to identify and prevent unfair acts or practices under Dodd-Frank Act section 1031, the section-by-section analysis explains why the Bureau proposes to identify the act or practice as unfair under the Dodd-Frank Act. (NPRM at 31, emphasis added)

The highlighted portions of this footnote should concern first-party creditors, because the NPRM suggests therein that the CFPB may seek to enforce the unlawful practices it defines in this NPRM pursuant to its powers to regulate “unfair, deceptive or abusive acts or practices” under section 1031 of the Dodd-Frank Act. That enforcement, if actually undertaken, would cover not just debt collectors as defined by the FDCPA, but arguably any “covered person or service provider” subject to the reach of the CFPB, including first-party creditors.

Another provision of the NPRM also suggests the application of specific FDCPA rules to first-party creditors. At first blush, the CFPB’s controversial proposed limitations on telephone calls to consumers to one call per week absent an exception appears to apply to debt collectors as defined by the FDCPA (NPRM at 156). But, again, a footnote suggests that there may be future attempts to extend the rule to first-party creditors. Footnote 331 to the NPRM states:

The Bureau has not determined in connection with this proposal whether telephone calls in excess of the limit in proposed § 1006.14(b)(2)(ii) by creditors and others not covered by the FDCPA would constitute an unfair act or practice under Dodd-Frank Act 1031(c) if engaged in by those persons, rather than by an FDCPA-covered debt collector. (NPRM at 156)

Just as with footnote 69, footnote 331 leaves open the possibility that the CFPB will enforce the limitation on weekly calls to first-party creditors.

Rulemaking by Enforcement?

Historically, the CFPB has been criticized for its perceived tendency to regulate by enforcement. In other words, some industry participants have observed that the CFPB tends to announce new rules—particularly under its UDAAP powers—through enforcement proceedings and consent orders. This perception, whether right or wrong, leads to the uncomfortable concern that any single financial services industry participant might be subject to a claim of UDAAP violations for conduct that has not been specifically targeted in any statute or regulation.

For instance, what if a hypothetical auto lender is servicing an account that is just less than 30 days late. If that auto lender places a call to its customer on Monday and discusses a promise to make a payment to bring the account current, will the lender be allowed to call the customer later that week if the promise is not kept? As industry participants know, it is critical in many cases to conduct early follow up on recent delinquencies in order to maximize repayment—particularly in the subprime space. The follow-up call is critical.

Current law excludes first-party creditors, such as the hypothetical auto lender, from the scope of the FDCPA. For a debt collector, the NPRM suggests that a second telephone call to this delinquent customer within a seven-day period would be an unfair, deceptive or abusive act or practice. Considering the text of footnote 331, it appears at least plausible that the hypothetical auto lender should have some concern that the CFPB might extend this rule to cover its collection calls, too. What is more concerning is the fact that the hypothetical auto lender might not find out about the application of the rule to first-party creditors until after it has been made a party to an enforcement action.

One other concern for this hypothetical auto lender reaches beyond the CFPB. Some states have enacted their own debt collection laws that expand the reach of the FDCPA’s enumerated unfair and deceptive acts to first-party creditors. It is eminently possible that certain states might enforce the NPRM’s proposed rules to first-party creditors under those statutes. Additionally, Section 1042 of the Dodd-Frank Act provides state attorneys general and state regulatory agencies with the ability to enforce UDAAP violations, so a state attorney general or state regulator may also seek to enforce the NPRM through this avenue.

Timing of Implementation

It should be noted that the NPRM is not yet law and may still change. The comment period following this rulemaking will last for 90 days, with a possible extension of 60 days. Thereafter, there will be a period for the CFPB to review comments and revise the NPRM. The revised proposed rulemaking will then be published, likely in early 2020, and go into effect one year later. Thus, the changes might not take effect until 2021.

Has the FDCPA’s Reach Indeed Expanded?

Unless the CFPB alters course and explicitly carves out first-party creditors from the NPRM, we believe that certain provisions of the FDCPA will be expanded to cover first-party creditors when the NPRM becomes law. While unlikely, the CFPB could announce that it will adopt all of its regulations in the NPRM as examples of unfair, deceptive, or abusive acts or practices that apply to all entities it regulates—including first-party creditors. More likely, the CFPB would abstain from explicitly expanding UDAAP for now, but state laws or state regulators through their UDAAP authority may decide to apply the NPRM’s regulations to first-party creditors.

It is also important to recognize that in the absence of an explicit carve out for first-party creditors, a more idealistic administration than the one we have presently may seek to penalize past conduct in violation of the NPRM using a UDAAP theory. This is particularly true since the CFPB has essentially already gone through the exercise of defining the conduct covered by the NPRM as “conduct the natural consequence of which is to harass, oppress, or abuse . . . .” (NPRM at 30, emphasis added).

It is far from certain that these regulations will be adopted in their current form. Yet, if the NRPM does become law in its current form, it would be hard to take the position that the FDCPA’s reach has not expanded in some form or fashion. We expect to provide more thoughts on this NPRM as the comment and revision process continues.

New “Do Not Sell” Nevada Privacy Law Requirement Rolls Out Ahead of CCPA Deadline

By Erin Jane Illman and Steve Snyder on Posted in CCPA, Cybersecurity, Data Privacy, Debt Collection

New “Do Not Sell” Nevada Privacy Law Requirement Rolls Out Ahead of CCPA DeadlineStates across the country are floating privacy-related legislation in many forms, and California continues to consider many potential amendments to the landmark California Consumer Privacy Act (Cal. Civ. Code 1798.100 et seq., “CCPA”), which goes into effect on January 1, 2020. On May 30, a law of significance to sellers of consumer personal information was signed into law in Nevada, and it will become effective October 1, 2019, three months prior to the CCPA.

Senate Bill 220 (SB 220) is significant because, similar to CCPA, it requires sellers of consumer personal information to provide consumers with an option to opt-out of the sale of their information. SB 220 is an amendment to existing provisions of Chapter 603A of the Nevada Revised Statutes that will “prohibit[] an operator of an Internet website or online service which collects certain information from consumers in this State from making any sale of certain information about a consumer if so directed by the consumer.”

SB 220 establishes that an operator must provide a “designated request address through which a consumer may submit a verified request” (Sec. 2.1) and requires that upon receiving such a request, the operator “shall not make any sale of any covered information the operator has collected or will collect about that consumer” (Sec. 2.3.). While the CCPA defines selling as exchanging for “monetary or other valuable consideration” (Cal. Civ. Code 1798.140(t)(1)), SB 220 is narrower in restricting the definition to an exchange for “monetary considerations” (Sec. 1.6.). Also, despite the original bill having a private right of action, that option was removed in an amendment prior to the final approved bill. Therefore, enforcement of this provision will be by the Nevada attorney general who can seek fines or injunction for non-compliance.

Businesses that sell consumer information need to take heed to this changing landscape and consider these new deadlines in their implementation strategies. This Nevada law will be in effect in under three months, and for many companies a broad right for consumers to opt-out of the sale of their information is a significant operational and business change that the business has not previously had to contemplate. It is imperative that companies take the steps now to understand what data they collect, how it is used, and with whom it is shared or exchanged for value. As privacy laws continue to evolve, it is likely that legislatures will provide companies with shorter compliance timelines, as companies may be expected to be on notice of this focus on privacy as a core consumer protection. This Nevada law will likely be the first such change, but it is highly likely more will follow even beyond the CCPA.

Where a “Fair Ground of Doubt” Can Create Comfort: Taggart v. Lorenzen

By Karlene A. Archer and Christopher L. Hawkins on Posted in Bankruptcy, Mortgage Servicing, Supreme Court

Where a “Fair Ground of Doubt” Can Create Comfort: <i>Taggart v. Lorenzen</i>In a unanimous, and perhaps unsurprising, decision, the Supreme Court determined that a creditor may be held in civil contempt for violating the discharge injunction if there is “no fair ground of doubt” as to whether the creditor’s conduct was barred by the order placing that injunction.  The Supreme Court declined to adopt the standard of either of the courts below – the bankruptcy court’s strict liability standard or the Ninth Circuit’s good faith belief “even…if unreasonable” standard.  Instead, the Supreme Court determined that “civil contempt may be appropriate if there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful.”

In the underlying case, a plaintiff in a prepetition state court suit sought post-petition attorneys’ fees from the defendant after the defendant received a discharge in his Chapter 7 bankruptcy case.  The state court allowed the plaintiff to collect those fees, and the defendant filed a motion with the bankruptcy court to hold the plaintiff in civil contempt for violation of the discharge injunction. The bankruptcy court initially determined the fees were exempt from the discharge order because the defendant had “returned to the fray” in state court post-petition. The district court disagreed, and on remand, the bankruptcy court held that if the fees were subject to the discharge injunction, the plaintiff was in violation of that injunction because it was “aware of the discharge” and “intended the action.”  The standard, the district court stated, was similar to the “strict liability” standard found in other areas of the law.

On further appeal, the Ninth Circuit applied a standard far from strict liability. It held that a creditor could not be held in contempt for violation of the discharge injunction if it had a “good faith belief” that the discharge injunction did not apply to its action, “even if the creditor’s belief is unreasonable.”

Both the district court’s and the Ninth Circuit’s standards would have proven problematic and expensive for all parties. The district court’s strict liability standard would have resulted in more cautious behavior by creditors, including more frequent requests for an advance determination of the applicability of the discharge to a specific course of conduct. Conversely, the Ninth Circuit’s subjective standard would have relied too heavily on “difficult-to-prove states of mind,” leading to more costly discharge violation litigation for both debtors and creditors.

The Supreme Court clarified the standard to be used in determining whether a creditor has violated the discharge injunction. The Supreme Court analyzed the historical use of an objective standard grounded in reasonableness and fairness, and adopted a standard found in an 1885 case – that “civil contempt ‘should not be resorted to where there is [a] fair ground of doubt as to the wrongfulness of the defendant’s conduct.’” The Supreme Court reasoned that under the “fair ground of doubt” standard, a creditor’s good faith can be analyzed, but only under that objective standard of reasonability.

The Supreme Court’s objective standard is good news for everyone. An objective standard grounded in reasonableness and good faith levels the playing field for the post-discharge relationship between creditors and debtors. Creditors may be less risk-averse in their engagement with debtors, particularly in those areas in which there is a “fair ground of doubt” as to the application of the discharge injunction. This environment will benefit debtors who seek information about their loans or loss mitigation after their discharge. As we recently discussed, servicing mortgage loans for borrowers who have received a discharge of the debt is fraught with issues. Further, in the financial services arena, there are non-bankruptcy laws and regulations, such as the FDCPA and the FCRA that seem to conflict with the Bankruptcy Code. These conflicts, which make the post-discharge relationship difficult to navigate, have created what is practically a universally recognized “fair ground of doubt.” A creditor acting reasonably and in good faith may therefore find a shield in the Supreme Court’s new standard.

Escrow Accounts and Chapter 13 Bankruptcy: Inherent Problems with Form B410A

By Glenn E. Glover on Posted in Bankruptcy, Credit Reporting Industry, FCRA, FDCPA, Mortgage Servicing, Secured Creditors

Escrow Accounts and Chapter 13 Bankruptcy: Inherent Problems with Form B410AThe intersection of Chapter 13 bankruptcy and escrow accounts is complicated and confusing.  Since 2011, various bankruptcy rule and form changes have occurred in an effort to eliminate perceived problems with Chapter 13 escrow issues. This article explains how one of these changes – a revised version of a proof of claim attachment form – actually added to the confusion instead of alleviating it, and how that confusion can be costly to servicers.

Official Form B410A

One of the changes was a new form attachment for mortgage proofs of claim effective December 1, 2011 – Official Form B10A (entitled “Mortgage Proof of Claim Attachment”). An accompanying revision to Bankruptcy Rule 3001 mandated use of Form B10A if a security interest is claimed on the debtor’s principal residence. Four years later, effective December 1, 2015, Form B10A was superseded by a new Official Form B410A (also entitled “Mortgage Proof of Claim Attachment”). Unfortunately, Form B410A often causes issues at the end of a successful Chapter 13 case.

Part 3 of Form 410A contains numerous line items to calculate the prepetition arrearage. They include amounts for “Escrow deficiency for funds advanced” and “Projected escrow shortage,” which the Official Instructionsmake relatively clear are the same amounts as “escrow deficiency” and “escrow shortage” as defined by RESPA in Regulation X, 12 C.F.R § 1024.17. The line item for “Principal and interest” must include only the principal and interest component of the missed prepetition payment and cannot include any escrow portion.

The Disconnect Caused by B410A

Unlike former Form B10A, current Form B410A does not allow a servicer to include the escrow component of the missed prepetition payments in the prepetition arrearage. Instead, escrow is severed from those missed prepetition payments and accounted for in the arrearage by including any escrow shortage/deficiency (or surplus) identified by a petition-date escrow analysis as a separate line item(s).  Few, if any, servicing systems of record, however, allow a servicer to simply change the escrow amount of missed prepetition payments. Instead, those payments remain fixed after the bankruptcy case is filed and must be satisfied to advance the contractual due date of the loan. Simply put, the end result is that the servicer’s system of record requires one escrow amount to satisfy missed prepetition escrow payments, and Form B410A requires an escrow shortage/deficiency amount that is virtually never the same. This means that at the end of a successful Chapter 13 case, the mismatch of these two amounts presents a situation in which the debtor can never be precisely “current.”

As a hypothetical, suppose the borrower misses six $1,000 monthly payments each containing a required principal and interest component of $800 and a required escrow component of $200. This means he has missed $4,800 of prepetition principal and interest payments and a $1,200 of prepetition escrow payments. Further suppose that the petition-date escrow analysis recognizes an escrow shortage of $1,040. Part 3 of Form 410A will therefore include $4,800 for principal and interest and $1,040 for escrow in the prepetition arrearage, or a total amount of $5,840. The system of record, though, needs $6,000 to fully pay the six missed prepetition payments of $1,000 each. Holding numerous other variables constant for illustration purposes, this means that at the end of the Chapter 13 case the borrower will be $160 short of being current on his payments.

The Potential Financial Impact

At the end of a Chapter 13 case, upon completion of the Chapter 13 trustee’s repayment of the prepetition arrearage, she is required to file a “notice of final cure payment” pursuant to Bankruptcy Rule 3002.1(f).  The servicer is then required to file a response pursuant to subsection (g) stating whether or not the debtor is current on his postpetition payments.  In situations like the above hypothetical (which may involve “mismatch” amounts much greater than $160), the servicer will often simply bring the debtor current and waive the difference when performing reconciliation in preparation for a response. Less frequently, the servicer will respond that the debtor is not current but end up writing the difference off because of further debtor objection. Either way, bringing the debtor’s loan current when it is not in fact current often causes an actual monetary loss to the servicer.  Over time, these losses of course add up.

Conclusion

This issue will become more and more common in the near future, as three-year Chapter 13 plans based on servicer proof of claims filed after December 1, 2015, approach their end date, and continue to be common so long as Form B410A remains in its present form. Servicing bankruptcy departments, specifically staff and management charged with responding to Chapter 13 trustee notices of final cure, must be aware of this issue. It is not difficult to compare the escrow amounts in the Form B410A with the sum of the missed prepetition escrow payments to determine if there is a substantial difference and whether or not the difference is contributing to a debtor’s delinquency at the end of a Chapter 13 case.  Proper education of staff and management on this issue can directly assist servicers in avoiding substantial write-offs.

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