HUD Charges Facebook with Violating the Fair Housing Act over Targeted Ads

HUD Charges Facebook with Violating the Fair Housing Act over Targeted AdsThe United States Department of Housing and Urban Development (HUD) recently announced charges against social media company Facebook for violating the Fair Housing Act (42 U.S.C. 3601-3619 and 3631). The charges derive from Facebook enabling housing advertisers to target Facebook users based on protected class status: race, nationality, religion, color, familial status, sex, and disability. HUD Secretary Ben Carson, in a March 28, 2019 press release, stated that “Facebook is discriminating against people based on who they are and where they live . . . . Using a computer to limit a person’s housing choices can be just as discriminatory as slamming the door in someone’s face.” HUD alleges that Facebook’s advertising platform is designed in a way that “ads for housing and housing-related services are shown to large audiences that are severely biased based on characteristics protected by the Act . . . .” HUD further alleges that Facebook’s advertising platform provides tools to advisers to exclude members falling into certain categories from receiving housing-based ads.

These allegations are not new. In late 2016, the Obama administration began a preliminary investigation into Facebook based on similar allegations, and HUD Secretary Carson filed an administrative complaint in August 2018. These allegations stemmed from a 2016 Pro Publica report claiming that housing advertisers could use Facebook’s advertising platform to exclude users based on protected categories. In addition, several non-profit fair housing organizations filed a federal lawsuit in the Southern District of New York. These actions were all originally discussed on the Bradley blog in September 2018.

What makes HUD’s latest charges especially concerning to housing advertisers and advertising platforms is that they come just a week after Facebook settled multiple lawsuits with housing and civil rights organizations by agreeing to conduct a major overhaul of its ads software. Specifically, Facebook has removed housing advertisers’ ability to micro-target individuals based on certain categories such as age, gender, familial status, sexual orientation, ZIP code, national origin, etc. Facebook also paid around $5 million in costs and legal fees. HUD’s charges are yet another indication that it will take aggressive action to enforce the Fair Housing Act.

HUD’s charges are also indicative of its commitment to applying the Fair Housing Act to new modes of communication, advertising, and technology. Social media and other forms of big data give housing advertisers unprecedented ability to target both mass audiences as well as specific groups through segmentation and micro-targeting. There are obvious benefits to housing advertisers’ ability to cheaply and efficiently reach potential customers. However, the nature of this type of advertising lends itself to potential violations of the Fair Housing Act. Add to this mix non-profit fair housing groups actively seeking to file private actions and a HUD that has proven to be aggressive in its enforcement of the act, and you have a particularly dangerous situation for housing advertisers and advertising platforms alike. Thus, it is important that financial institutions, lenders, real-estate brokers, property managers, and any other organizations that advertise real estate or real-estate services over social media have a robust set of policies and procedures regarding the use of social media advertising. Moreover, all employees involved in these institutions’ social media presence should be sufficiently trained on policies and procedures designed to prevent Fair Housing Act violations.

The New Prepaid Rule is Here. What Now? Bradley to Hold April 23 Webinar

The Consumer Financial Protection Bureau’s (CFPB) new Prepaid Rule went into effect on April 1, 2019. At a high level, the Prepaid Rule amends portions of the Truth in Lending Act and the Electronic Funds Transfer Act by extending a number of credit card-like protections to “prepaid accounts”: pre-acquisition and initial disclosures, change in terms notices, periodic statements, error resolution procedures, and regulating overdraft credit features. While each of these areas warrant close scrutiny to ensure compliance with these new restrictions, a couple items bear particular mention.

First, the Prepaid Rule is broader than prepaid credit cards. The new rule adds the term “prepaid account” to the definition of “account” in Regulation E. 12 CFR 1005.2(b)(3). The rule goes on to define “prepaid account” to include items that have traditionally been thought of in the industry as prepaid accounts: (1) a payroll card account, (2) a government benefit account, or (3) an account that is marketed or labeled as “prepaid” and is redeemable upon presentation at multiple, unaffiliated merchants. The new rule goes one step further, however, and includes the following in its definition of “prepaid account”: an account that is (1) issued on a prepaid basis in a specific amount or capable of being loaded with funds after issuance; (2) has a primary function of conducting transactions with multiple, unaffiliated merchants, conducting transactions at ATMs, or conducting person-to-person (P2P) transfers; and (3) is not a checking account, share draft account, or negotiable order of withdrawal (NOW) account. This final provision greatly expanded the universe of accounts subject to the Prepaid Rule, as it includes products such as person-to-person transfer accounts that have not traditionally been considered prepaid accounts.

The second item that bears particular mention is the upcoming account agreement submission deadline. Under the Prepaid Rule, issuers of prepaid accounts are generally required to submit prepaid account agreements that the issuer offers within 30 days of a triggering event: (1) when an issuer offers a new prepaid account agreement; (2) amends a prepaid account agreement; or (3) ceases to offer a prepaid account agreement (12 CFR 1005.19). According to the text of the rule, the first submission deadline for prepaid account agreements offered as of April 1, 2019, is May 1, 2019. As a result, industry participants should be preparing for their first submission in the next couple of weeks. Note, however, that entities with less than 3,000 open prepaid accounts are not required to make submissions to the CFPB under the de minimis exception.

Upcoming Webinar

Webinar, Computer, Notepad, Pen, Glasses, PhoneIf this is an area you would like to learn more about, we encourage you to join us for “The New Prepaid Rule is Here. What Now?” webinar, which is scheduled for Tuesday, April 23, from 11:30 a.m. to 12:30 p.m. CT. This webinar will discuss the challenges posed by the prepaid rule and offer practical tips to ensure compliance with the new requirement. Click here to RSVP to the webinar. Webinar login information will be provided one day prior to the event.

This will be the third webinar in our Payment Systems Webinar Series, which will cover hot topics and common pitfalls for entities navigating the compliance challenges of this dynamic industry — from traditional products (e.g., credit cards, debit cards, prepaid cards, gift cards, Automated Clearing House transactions, rewards programs) to emerging technologies (e.g., mobile payments, mobile wallets, cryptocurrencies).

Part IV: Navigating the Maze of Servicing Discharged Debt

Part IV: Modifications Post-Discharge

Part IV: Modifications Post-DischargeWelcome to Part IV of our series on servicing discharged mortgage debt. This part will discuss modifying a borrower’s loan post-discharge. (If you missed Part I, Part II or Part III, go ahead and catch up.) Part III discussed the legal ambiguity surrounding loan modifications when the borrower discharges personal liability in bankruptcy. However, as a practical matter, regulators, investors, and many bankruptcy courts expect lenders and servicers to evaluate borrowers for possible loan modifications post-discharge (whether such an expectation violates the Contracts Clause is a question for the academics among us). Notwithstanding this expectation, lenders and servicers should proceed with caution when processing post-discharge requests for loss mitigation assistance, as courts are unlikely to accept widespread industry practice as a defense to discharge injunction violations. Set forth below are some items to consider regarding loss mitigation practices for discharged borrowers.

1. Templates exist for a reason, but consider whether adjustments would mitigate risk.

Investors often provide templates or required language to document loan modification agreements. Some specifically may include language to reflect a bankruptcy discharge. For example, the FNMA loan modification agreement (Form 3179) provides:

Notwithstanding anything to the contrary contained in this Agreement, Borrower and Lender acknowledge the effect of a discharge in bankruptcy that has been granted to Borrower prior to the execution of this Agreement and that Lender may not pursue Borrower for personal liability.  However, Borrower acknowledges that Lender retains certain rights, including but not limited to the right to foreclose its lien evidenced by the Security Instrument under appropriate circumstances.  The parties agree that the consideration for this Agreement is Lender’s forbearance from presently exercising its rights and pursuing its remedies under the Security Instrument as a result of Borrower’s default thereunder.  Nothing in this Agreement shall be construed to be an attempt to collect against Borrower personally or an attempt to revive personal liability.

If templates do not include similar disclaimers, servicers should strongly consider discussing and seeking approval from the investor to incorporate such disclaimers in their forms. Alternatively, servicers could consider sending separate correspondence to the borrower confirming that personal liability has been extinguished by the bankruptcy discharge and perhaps including some acknowledgement to that effect to be signed by both parties.

2. Evaluate treatment of borrowers who have surrendered.

Courts generally view a borrower’s intent to surrender the property — via statement of intention or confirmed plan — as evidence that the borrower no longer wants to continue the relationship with the servicer or stay in the property. To mitigate risk, it may be advisable to avoid soliciting and entering into loan modifications following a borrower’s stated intent to surrender the property. However, such broad prohibitions are likely impractical. Many “surrender” discharged borrowers continue to make voluntary payments and may even seek loan modifications. Additionally, some states — such as California and Nevada — have pre-foreclosure requirements that may include loss mitigation solicitation.

Servicers should develop robust procedures regarding solicitation of discharged borrowers for loss mitigation to avoid borrowers who have surrendered. Within these procedures, servicers should carefully consider and outline their process for credit pulls – even soft credit pulls – for borrowers who have indicated an intent to surrender. In the event such borrowers initiate and request loss mitigation, carefully tailored communications are critical to minimize the risk of violating the discharge injunction. Servicers should consider drafting and reviewing these communications on a one-off basis, rather than relying on forms, to ensure all of the borrower’s circumstances are considered. Personalized, individual analysis decreases the likelihood of borrower complaints or litigation for post-discharge conduct relating to modification outreach.

3. Beware of court-specific loss mitigation requirements.

Among the nearly 100 bankruptcy courts across the country, approximately two dozen courts or individual bankruptcy judges have adopted local rules, entered administrative orders or published formal guidelines permitting debtors and creditors to engage in loss-mitigation negotiations under court supervision. These bankruptcy loss-mitigation programs share some common traits, such as the entry of an order setting deadlines and establishing certain ground rules for the loss-mitigation process. However, many variations exist, including the use of an electronic portal for all communications related to the loss-mitigation process and the appointment of a mediator. While many post-discharge loss mitigation efforts occur after a bankruptcy case has closed, it is important for servicers to stay apprised of all local court requirements related to loan modifications.

4. Conduct specialized training for customer-facing employees.

To mitigate risk, it is critical that lenders and servicers develop and conduct cross-department training to educate employees on the complexity and risks of solicitation and loan modifications for discharged borrowers. Key concepts can also be memorialized in FAQ or talking points, particularly for employees handling calls or customer complaints.

We hope that you have enjoyed our series on servicing discharged debt and gleaned helpful information to better assess decisions on servicing of these accounts. If you have any suggestions for further posts or series on servicing bankruptcy accounts, please let us know.

Student Loan Servicers’ Fight over Federal Preemption of State Regulation May End Up in the Supreme Court

Student Loan Servicers' Fight over Federal Preemption of State Regulation of May End Up in the Supreme CourtIn courts across the country, servicers are facing off against states and borrowers over the extent to which federal laws preempt state regulation of federal student loan servicers. Numerous states have stepped up their enforcement activity against student loan servicers and begun enacting new laws aimed at regulating student loan servicing, partially in response to what the states view as a slowdown in federal oversight. Some servicers of federal student loans, pushing back against the state regulations, have argued that the state laws impermissibly conflict with the federal student lending laws.

The dispute largely centers on the Higher Education Act (HEA), which servicers argue preempts all state regulation of federal student loan servicers. Because the HEA and its implementing regulations govern the procedures and standards that servicers must follow when servicing federal student loans, servicers have argued that the HEA preempts all state laws that potentially conflict with the HEA, such as state disclosure and licensing laws. States and borrowers disagree that the HEA completely preempts the state regulation, instead contending that the HEA was never intended to completely preempt state laws and leaves room for states to regulate many aspects of student loan servicing.

The Department of Education, which regulates the federal student loan industry, also weighed in on the debate. The department published an interpretation that sides with the servicers, concluding that state regulation of federal loan servicers is preempted by the HEA. Courts are to give deference to the department’s interpretation, but it is not binding on their decisions. Accordingly, some courts, finding the department’s interpretation persuasive, have held that preemption applies, while other courts have rejected preemption despite the department’s conclusion.

Below are a few of the cases currently progressing through the court system that raise this preemption issue:

Lawson-Ross v. Great Lakes Higher Education Corp. (11th Circuit)

Student loan borrower plaintiffs brought an action against student loan servicer Great Lakes asserting various state common law claims and alleging that Great Lakes misled the plaintiffs with regard to their eligibility for the Public Service Loan Forgiveness program. Noting that federal laws and federal regulations—including the Higher Education Act—impose detailed and complex disclosure requirements on student loan servicers, the district court held that the federal laws preempted the plaintiffs’ state law claims. The court found preemption applied even though the plaintiffs alleged that Great Lakes made affirmative misrepresentations, stating that the failure to provide accurate information is, in essence, covered by the federal disclosure requirements. The court relied upon and deferred to the Department of Education’s interpretation of the HEA. The plaintiffs have appealed the district court’s ruling to the Eleventh Circuit Court of Appeals, where it is currently pending before the Third Circuit Court of Appeals.

Commonwealth of Pennsylvania v. Navient Corporation et al. (Third Circuit)

The Pennsylvania attorney general brought an action against loan servicer Navient in federal court over alleged abuses in its servicing practices, including allegations related to the origination and servicing of both federal and private student loans. Navient denied the allegations and filed a motion to dismiss arguing, in part, that the HEA preempted the state-law claims. The district court denied Navient’s motion to dismiss, holding that the HEA did not expressly or through conflict preemption foreclose the commonwealth’s state law claims brought under the Pennsylvania Unfair Trade Practices and Consumer Protection Law. The district court determined that the relevant language from the HEA, that federal student loans “shall not be subject to any disclosure requirements of any State law,” 20 U.S.C. § 1098g, did not cover the type of affirmative misconduct alleged by the commonwealth and thus was not directly governed by HEA disclosure requirements. Recognizing that the preemption issue is of “nationwide importance,” the district court certified an interlocutory appeal of the preemption issue. The interlocutory appeal is currently pending before the Third Circuit Court of Appeals.

Student Loan Servicing Alliance v. District of Columbia (D.C. Circuit)

The Student Loan Servicing Alliance (SLSA), on behalf of the student loan servicers that make up its membership, brought action against the District of Columbia alleging that the District of Columbia’s Student Loan Ombudsman Establishment and Servicing Regulation Amendment Act, as well as emergency rules promulgated under that statute, were preempted by federal law and seeking an order permanently enjoining the district from enforcing the law and regulations against student loan servicers. The district court held that the D.C. law and regulations are preempted under principles of conflict preemption as they relate to the servicing of Federal Direct Loan Program and government-owned Federal Family Education Loan Program (FFELP) loans, but not with respect to privately owned, commercial FFELP loans. The decision is currently on appeal by both parties to the D.C. Circuit Court of Appeals.

Nelson v. Great Lakes Educational Loan Services, Inc. (Seventh Circuit)

Plaintiffs brought a putative class action claiming that Great Lakes steered borrowers into less favorable forbearance and deferment programs rather than income-driven or alternative repayment plans. Great Lakes moved to dismiss the plaintiff’s state law claims based on preemption. Great Lakes argued that the HEA and Department of Education’s comprehensive regulations prescribe the disclosures for repayment options provided to borrowers, and thus preempt state laws relating to the same. The district court agreed with Great Lakes, holding that the HEA preempted the state law claims and dismissed the case. The plaintiffs appealed to the Seventh Circuit Court of Appeals. The appeal has been fully briefed and argued, and is pending a decision.

The appeals in the above cases could lead to a split among the circuits on whether federal law preempts state regulation of federal student loan services, which may result in the U.S. Supreme Court weighing in on this significant issue.

A Cannabis Banking Bill, Sitting on Capitol Hill

A Cannabis Banking Bill, Sitting on Capitol HillLegislation that would pave the way for financial institutions to transact with cannabis-related businesses operating in states that have legalized marijuana (herein “cannabis-related legitimate businesses”) is quickly working its way through the House of Representatives.

The SAFE Banking Act of 2019 was introduced in the House by Rep. Ed Perlmutter (D-CO) on March 7, 2019. The bill is co-sponsored by 158 representatives—15 Republicans and 143 Democrats, representing over a third of the House. On March 28, 2019, the bill advanced, with bipartisan support, through the House Financial Services Committee by a vote of 45-15. The bill now heads to the House Judiciary Committee and is poised for a floor vote as early as May. If passed in the House, the bill still faces an uphill battle to make it through the Republican-controlled Senate.

As discussed in a previous post in this series, many financial institutions have been hesitant to transact with cannabis-related legitimate businesses given the ambiguity created by divergent state and federal cannabis laws and uncertain federal guidance. The bill seeks to remove many of these obstacles at the federal level, thereby opening the doors of financial institutions to cannabis-related legitimate businesses. While not an exhaustive list, some of the key aspects of the bill include:

  • Prohibiting federal regulators from terminating or limiting depository insurance solely because a financial institution provides services to a cannabis-related legitimate business.
  • Prohibiting federal regulators from taking adverse actions against, or otherwise discouraging, financial institutions for providing services to cannabis-related legitimate businesses.
  • Protecting depository institutions from civil, criminal, or administrative forfeiture for providing financial services to cannabis-related legitimate businesses.
  • Amending the suspicious activity reporting guidelines for cannabis-related legitimate businesses.
  • Directing the Financial Crimes Enforcement Network to issue guidance and exam procedures for financial institutions transacting with cannabis-related legitimate businesses.

Proponents of the bill argue that it will add legitimacy and transparency to the state-legal cannabis industry by placing it under the umbrella of federal banking laws, reduce violent crime, remove large amounts of unregulated and unprotected cash from the streets, and make communities safer. The bill has received strong support from both the American Bankers Association and the Credit Union National Association.

While it is still just a bill on Capitol Hill with a long, long journey ahead, the SAFE Banking Act of 2019 represents a significant step toward cannabis-related legitimate businesses having access to financial institutions. Financial institutions would be wise to keep abreast of this rapidly evolving space and be prepared to update their compliance programs accordingly.

First Federal Legislation Proposed Relating to Protection of Biometrics

First Federal Legislation Proposed Relating to Protection of BiometricsAmidst privacy concerns and booming technological innovation, Sens. Roy Blunt (R-Mo.) and Brian Schatz (D-Hawaii) have introduced a bill proposed as the “Commercial Facial Recognition Privacy Act of 2019” (CFRPA) targeting arguably the most “personal” biometric identifier—our face. While several states have enacted legislation relating to protection of biometric identifiers, this is the first federal legislation targeted at consumer protection using biometrics, namely facial recognition (FR). The purpose of the bill is to prohibit certain entities from using FR technology to identify or track an individual without obtaining the affirmative consent of that end user. Below is a high-level overview of the key components proposed by the bill:

  • Prohibited Activity and General Requirements
    • Using FR technology to collect FR data on an individual requires “affirmative consent,” which must involve an individual, voluntary and explicit agreement to the collection and data use policies of the covered entity.
      • When obtaining consent, a covered entity must make available to the individual detailed notice describing the specific practices of the processor in terms that end users are able to understand regarding the collection, storage, and use of FR data.
      • The consent must include a description of the specific collection, use and storage practices of any third-party that processes FR data on behalf of a covered entity.
      • Generally, a covered entity cannot condition service on consent unless the FR technology is required for the service.
    • FR cannot be used to discriminate against an individual.
    • Both the covered entity and any third-party that processes FR data on behalf of a covered entity must employ a meaningful human review prior to making any final decision based on FR technology, if the decision could result in physical or financial harm, or be unexpected or offensive to the individual.
    • Sharing FR data with an unaffiliated third party requires affirmative consent separate than that required for general use.
  • Exceptions
    • Applications that do not use FR technology to: (1) analyze unique personal facial features in still or video images, (2) assign a unique persistent identifier, or (3) personally identify a specific individual.
    • Controllers that use FR applications as a “security application” (i.e., loss prevention or application intended to prevent criminal activity such as shoplifting and fraud) are not subject to the affirmative consent requirement; however general disclosure, anti-discrimination, and sharing requirements still apply.
  • Security Requirements and Regulation/Enforcement
    • CFRPA requires FR providers to meet data security, minimization and retention standards as determined by the Federal Trade Commission (FTC) and the National Institute of Standards and Technology, which would be promulgated within 180 days of the act’s enactment.
    • Violation of the law shall be deemed an unfair or deceptive act or practice under the FTC Act.
    • State attorneys’ general have the power to enforce the act via civil action.
    • State law can provide greater protection and is not preempted except as inconsistent with CFRPA.
    • The proposed bill does not include an explicit private right of action for individuals.

If Enacted, How Will This Affect Existing State Biometric Laws?

Currently, only three states — Illinois, Washington and Texas — have biometric privacy laws. The current Washington statute does not specifically encompass FR technology, however, a newly proposed Washington state law would specifically address the use of FR. On the horizon, California’s sweeping new privacy law, the California Consumer Privacy Act, which will become effective on January 1, 2020, will also apply to biometric data. Additionally, at least six other states have proposed biometric laws (Alaska, Delaware, Florida, Massachusetts, Michigan and New York), several of which include a private right of action.

Illinois’ Biometric Information Privacy Act (BIPA), often considered the “gold standard” of biometric privacy laws, makes it illegal for a company to collect an individual’s biometric identifier or information, unless the company first informs the person in writing and discloses the specific purpose and length of time for which the data is being collected, stored, or used. BIPA provides a private right of action for violations — $1,000 in statutory damages for each negligent violation and $5,000 for intentional or reckless violations, as well as costs and attorneys’ fees. The two other states do not provide a private right of action.

The proposed federal law, CFRPA, clearly states that “This Act shall not be construed as superseding, altering, or affecting any statute, regulation, order, or interpretation in effect in any State, except to the extent . . . inconsistent with the provisions of this Act, and then only to the extent of the inconsistency.” As a result, it does not appear that the proposed federal law will affect existing state biometric laws, nor curb the marked increase in litigation relating to biometric data collection.

Why Is the Bill Limited to Facial Recognition Technology?

CFRPA’s sponsors, including Sen. Schatz, have stated that “Our faces are our identities. They’re personal. So the responsibility is on companies to ask people for their permission before they track and analyze their faces.” As reported by The Economic Times, a study from MIT Media Lab has found that FR technology is often subject to bias, specifically determining that Amazon’s FR system made errors in recognizing darker-skinned women. Additionally, more regulation and oversight of FR technologies have been supported by tech giants such as Amazon, Microsoft and Google. Brad Smith, the president of Microsoft, is a strong supporter of the bill. “Facial recognition technology creates many new benefits for society and should continue to be developed. Senators Blunt and Schatz’s bill has started an important conversation in Congress about the responsible use of this technology. We’re encouraged by their efforts, applaud their leadership and look forward to working with them to develop balanced policy.”

How Would This Affect Employers?

Employers who utilize FR technologies for authentication should closely monitor this bill. For example, some employers utilize FR to control access to physical facilities instead of ID cards. Additionally, other employers may utilize FR technologies to access services, such as access to computers and copiers.

What Can I Do Now?

Any companies that collect or store FR data or use FR technology should carefully monitor this legislation and its potential progression, as well as the various pending state biometric laws. To the extent this bill or others gain traction, companies should pay close attention to any potential revisions and changes, particularly as under CFRPA — the proposed effective date is only 180 days after its enactment. Further analysis will certainly be needed to flesh out key terms in the proposed bill, such as what constitutes adequate notice or how can affirmative consent be effectuated. Additionally, knowledge of and compliance with these laws will continue to be important to companies who utilize biometric data, or process biometric data on behalf of a covered entity, as the risks increase through an enhanced regulatory environment and potential litigation.

Nevada Supreme Court Rules Bank Tender Defeats HOA Superpriority Lien

As lenders and servicers continue to litigate in Nevada’s state and federal courts about the effect of homeowner associations’ (HOAs) foreclosure sales, some questions have proven particularly sticky. What happens when a lender mails in a check to an HOA for its superpriority lien, but the check is refused? How about when the lender offers to pay the superpriority lien, but the HOA indicates that a payment will not be accepted?

In our last post touching on Nevada’s HOA superpriority lien litigation, we noted that the Nevada Supreme Court had not yet given the final word on these topics. Over the last few months, the court announced its final word—or, more accurately, two final words. In a pair of published opinions, the court held that lenders had preserved the priority of their deeds of trust when attempting to pay off the superpriority portion of an HOA’s lien.

Nevada Supreme Court Rules Bank Tender Defeats HOA Superpriority LienThe decision in Bank of America v. SFR Investments Pool 1 dealt with one typical fact pattern. After the HOA’s lien was recorded, a lender sent a check to the HOA’s foreclosure agent for the correct superpriority amount. However, the HOA’s agent rejected the check and (incorrectly) asserted that the lender was required to pay collection costs and fees to satisfy the superpriority portion. In an opinion issued on September 13, 2018, the Nevada Supreme Court confirmed what lenders had long argued: that this offer of payment with a check, regardless of the rejection, was a valid tender that discharged the superpriority portion of the lien. Although the HOA was free to foreclose on the remaining portion of its lien, the foreclosure would not wipe out the senior deed of trust.

The decision resolved several other issues in favor of lenders, finding (1) there was no requirement for a notice of tender to be recorded; (2) the bona fide purchaser doctrine was inapplicable, meaning that a sufficient tender preserves the deed of trust regardless of whether the HOA sale purchaser has notice of the tender; and (3) lenders did not have to deposit the tendered amount into a court or escrow account. The purchaser’s petition for rehearing was denied on November 13, 2018, leaving the opinion standing.

Even after the Bank of America decision, there remained uncertainty about another common fact pattern: a situation where a lender offered to pay the lien, but did not send a check for the right amount (presumably because it did not have a way to determine the HOA’s monthly assessment amount), and the HOA nonetheless rejected the offer. On March 7, 2019, the court held in Bank of America v. Thomas Jessup that an offer to pay a “yet-to-be-determined superpriority amount was not sufficient to constitute a valid tender.” However, the court ruled that the superpriority portion of the HOA’s lien had nevertheless still been discharged because the HOA’s agent indicated that it would have rejected a tender. Under the excuse of tender rule endorsed by the court, a rejected offer to pay has the same result as a rejected tender of payment. In either situation, a subsequent foreclosure by the HOA will not extinguish the first deed of trust.

The purchaser in Jessup petitioned the court for rehearing on March 26, so the decision is not yet final. But given that it was signed by three of the seven justices on the court, it would take a significant reversal of course for the court to grant rehearing or vacate the panel’s opinion.

Lenders who attempted to pay off at least the superpriority portion of HOA liens are now well-positioned to argue that their deeds of trust were preserved by tender or excuse of tender. These decisions from the Nevada Supreme Court resolve arguably the largest remaining issues in HOA lien litigation (at least the largest issues remaining after pro-lender rulings on the Federal Foreclosure Bar). Purchasers undoubtedly will attempt new defenses against these arguments, but these published opinions are clear wins for lenders.

Application of the Fair Debt Collection Practices Act in Bankruptcy

Application of the Fair Debt Collection Practices Act in BankruptcyOn October 17, 2018, the Consumer Financial Protection Bureau (CFPB) released its Fall 2018 rulemaking agenda. Among the items on the agenda was the CFPB’s planned issuance – by March 2019 – of a Notice of Proposed Rulemaking (NPRM) for the Fair Debt Collection Practices Act (FDCPA). The goal of the NPRM is to address industry and consumer group concerns over “how to apply the 40-year old [FDCPA] to modern collection processes,” including communication practices and consumer disclosures. The CFPB has not yet issued an NPRM regarding the FDCPA, leaving it up to courts and creditors to continue to interpret and navigate statutory ambiguities.

If recent United States Supreme Court activity is any indication, there is plenty of ambiguity in the FDCPA to go around. The Court’s decisions in Obduskey v. McCarthy & Holthus LLP (March 20, 2019) and Henson v. Santander Consumer USA Inc. (June 12, 2017) have helped to flesh out who is a “debt collector” under the FDCPA. On February 25, 2019, the Court granted certiorari in Rotkiske v. Klemm on the issue of whether the “discovery rule” applies to toll the FDCPA’s one-year statute of limitations. In the bankruptcy context, the Court held in Midland Funding, LLC v. Johnson (May 15, 2017) that “filing a proof of claim that is obviously time barred is not a false, deceptive, misleading, unfair, or unconscionable debt collection practice within the meaning of the FDCPA.” However, there remain a number of unresolved conflicts between the Bankruptcy Code and the FDCPA that present risk to creditors, and this risk can be mitigated by bankruptcy-specific revisions to the FDCPA.

The Mini-Miranda

One area of seemingly irreconcilable conflict relates to the “Mini-Miranda” disclosure required by the FDCPA. The FDCPA requires that in an initial communication with a consumer, a debt collector must inform the consumer that the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose. Later communications must disclose that they are coming from a debt collector. The FDCPA does not explicitly reference the Bankruptcy Code, which can lead to scenarios where a “debt collector” under the FDCPA must include the Mini-Miranda disclosure on a communication to a consumer that is protected by the automatic stay or discharge injunction under applicable bankruptcy law or bankruptcy court orders.

Unfortunately for creditors, guidance from the courts regarding the interplay of the FDCPA and the Bankruptcy Code is not uniform. The federal circuit courts of appeals are split as to whether the Bankruptcy Code displaces the FDCPA in the bankruptcy context with respect to the Mini-Miranda disclosure, with no direct guidance from the Supreme Court. This lack of guidance puts creditors in a precarious position, as they must attempt to comply simultaneously with provisions of both the FDCPA and the Bankruptcy Code, all without direct statutory or regulatory direction.

Because circuit courts are split on this matter and because of the potential risk in not complying with both federal legal requirements, many creditors have tailored correspondence in an attempt to simultaneously comply with both requirements by including the Mini-Miranda disclosure, followed immediately by an explanation that – to the extent the consumer is protected by the automatic stay or a discharge order – the letter is being sent for informational purposes only and is not an attempt to collect a debt. An example might be as follows:

“This is an attempt to collect a debt. Any information obtained will be used for that purpose. However, to the extent your original obligation has been discharged or is subject to an automatic stay under the United States Bankruptcy Code, this notice is for compliance and/or informational purposes only and does not constitute a demand for payment or an attempt to impose personal liability for such obligation.”

This improvised attempt to balance competing statutes underscores the need for a bankruptcy exemption from including the Mini-Miranda disclosure on communications to the consumer.

Consumers Represented by Bankruptcy Counsel

Similar conflicts arise regarding the question of who should receive communications when a consumer in bankruptcy is represented by counsel. In many bankruptcy cases, the consumer’s contact with his or her bankruptcy attorney decreases drastically once the bankruptcy case is filed. The bankruptcy attorney is unlikely to regularly communicate with the consumer regarding ongoing monthly payments to creditors and the specific status of particular loans or accounts. This lack of communication leads to tension among the FDCPA, the Bankruptcy Code and certain CFPB communication requirements set forth in Regulation Z.

The FDCPA provides that “without the prior consent of the consumer given directly to the debt collector or the express permission of a court of competent jurisdiction, a debt collector may not communicate with a consumer in connection with the collection of any debt … if the debt collector knows the consumer is represented by an attorney with respect to such debt and has knowledge of, or can readily ascertain, such attorney’s name and address, unless the attorney fails to respond within a reasonable period of time to a communication from the debt collector or unless the attorney consents to direct communication with the consumer.”

Regulation Z provides that, absent a specific exemption, servicers must send periodic statements to consumers that are in an active bankruptcy case or that have received a discharge in bankruptcy. These statements are modified to reflect the impact of bankruptcy on the loan and the consumer, including bankruptcy-specific disclaimers and certain financial information specific to the status of the consumer’s payments pursuant to bankruptcy court orders.

Regulation Z does not directly address the fact that consumers may be represented by counsel, which leaves servicers in a quandary: Should they follow Regulation Z’s mandate to send periodic statements to the consumer, or should they follow the FDCPA’s requirement that communications should be directed to the consumer’s bankruptcy counsel? When given the opportunity to provide some much-needed clarity through informal guidance, the CFPB demurred:

If a borrower in bankruptcy is represented by counsel, to whom should the periodic statement be sent? In general, the periodic statement should be sent to the borrower. However, if bankruptcy law or other law prevents the servicer from communicating directly with the borrower, the periodic statement may be sent to borrower’s counsel.
                   -CFPB March 20, 2018, Answers to Frequently Asked Questions

At least one consumer bankruptcy attorney has brought this issue to the bankruptcy court’s attention. In the Ferguson case in the United States Bankruptcy Court for the Northern District of New York (case number 17-12324), the attorney noted that the mailing of statements to him instead of the consumer violated the court’s confirmation order and placed his firm “in the position of being the post office for monthly mortgage statements,” which increased both the “clerical time spent on the re-mailing function” as well as liability to his firm in ensuring that the statements are re-mailed. The parties entered into an agreement that statements would be mailed directly to the consumer going forward, but a one-off approach to the issue is not practical for creditors.

The Need for Revisions to the FDCPA to Reflect Bankruptcy

The foregoing examples highlight the need for revisions to the FDCPA to ensure that it reflects the realities of bankruptcy practice. Without limitation, the Mini-Miranda disclosure requirement exposes creditors to significant risk in connection with consumers affected by bankruptcy. Likewise, bankruptcy counsel has little use for bankruptcy-tailored monthly financial information designed to keep the consumer apprised of the account status, yet the lack of specific guidance from the CFPB leaves creditors with no easy choice – absent obtaining a court order – on where the creditor should send statements. When the CFPB releases its NPRM on the FDCPA, we encourage creditors to raise these issues.

Arkansas Modifies Fair Mortgage Lending Act – Big Changes Will Ease Burdens on the Mortgage Industry

Arkansas Modifies Fair Mortgage Lending Act – Big Changes Will Ease Burdens on the Mortgage IndustryThe Arkansas State Legislature modified the Fair Mortgage Lending Act in February to “comply with recent developments in Federal Law and other purposes.” Federal law was recently amended to allow for Temporary Mortgage Loan Originator (MLO) Authority as defined under the Economic Growth, Regulatory Relief, and Consumer Protection Act or S.2155. The “other purposes” reason in the Arkansas law modification appears to be the easing of several regulatory burdens. The industry should embrace these changes since it will now be easier to operate in Arkansas.

Mortgage Loan Originator Temporary Authority

The mortgage industry is eagerly waiting for the Nationwide Multistate Licensing System (NMLS) to implement the new temporary MLO authority on November 24, 2019. The modifications to the act provide additions to definitions and clarifications that a “transitional loan officer” is allowed under Arkansas law.

The act now defines “transitional loan officer” as someone who is “authorized to act as a loan officer subject to the transitional loan officer license.” The federal definition in S.2155 and the clarifications provided on the NMLS Resource Center grant an authority to the eligible individual who has applied for a mortgage loan officer license but that such authority, on its own, is not a license. Under the modification to the act, in Arkansas, the licensed transitional loan officer is “not subject to reapplication, renewal or extension” and this temporary authority is only granted for 120 days. The act follows the spirit of S.2155; however, there is variation in the terms “transitional” and “temporary authority.” Additionally, Arkansas codifies that this authority is a license within the state of Arkansas.

Control Persons

The next impactful edit to the act is the change in who is considered a control person of the company. Previously, in Arkansas, anyone who has the right to vote 10 percent of the voting securities of the company would be considered a control person. With the modification to the act, a control person is now anyone who has the right to vote 25 percent or more of the voting securities of a company.

This is a major positive change for mortgage brokers, mortgage bankers and mortgage servicers operating in Arkansas. However, we note that this change is not consistent with the NMLS Guidebook standard, which requires disclosure of any 10 percent or more direct control persons or owners on the NMLS. Additionally, any mortgage companies operating nationwide will still need to meet other stricter definitions relating to control persons, owners and who must be disclosed on the NMLS.

Manufactured Home Dealers

The modification to the act expands the exemption for Manufactured Home Retailers or their employees beyond only administrative and clerical tasks. The Manufactured Home Dealer and its employees may now assist beyond administrative and clerical tasks as long as they “do not receive compensation or financial gain for engaging in loan officer activities that exceeds the amount of compensation or financial gain that could be received in a comparable cash transaction for a manufactured home.” The Manufactured Home Dealer must provide an affiliated business arrangement disclosure form to inform the consumer of any affiliation with a mortgage banker, and the dealer must refer at least one unaffiliated creditor that did not directly negotiate terms of the mortgage loan to a consumer.

Financial Statements

Finally, the act allows the Arkansas Securities Department to accept financial statements that are prepared internationally as long as they are prepared according to standards of the International Financial Reporting Standards Foundation and the International Accounting Standards Board. This change is a recognition of the growing international ownership of large mortgage lenders or servicers.

Mortgage bankers, mortgage lenders and mortgage servicers are encouraged to review the legislation to consider how these changes may impact your business model. For more information about the Fair Mortgage Lending Act changes, please contact Bob Niemi, Amy Magdanz Rose or Haydn Richards.

What to Make of the CFPB’s Enforcement Activity under Director Kraninger; Bradley to Hold March 26 Webinar

What to Make of the CFPB’s Enforcement Activity under Director Kraninger; Bradley to Hold March 26 WebinarSince Kathleen Kraninger was confirmed as the Director of the Consumer Financial Protection Bureau (CFPB) on December 6, 2018, six enforcement actions have been publicly resolved. Those cases have involved various types of defendants, and have covered a broad range of conduct that allegedly violated federal consumer financial law. Individuals, a federally chartered savings association, an online lender, offshore and domestic payday lenders, and a jewelry retailer have all been subject to the CFPB’s enforcement powers under Director Kraninger.

In contrast, the CFPB only finalized 10 enforcement actions during the 13-month period that Acting Director Mick Mulvaney was at the helm of the Bureau. For purposes of our analysis, we categorize the CFPB’s consent order that was filed on December 6, 2018—the same day Director Kraninger was confirmed—as one that was finalized and signed off on under Acting Director Mulvaney’s tenure. We do acknowledge that Director Kraninger has only been in her role for a short period of time thus far, and much of the behind-the-scenes enforcement activity likely occurred prior to her arrival at the CFPB. However, Director Kraninger has been the final sign-off for the six cases resolved after her confirmation and reviewing the enforcement activity during her short tenure may provide a glimpse into future trends and philosophies.

When reviewing and comparing the enforcement activity under Acting Director Mulvaney and Director Kraninger, a few takeaways emerge:

  • The CFPB appears to be resolving cases far more frequently under Director Kraninger than under Acting Director Mulvaney;
  • One case involved a parallel investigation and settlement with the State of New York;
  • The Bureau under Director Kraninger has imposed a total of $16.8 million in civil money penalties;
  • Director Kraninger has shown a willingness to impose more severe civil money penalties than Acting Director Mulvaney;
  • All cases finalized under Direct Kraninger have relied on the CFPB’s UDAAP authority; and
  • The CFPB under Director Kraninger demonstrated a rare willingness to impose a civil money penalty based on a defendant’s inability to pay more.

Upcoming Webinar

Webinar, Computer, Notepad, Pen, Glasses, PhoneIf this is an area you would like to learn more about, we encourage you to join us for our “Enforcement Update” webinar, which is scheduled for Tuesday, March 26 from 11:30 a.m. to 12:30 p.m. CT. This webinar will focus on the enforcement activity during Director Kraninger’s time at the CFPB and will discuss our takeaways in depth. Click here to RSVP to the webinar. Webinar login information will be provided one day prior to the event.

This will be the second webinar in our Payment Systems Webinar Series, which will cover hot topics and common pitfalls for entities navigating the compliance challenges of this dynamic industry — from traditional products (e.g., credit cards, debit cards, prepaid cards, gift cards, Automated Clearing House transactions, rewards programs) to emerging technologies (e.g., mobile payments, mobile wallets, cryptocurrencies).