Part II: Navigating the Maze of Servicing Discharged Debt

By Karlene A. Archer and Alexandra Dugan on Posted in Bankruptcy, Mortgage Servicing, Secured Creditors

Part II: Navigating the Maze of Servicing Discharged DebtWelcome to Part II of our series on the servicing of discharged mortgage debt (catch up on Part I). This part will discuss communications to discharged borrowers and evaluate various disclaimers that can be utilized.

The only way to fully eliminate the risk of violating the bankruptcy discharge injunction is to cease all communications to borrowers who received a discharge of the debt. However, this drastic change in practice is not realistic. First, the discharge only eliminates the borrower’s personal liability – the servicer’s lien, and its right to foreclose on the collateral, still exists. A discharge of this personal liability does not preclude servicers from communicating information to the borrower that may be relevant to possible foreclosure or how to avoid foreclosure, and does not absolve the servicer of any existing requirement to send such notices. In fact, courts have found that statutorily required pre-foreclosure notices do not violate the discharge injunction (although a carefully worded disclaimer is still advisable). Second, where the borrower is still living in the home, and is still paying on the loan, the borrower may be seeking additional information about the loan, including how much they are required to pay to avoid foreclosure. Just as the discharge injunction does not absolve the servicer of sending statutorily required foreclosure notices, neither does it absolve the servicer of sending escrow statements as required by RESPA. Thus, servicers are left manipulating this required correspondence to such borrowers to mitigate the risk of violating the discharge injunction.

To determine whether a post-discharge communication violates the discharge injunction, courts embark on a fact-intensive inquiry into whether such communication was an attempt to collect the debt from the borrower personally. Courts heavily scrutinize the existence of, and language within, bankruptcy disclaimers on borrower communications. As part of this scrutiny courts will view such communications from the perspective of the unsophisticated consumer. Following such inquiries in cases involving correspondence to borrowers following their discharge, courts have found discharge violations where such correspondence included due dates, amounts due, and stated that a late fee would be charged for untimely payment. However, if the statement is for informational purposes only, and has a proper disclaimer, a court is less likely to find a violation. A proper disclaimer should include a statement acknowledging the effect of the discharge, that the creditor is not attempting to collect discharged debt against the borrower personally, and that any payments would be voluntary. However, a survey of relevant case law shows it is abundantly clear that there is no “magic shield” for a bankruptcy disclaimer, and even innocuous statements under the right facts may be found to violate the discharge injunction. In fact, similar disclaimers may appear on correspondence in a case where the judge finds no discharge injunction violation in one case, and where an opposite finding results in another case.

The specific circumstances of the borrower-servicer relationship, and the facts presented by the borrower, weigh heavily into a judge’s decision of whether the servicer has violated the discharge injunction. One of the most critical facts is the volume of communication. Even where a servicer uses carefully crafted disclaimer language, if it sends a large quantity of letters offering alternatives to foreclosure in a short period of time, this will look more like coercive behavior than sending similar correspondence once. Further, if the borrower indicated an intent to surrender the property that fact will often tip the scales toward a finding of a discharge injunction violation. Lastly, if the borrower or his attorney has previously requested that the servicer cease sending such correspondence, the court is more likely to find a violation.

Crafting correspondence to discharged borrowers is further complicated where that correspondence requires an FDCPA disclaimer. While courts have generally found that statutorily required pre-foreclosure notices do not violate the discharge injunction, servicers still must take care to carefully review and craft disclaimer language. These FDCPA disclaimers often look to be in direct conflict with the bankruptcy code where they state that the correspondence is a communication from a debt collector, for the purpose of collecting a debt and that information obtained may be used for that purpose. The servicer of a discharged debt therefore looks like they are telling the borrower that they intend to collect the debt, but that they are also recognizing that they cannot do so. This dichotomy has led some courts to find that this type of disclaimer could be misleading to the least sophisticated customer. However, there is at least some case law support that it is permissible to include FDCPA disclaimers in addition to significant and prominent bankruptcy disclaimers.

Takeaways

  • Servicers should ensure that all communications to discharged borrowers are carefully tailored to acknowledge the discharge and the voluntary nature of continued payments, and contain other appropriate language and disclaimers. Such disclaimers should be prominently included and not part of the “fine print.” Where possible, disclaimers should not be generic or hypothetical.
  • Borrowers should be regularly reminded that all payments are voluntary and that they have no personal obligation to pay the servicer.
  • Repeated disclaimers are beneficial, and all correspondence related to payments of any type should have disclaimers.
  • Servicers should consider the totality of its communications with borrowers, such as spacing of all letters, loss mitigation overtures, monthly statements, escrow statements, and/or phone calls.
  • Servicers should avoid sending any unnecessary letters to discharged borrowers, including letters not otherwise required by non-bankruptcy law.

Part III of this series will discuss loan modifications for discharged borrowers and evaluate practices that servicers can employ to reduce risk.

CFPB Guts Major Component of Payday Lending Rule

By Preston H. Neel and Jennifer L. Galloway on Posted in Automobile Finance, CFPB, Installment Lending, Payday Lending, Small-Dollar Lending, Title Loans

CFPB Guts Major Component of Payday Lending RuleToday, the CFPB proposed amendments to its Payday, Vehicle Title, and Certain High-Costs Installment Loans Rule. As anticipated, the bureau is proposing to rescind the rule’s requirements that lenders make certain ability-to-repay underwriting determinations before issuing payday, single-payment vehicle title, and longer-term balloon payment loans on the basis that such restrictions would limit consumer access to credit. The bureau is also proposing to delay the August 19, 2019, compliance date for the mandatory underwriting provisions of the 2017 final rule to November 19, 2020.

The bureau further indicated that it will not reconsider changes to the rule’s payment provisions. Those provisions prohibit payday and certain other lenders from making a new attempt to withdraw funds from an account where two consecutive attempts have failed unless the lender obtains a new consumer authorization to withdraw funds. The payment provisions also require such lenders to provide consumers with written notice before making their first attempt to withdraw payment from their accounts and before subsequent attempts that involve different dates, amounts, or payment channels. These new payment obligations are more restrictive than the current federal laws in place, including the NACHA rules, and will be very problematic for lenders.

There will be a 90-day public comment period for the proposed amendments to the underwriting provisions. On the other hand, there will be a 30-day comment period for the proposed extension to the implementation date for the underwriting provisions. That said, the bureau’s comments seem to suggest the payment provisions may still go live on August 19, 2019. Accordingly, lenders should take stock of the payment provisions and be prepared for an August 19, 2019, effective date until further  notice.

CFPB Proposes Reporting and Examination Authority Over Military Lending Act

By Erika J. Sonstroem and Jennifer L. Galloway on Posted in CFPB, Fair Lending, MLA

CFPB Proposes Reporting and Examination Authority Over Military Lending ActThe Consumer Financial Protection Bureau on January 17, 2019, asked Congress to grant the bureau clear authority to supervise compliance-related issues for the Military Lending Act. CFPB Director Kathy Kraninger transmitted a legislative proposal to the speaker of the U.S. House of Representatives and Vice President Pence in his capacity as president of the U.S. Senate. She also shared copies with the chairs and ranking members of the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services, which have had revisions to their membership rolls in recent days.

Currently the Military Lending Act grants enforcement authority to the agencies specified in section 108 of TILA, including the Board of Governors of the Federal Reserve System, the CFPB, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Federal Trade Commission. The proposed legislation would allow the CFPB nonexclusive authority to require reports and conduct examinations specifically focusing on the Military Lending Act among consumer and small loan lenders. In her statement, Director Kraninger stated that, “The Bureau is committed to the financial well-being of America’s service members. This commitment includes ensuring that lenders subject to our jurisdiction comply with the Military Lending Act so our service members and their families are provided with the protections of that law.”

In addition to the legislative proposal introduced by Director Kraninger, the Senate and House of Representatives have each introduced bills to amend the Mortgage Lending Act. The Senate Bill – the Military Lending Improvement Act of 2018 (S. 3334) – was introduced last August and referred to the Committee on Banking, Housing, and Urban Affairs. The bill would, among other things:

  • Extend the Military Lending Act to recently discharged or released members of the armed forces;
  • Lower the maximum authorized annual percentage rate on applicable credit from 36 percent to 24 percent;
  • Extend the coverage of the Military Lending Act to credit for cars and other personal property; and
  • Implement certain privacy protections and provide enhanced protection from debt collector harassment.

The House of Representatives Bill – the Financial Protection for Our Military Families Act (H.R. 442) – was introduced on January 10, 2019, and has been referred to the Committee on Financial Services and the Committee on Armed Services. The bill would explicitly extend CFPB supervisory authority to allow the CFPB to assess compliance with the Military Lending Act with respect to insured depository institutions.

Cryptocurrencies: Currency, Commodity, Security or Something Else?

By J. Riley Key, Lee Gilley and Erin Jane Illman on Posted in Blockchain, Digital Currency / Cryptocurrency, SEC

Crytpocurrencies: Currency, Commodity, Security or Something Else?Courts and regulators continue to struggle with how to define cryptocurrencies. The latest installment of this ongoing debate came from an unlikely source: a state appellate court’s opinion on a criminal matter. Specifically, on January 30, 2019, the Third District Court of Appeal for the State of Florida entered an order reversing a trial court’s dismissal of charges of illegal money transmission, finding that Bitcoin was a payment instrument under Florida law.

The State of Florida charged the defendant, who allegedly operated an unlicensed bitcoin-for-cash brokerage business, with one count of unlawfully engaging “in the business of money transmitter while not being registered as a money transmitter or authorized vendor” and two counts of money laundering. The trial court dismissed the charges, finding that Bitcoin did not fall within the ambit of the money transmission statute.

On appeal, the court of appeals reversed the trial court’s decision, finding that Bitcoin does not expressly fit within the definition of “currency,” but it does qualify as a payment instrument, defined as a “medium of exchange, whether or not redeemable in currency,” under Florida’s money transmission statute. In reaching this conclusion, the court noted that Bitcoin was accepted as a form of payment by several restaurants in the Miami area, a prominent Miami plastic surgeon, and the defendant’s own expert, who conceded he was paid in Bitcoin for his services. Additionally, the defendant marketed his business as an exchange of cash for Bitcoins. As a result, the defendant was required to be registered under the statute as a money transmitter.

This is a significant development under Florida law, as a person is prohibited by the Florida Money Services Businesses Law, Chapter 560, Florida Statutes (the “Florida MSB Code”) from engaging in, and in some cases merely advertising its engagement in, a Regulated Money Service in Florida without first obtaining a license from the Florida OFR or qualifying for a statutory exemption from licensure. This case appears to widen the scope of cryptocurrency businesses that must now register under the Florida MSB Code — holding even brokers who facilitate the buying/selling or exchange of cash for Bitcoin (or potentially other cryptocurrencies) with engaging in “selling or issuing payment instruments for compensation.”

Cryptocurrency businesses must navigate a fragmented state-by-state approach to permissible business practices, licensing requirements, and related know-your-customer procedures. The fragmented regulatory requirement is further complicated by the varying definitions of cryptocurrency itself.

This case is hardly the first instance where a court or regulator struggled to define the nature of cryptocurrency. In July 2017, the Securities and Exchange Commission (SEC) released a “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO” (the “21(a) Report”). The 21(a) Report considered whether the DAO—a Decentralized Autonomous Organization, or virtual organization executed on a distributed ledger or blockchain—violated federal securities law by selling DAO tokens, which would then be used to fund projects, to investors. The SEC ultimately determined that the DAO tokens were securities under the Securities Act of 1933 and the Securities Exchange Act of 1934, and therefore should have been registered with the SEC. According to the SEC, the 21(a) Report was intended to stress that U.S. federal securities law may apply to “Initial Coin Offerings” (ICO) or “token sales” depending on the particular facts and circumstances, without regard to the form of the organization or technology used to effectuate a particular offer or sale.

In November 2018, the SEC announced a settlement with two companies that sold digital tokens in ICOs and imposed civil penalties for ICO securities offering registration violations. And, in September 2018, the SEC settled an enforcement action with a self-described “ICO superstore” for operating as unregistered broker-dealers.

As a result of the SEC’s position on ICOs, Basis, a stablecoin startup with $133 million in funding, announced in December 2018 that it was shutting down and returning funds to investors because it would be unable to avoid securities classification by the SEC.

While the SEC appears to take a broad view of what constitutes a security in the cryptocurrency space, not all regulators and courts agree. In 2015, the U.S. Commodity Futures Trading Commission officially categorized Bitcoin as a commodity, which puts Bitcoin in the same classification as gold. This classification has been upheld by the U.S. Bankruptcy Court for the Northern District of California and recently received further support from a decision by the U.S. District Court for the District of Massachusetts.

The proper categorization of a particular cryptocurrency is a complex legal issue. Nonetheless, companies with existing cryptocurrency businesses, cryptocurrency brokers, those considering an ICO, or businesses considering expanding into cryptocurrencies should carefully consider the regulatory guidance in this area to ensure they do not run afoul of U.S. securities law or related state money transmitter and money broker laws. Additionally, cryptocurrency exchanges should also consider registration requirements under U.S. securities laws and state money transmitter statutes.

CFPB Settles with Payday Lenders for Deceptive Practices

By Preston H. Neel on Posted in CFPB, Payday Lending, Small-Dollar Lending

Last week, in CFPB v. NDG Financial Corp. et al., the Consumer Financial Protection Bureau (CFPB) entered into a proposed settlement with several payday lenders and corporate officials based in Canada and Malta. As background, the corporate defendants consisted of a network of affiliated companies, known as the NDG Enterprise, which extended high-cost, short-term payday loans over the internet to consumers in all 50 states. The CFPB alleged the NDG Enterprise defendants violated the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition on unfair, deceptive, and abusive acts and practices by (1) failing to obtain necessary licenses, (2) exceeding state usury limits, (3) making false threats to consumers, (4) deceiving consumers about their debts, and (5) using illegal wage-assignment clauses in violation of the Credit Practices Act.

As for the settlement, the CFPB permanently barred the entities from advertising, marketing, promoting, offering, originating, servicing, or collecting any consumer loan issued to any consumer residing in the United States. The CFPB also barred the entities from assigning, selling, or transferring any existing debt to another company and from disclosing, using, or benefiting from customer data. The proposed settlement covers NDG Financial Corp., E-Care Contact Centers, Ltd., Blizzard Interactive Corp., New World Consolidated Lending Corp., New World Lenders Corp., Payroll Loans First Lenders Corp., New World RRSP Lenders Corp., Northway Financial Corp., Ltd., and Northway Broker, Ltd., as well as some corporate officials.

Of note, this case was filed, litigated, and ultimately settled under three different directors – Richard Cordray, Mick Mulvaney, and Kathy Kraninger. It also comes in the midst of Director Kraninger’s recent statements that the CFPB will revise certain aspects of the Payday, Vehicle, Title, and High-Cost Installment Loan Rule. While this case doesn’t shed any light on the pending revisions, it should be a wake-up call to the small dollar industry. The CFPB, under Director Kraninger, will continue to take a hard line stance against unfair, deceptive, and abusive acts and practices.

Some of Florida’s Regulatory Restrictions on the Cannabis Industry Could Soon Be a Thing of the Past

By J. Hunter Robinson and James W. Wright Jr. on Posted in Cannabis, Commercial Lending, Florida

Some of Florida's Regulatory Restrictions on Cannabis Industry Could Soon Be a Thing of the PastOn January 17, 2018, Florida’s new governor, Ron DeSantis, delivered news that could supercharge the growth of Florida’s medical-cannabis industry. Governor DeSantis indicated he may drop the State’s appeal from a trial court’s ruling that the statutory cap on the number of licenses for “medical marijuana treatment centers” (MMTCs), and the requirement that MMTCs be vertically-integrated companies that cultivate, process, and dispense cannabis, violate the medical-cannabis amendment to Florida’s Constitution. Further, Governor DeSantis asked the Florida Legislature to remove the statutory ban on smoking medical cannabis, and stated he would drop the State’s appeal from another ruling that the ban was unconstitutional absent legislative action.

Eliminating these restrictive licensing requirements would allow new companies to enter Florida’s medical-cannabis market, and eliminating the smoking ban would allow MMTCs to cultivate and sell a new product. Both changes to Florida law would provide additional opportunities for cannabis companies and the financial institutions that provide services to them.

The Tension Between Florida’s Constitutional Amendment and the Implementing Statute

Florida’s cannabis regime is grounded in a voter-approved amendment to Florida’s Constitution (Amendment). The Amendment authorizes licensed physicians to prescribe cannabis to patients with certain medical conditions, who can then purchase cannabis from licensed MMTCs. The Amendment charges Florida’s Department of Health with implementing regulations regarding the “[p]rocedures for registration of MMTCs,” but is silent regarding the number of MMTCs that can operate in the state. However, the Amendment requires that the Department of Health’s regulations “ensure the availability and safe use of medical marijuana by qualifying patients.”

Following the Amendment, the Florida Legislature enacted Florida Statute 381.986 (Statute), which provides a host of restrictions on how medical cannabis is cultivated, dispensed, prescribed, and consumed, including a ban on smoking cannabis. The Statute initially provided for 10 MMTC licenses, and requires that four additional licenses be issued each time 100,000 additional patients are added to Florida’s medical marijuana use registry. There are 14 MMTCs currently operating in Florida.

Florigrown, LLC v. Florida Dept. of Health

Florigrown, LLC, a company seeking an MMTC license, filed suit in December 2017, contending that the Statute’s licensing requirements were unconstitutional under the Amendment. Florigrown first moved for a temporary injunction on April 30, 2018, seeking to enjoin the Department of Health from registering MMTCs pursuant to the “blatantly unconstitutional” Statute, and requiring that the Department register MMTCs in accordance with the Amendment’s “plain language,” which, according to Florigrown, did not allow the licensing cap or the vertical-integration requirement found in the Statute.

While the court initially denied the motion, it found that Florigrown had a substantial likelihood of success on the merits of its core claims – that the Statute’s licensing cap and vertical-integration requirement are unconstitutional.

Florigrown renewed its motion for a temporary injunction, and on October 5, 2018, the trial court granted it, finding that the Department of Health’s failure to “cure the serious Constitutional problems” the court outlined in its order denying Florigrown’s first motion showed the injunction would serve the public interest. The court thus entered an order that:

(1) [I]mmediately enjoined the Department of Health from registering or licensing any MMTCs pursuant to the unconstitutional legislative scheme set forth in [the Statute], (2) requir[ed] the Department … to commence registering MMTCs in accordance with the plain language of the [Amendment], and (3) require[d] the Department to register Florigrown as an MMTC … unless the Department [could] clearly demonstrate to th[e] court that such registration would result in unsafe use of medical marijuana by qualifying patients.

The Department of Health appealed, which automatically stayed the injunction while the appeal is pending.

While the order’s language is far from clear, reading it in conjunction with the court’s previous order outlining the Statute’s constitutional infirmities indicates that it strikes down the Statute’s vertical-integration requirement and its cap on the number of MMTC licenses. If the State drops its appeal, it appears the Department would no longer be limited in the number of MMTC licenses it could issue, and that entities could obtain a license to operate exclusively as a cultivator, processor, or dispensary, rather than all three, allowing smaller businesses to enter Florida’s medical-cannabis market.

State Senator Jeff Brandes has announced he will file a bill to remove the Statute’s licensing cap and vertical-integration requirement during the next legislative session, which begins on March 5, 2019.

People United for Medical Marijuana v. Florida Dept. of Health

People United for Medical Marijuana (PUMM) filed suit in July 2017, seeking a declaration that the Statute’s ban on smoking cannabis was unconstitutional under the Amendment. The trial court agreed with PUMM, and entered an order declaring the Statute’s smoking ban unconstitutional on May 25, 2018. The Department appealed, which automatically stayed the order while the appeal is pending.

On January 28, 2019, State Senator Jeff Brandes introduced a bill that, if enacted, would remove the smoking ban from the Statute.

Takeaways

The Statute’s restrictive licensing and smoking ban have curtailed the growth of Florida’s medical-cannabis industry. That industry is beginning to take flight nonetheless – the number of cannabis patients in Florida rose from 65,310 at the start of 2018 to approximately 209,000 at the end of the year, and the number of dispensaries grew from 25 to 83 during the same period. Lifting the Statute’s limit on the number of MMTCs, its requirement that MMTCs be vertically integrated, and its smoking ban – whether through legislation or the State dismissing its appeals – should accelerate that growth by allowing more entrants into the market and allowing those in the market to sell additional products.

This growth, in turn, will provide additional opportunities for financial institutions seeking to serve Florida’s medical-cannabis industry. As we’ve noted in previous blogs, many banks are unwilling to provide financial services to state-legal cannabis companies given that cannabis remains illegal under federal law. However, this lack of supply provides a potentially lucrative opportunity for financial institutions willing to work with the cannabis industry. Such institutions would be wise to keep a close eye on Florida given the DeSantis Administration’s apparent willingness to loosen Florida’s restrictions on the medical-cannabis industry.

Part I: Navigating the Maze of Servicing Discharged Debt

By Karlene A. Archer and Alexandra Dugan on Posted in Bankruptcy, Mortgage Servicing, Secured Creditors

Part I: Navigating the Maze of Servicing Discharged DebtMortgage servicers are plagued by their nebulous relationships with the borrowers who discharge their personal liability in bankruptcy. Issues arise when the borrower whose debt has been discharged continues to engage with the mortgage servicer. These activities include making monthly payments and requesting and participating in loss mitigation. There are few, if any, bright line rules regarding this common scenario. Instead, courts generally employ an “I know it when I see it” approach to evaluate whether such activity violates the discharge injunction and/or the Fair Debt Collection Practices Act.

This is the first post in our four-part series where we will address issues that arise when servicing discharged debt, including credit reporting and loan modifications. Case law and regulatory guidance do not provide crystal clear answers, yet the sanctions and damages highlight the risk of engaging with discharged borrowers. Decisions regarding how to service these accounts should be determined based on the company’s risk tolerance in light of the potential liability and the fact-based nature of these cases. This series will highlight some of the risks, as well as the minimal guidance surrounding these issues.

Chapter 7

A Chapter 7 debtor has several options regarding real property. The Bankruptcy Code provides three specific options: (1) redeem the loan by paying it off, (2) surrender the property, or (3) reaffirm the loan and agree to be personally liable for the debt while maintaining ownership and possession of the property. For debtors who are current on their loan and have filed in certain jurisdictions, a fourth option also exists: a ride-through loan. A real property ride-through loan in bankruptcy converts a mortgage into a non-recourse obligation, meaning the filer chooses neither to redeem, surrender, nor reaffirm the loan. There is no nationally accepted official form or procedure for electing the ride-through in the statement of intention, but some debtors using this option have made it a practice to write in their own fourth option by stating an intention to have their loan ride through the bankruptcy instead of choosing to redeem, surrender or reaffirm.

Chapter 13

Most Chapter 13 debtors elect to file a Chapter 13 case, as opposed to Chapter 7, to keep their home and catch up on past due mortgage payments. However, some Chapter 13 debtors elect to surrender their property via their bankruptcy plan. Similar to a surrender in the Chapter 7 context, this results in a discharge of personal liability of the mortgage debt upon entry of the discharge. Poorly written plans that remain in effect may also result in a discharge of personal liability. For instance, if a borrower indicates that they intend to cramdown the value of the claim to the value of the property, but do not end up paying the entire claim over the life of the plan, the servicer may be stuck with a claim against the property but with no recourse against the borrower personally if the case later discharges.

Discharge of Personal Liability

The Chapter 7 discharge relieves individual debtors from personal liability of mortgage debt and prevents the creditor from taking any collection actions against the debtor personally (unless the debt was reaffirmed). A Chapter 13 discharge following surrender of property and the limited instances described above operates in a similar manner. However, while the debt becomes non-recourse to the debtor, the security interest (i.e., servicer’s right to proceed in rem against the property) survives the discharge. This surviving mortgage interest corresponds to an obligation of the debtor who wishes to retain possession of the property. Accordingly, while preserving the creditor’s right to proceed in rem, Congress has allowed creditors to retain the ability to take certain actions with the respect to the mortgage outside of foreclosure.

In 2005, Congress enacted 11 U.S.C. § 524(j), which excludes ordinary course of business activities where a creditor holding a secured claim in the debtor’s principal residence seeks to collect periodic payments in lieu of pursuit of in rem relief to enforce the lien. This limited safe harbor is not a bulletproof vest against discharge injunction violations arising from communications relating to collecting payments and/or other servicing costs. If servicers elect to accept payments in lieu of foreclosing on the property post-discharge, it is critical to ensure that all servicing activity, particularly communications, are narrowly tailored to eliminate the risk that these activities are viewed as coercive, and that any attempts to collect payment only inform of, rather than demand, payments. Sanctions and damages for discharge injunction violations range from minor slaps on the wrist to millions of dollars based on the particular facts of the case.

Part II of this series will discuss communications to discharged borrowers and evaluate various disclaimers that can be utilized, including how courts have reacted to such disclaimers.

California’s Servicemember Protections Expanded for Student Loans

By Keith S. Anderson on Posted in SCRA, State Law Developments, Student Loan Servicing

California’s Servicemember Protections Expanded for Student LoansWith the start of the new year, California has expanded protections for military servicemembers with student loans.

Student loans incurred by a protected servicember before entry into service have an interest rate cap of 6 percent during the period of service plus one year thereafter. Additionally, student borrowers can obtain a deferment on their payment obligations for 180 days or the period of active duty plus 60 days. California’s law AB-3212 amends the California Military & Veterans Code providing these protections.

The deferment protections have long been in place under the California Military & Veterans Code for other types of loans but the expansion to student loans, with the inclusion of the one-year period following the end of active duty, is noteworthy and new for California. Under the federal Servicemembers’ Civil Relief Act (SCRA) interest-rate protection in 50 U.S.C. §3937 (which does apply and has applied to student loans), a protected borrower is required to submit a written request with a copy of his or her orders. The California provision has no requirement for a request by the borrower for the interest rate protection. The amendments in AB-3212 include many other expansions of servicemember protections touching on the time periods of protections, lease termination, and storage liens among others. Now a lender receiving a request for relief from a servicemember must respond within 30 days regarding the request or the recipient waives any objection and the servicemember is automatically entitled to the relief sought.

“Interest” has a broad definition in this provision to include “service charges, renewal charges, fees, or any other charges, except bona fide insurance, in respect to any obligation or liability. The interest amount above the 6 percent protection is forgiven, and the period payment is to be reduced by the amount of interest forgiven. A covered servicemember includes anyone in federal active service or those called into active state service.

If a deferment is sought, the servicemember must either petition a court or deliver a written request with a copy of the military orders to the financial institution. Creditors should also be aware that the new provisions prohibit debt collectors from contacting a servicemember’s military unit or chain of command without the written consent of the member. Notably, protections under the federal SCRA can be waived, whereas the California provisions are enforceable by the Attorney General and cannot be waived by the servicemember.

Student lenders and servicers should be in tune with these California amendments and be prepared to provide safeguards for servicemember student borrowers.

Justice Department Banks on False Claims Act Enforcement Again in 2018

By Ty E. Howard and Brad Robertson on Posted in False Claims Act

Justice Department Banks on False Claims Act Enforcement Again in 2018Though recoveries from the financial services sector fell drastically in 2018, the Justice Department and a veritable army of whistleblowers’ counsel continue to use the False Claims Act (FCA) to bring suits against banks and mortgage companies. To keep you informed on the status of the law, Bradley’s Government Enforcement and Investigations Practice Group is pleased to present the False Claims Act: 2018 Year in Review, our seventh annual review of significant FCA cases, developments and trends. This year’s publication maintains the magazine-like format we introduced last year, making it an easy-to-read, printed resource as well as a convenient and searchable digital tool.

CFPB and New York Enter Into Consent Order over Credit Card Practices

By J. Riley Key, Lee Gilley and Jonathan R. Kolodziej on Posted in CFPB, Credit Card

CFPB and New York Enter Into Consent Order over Credit Card PracticesOn January 16, 2019, the Consumer Financial Protection Bureau (“CFPB”) and the Attorney General for the State of New York announced a consent order with Sterling Jewelers, Inc. (“Sterling”) related to Sterling’s credit card practices.

The consent order alleges that Sterling employees indicated they were either checking to see how much credit the consumer would qualify for or that the consumers were completing a survey or enrolling in a rewards program, when, in reality, Sterling was completing credit card applications for consumers without their knowledge or consent. The CFPB and New York characterized this conduct as a deceptive act or practice in violation of the Consumer Financial Protection Act of 2010 (“CFPA”). The CFPB and New York also alleged that this conduct violated the Truth in Lending Act’s prohibition against issuing a credit card except in response to an oral or written request or application.

The CFPB and New York also cited Sterling for violations of the CFPA related to alleged misrepresentations regarding certain financing terms, including the applicable interest rate, monthly payment amount, and eligibility for promotional financing. Finally, the CFPB and New York alleged that Sterling engaged in unfair acts or practices by enrolling consumers in optional payment protection plan insurance without informing consumers that they were being enrolled or by misleading consumers as to the product for which they were signing up.

Under the terms of the consent order, in addition to injunctive relief, Sterling is required to pay a $10 million civil money penalty to the CFPB and a $1 million civil money penalty to the State of New York.

While the CFPB has adopted a more business friendly approach since Director Richard Cordray’s resignation, this consent order illustrates the CFPB’s willingness to use the CFPA to pursue penalties related to conduct that it deems to be unfair or deceptive.

Credit card issuers would be wise to carefully review account opening practices to identify potential unfair, deceptive, or abusive conduct.

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