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

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 June 11, 2019 Posted in CCPA, Cybersecurity, Data Privacy, Debt Collection

New “Do Not Sell” Nevada Privacy Law Requirement Rolls Out Ahead of CCPA Deadline States 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 June 6, 2019 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 June 3, 2019 Posted in Bankruptcy, Credit Reporting Industry, FCRA, FDCPA, Mortgage Servicing, Secured Creditors

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

CFPB Quietly and Proactively Acts on Its Revised CID Policy

By Jonathan R. Kolodziej and Gregory B. Pipes on June 3, 2019 Posted in CFPB, Small-Dollar Lending

CFPB Quietly and Proactively Acts on Its Revised CID Policy The Consumer Financial Protection Bureau (CFPB) recently announced that it is adopting a new policy regarding Civil Investigative Demands (CIDs). Going forward, Director Kathleen Kraninger has committed to providing more information to the entity or individual that is the recipient of the CID. This will be accomplished through more specific notifications of purpose, which will explain the potential provisions of law that the CFPB believes may have been violated. While the CFPB did not include in its announcement how or when this new policy would become effective, the CFPB’s recent orders in response to numerous petitions to modify or set aside CIDs provide tangible insight into what the new approach will look like going forward.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires that when the CFPB issues a CID it must “state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.” This is accomplished through the notification of purpose section of the CID. However, the CFPB has historically provided generic, broad and vague notifications of purpose, and that practice has come under scrutiny. In response to one of the 12 requests for information (RFIs) that were issued by then-Acting Director Mick Mulvaney, the CFPB received numerous comments suggesting that it should provide more detail and direction regarding what it is investigating when a CID is issued. Director Kraninger’s new policy, which was announced on April 23, 2019, is at least partially driven by the comments it received in response to the Mulvaney RFIs.

Just a few weeks after the new policy was announced, Director Kraninger quietly gave five examples of how the CFPB will provide more detailed notifications of purpose under the new policy. This was done without any fanfare, press releases or announcements. The CFPB, as it has always done, publishes the decisions that are made in response to a CID recipient’s petition to modify or set aside the CID on its public website. On May 9, 2019, five new decisions were published, and all five contain substantial modifications to the notifications of purpose that were contained in the petitioners’ CIDs.

Consistent with the new policy announcement, each modified notification of purpose contains much more detail than the original version. For example, one of the original notifications of purpose implicated potential violations of the Fair Credit Reporting Act (FCRA) by saying:

The purpose of this investigation is to determine whether student loan debt-relief providers, mortgage lenders, or other persons . . . have violated the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq.

The original notification of purpose does not specify any actual conduct that may violate the FCRA, and it also cites to the entirety of the FCRA as potentially being violated. In contrast, under the CFPB’s new CID policy, the portion of the modified version of the notification of purpose related to potential FCRA violations now says:

The purpose of this investigation is to determine whether student loan debt-relief providers, mortgage originators, or associated persons . . . have obtained or used consumer reports without a permissible purpose in a manner that violates the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq., principally § 1681b.

This provides much more detail into both the conduct at issue, and the specific provisions of the FCRA that are being looked at. Similar enhancements were made to the CIDs of the other four petitioners as well. This shift in policy will greatly benefit recipients of a CFPB CID in the future.

Another interesting observation regarding the CFPB’s recent orders is that the CFPB proactively modified the notification of purpose section of CIDs for two petitioners who didn’t object to the broad nature of the original version. Director Kraninger simply cited the CFPB’s recent policy announcement and then provided a new notification of purpose that is consistent with that policy. Although none of the five petitions to modify or set aside a CID were fully granted, having more detail in the CFPB’s notification of purpose and having a better understanding of where the investigation may be headed is a major win for industry.

The Conundrum of Credit Reporting In and After Bankruptcy: Help May Be on the Way

By Keith S. Anderson and Andrew J. Narod on May 30, 2019 Posted in Automobile Finance, Bankruptcy, Credit Reporting Industry, FCRA, Small-Dollar Lending

The Conundrum of Credit Reporting In and After Bankruptcy: Help May Be on the Way

Creditors and credit furnishers often find properly reporting a payment status to Credit Reporting Agencies (CRAs) during, and after, bankruptcy a challenge. The recent Report of the American Bankruptcy Institute on Consumer Bankruptcy recognizes those challenges, and looks to convene a forum to provide better guidance and clarity as to proper credit reporting once a borrower goes into bankruptcy.

Challenges

What constitutes proper credit reporting with an account that is in, or after, bankruptcy is not always clear. The ABI Report highlighted an assortment of comments related to credit reporting in bankruptcy, including discharged debts being listed as “charged off” rather than reporting a zero balance; incorrect reporting after final cure in bankruptcy; the lack of a standard method for reporting debts after a Chapter 13 case is dismissed; lenders reporting a charge-off for a non-filer, co-obligor in a Chapter 13 after completion of the Chapter 13 plan rather than at the time of filing; and reporting of a third party who is not an obligor on the loan but has statutory or equitable rights in the collateral securing the loan. Although organizations such as the Consumer Data Industry Association (CDIA) provide resources like its resource guide for reporting in bankruptcy, which includes a helpful Q&A section, there remain nuanced situations that are far from clear for creditors in various reporting circumstances. Other resources providing industry guidance include CDIA’s “FAQ” publications and certain FTC opinions regarding credit reporting in and after bankruptcy.

Additionally, as creditors have certainly come to know, claims of improper investigation are being brought under the Fair Credit Reporting Act (FCRA), which allows for recovery of actual or statutory damages plus attorneys’ fees. Creditors are put in the position of either defending their credit reporting actions through litigation with the exposure of significant attorneys’ fees or settling early even if they may believe they have reported correctly.

The ABI convened and issued its report to recommend improvements to the consumer bankruptcy system. The thorough report covered a range of bankruptcy subject matters and “emphasized a pragmatic, problem-solving approach.” Bradley has detailed the ABI Commission’s Final Report in other two posts published on May 6 and May 17. Credit reporting was not the focus of the ABI Commission, but the uncertainty and controversy led the commission to at least craft a proposal for future substantive determinations, highlighting that one of the goals of bankruptcy is a fresh start for debtors, which includes the tools to rebuild their credit in their post-bankruptcy financial life.

ABI Proposal

The commission proposed that the ABI host a forum on credit reporting with bankruptcy experts, major industry players, advocacy groups, and policymakers to address problems and promote standardization in credit reporting on bankruptcy cases including best practices. The report did not describe any dates or deadlines, but it seems that credit reporting in bankruptcy is “on the radar” for industry experts and advocates from both sides to tackle.

The commission stated candidly that it did not have the resources to address the large scope of bankruptcy and post-bankruptcy credit reporting, but it wanted to raise the significance of the issue for future evaluation. The commission had discussed possible amendments to the FCRA, but believed it should first gather facts so it could implement changes without legislative or regulatory intervention.

Guidance on the Horizon?

Clarifying direction and guidance on how bankruptcy and post-bankruptcy accounts should be reported to CRAs will be welcomed by the industry. These recommendations will not be legally binding, but will carry considerable weight in the industry and may lead to amendments or regulatory changes. Although it will take time and does not provide any immediate direction, the hope is that clarity will result where there has been controversy and confusion.

Stay tuned for future announcements and recommendations from the industry on credit reporting.

The ABI Commission’s Final Report on Consumer Bankruptcy Issues: What Mortgage Creditors Need to Know

By Karlene A. Archer, Alexandra Dugan and Christopher L. Hawkins on May 17, 2019 Posted in Bankruptcy, Compliance, Events, Mortgage Servicing, Secured Creditors, Secured Debts

We previously provided you with some of the American Bankruptcy Institute’s Commission on Consumer Bankruptcy’s recommendations to improve the consumer bankruptcy system. As the commission noted, changes in bankruptcy law occur slowly. The last major amendments to the Bankruptcy Code were in 2005, and the last major amendments to the Bankruptcy Rules were in 2011. Despite the post-recession changes in the rules and local practice regarding mortgage servicing for borrowers in bankruptcy, gaps still exist, and the existing law often fails to effectively balance the interests of borrowers, mortgage servicers, the judicial system and other interested parties. Here are some suggested changes to address treatment of mortgages in bankruptcy:

Loan Modifications in Chapter 13

Uniformity and transparency should be encouraged.
Successful modifications should be approved through the plan modification process.
- Motions to modify a plan should be filed no more than 45 days after agreement to the terms of modification.
- Attachments to the motion should contain particular information about the terms of modification.
- Amended budget information should be required if the modification changes the original monthly mortgage payment by a substantial amount (>10%).
Payment change notices (PCNs) should not be required for a payment change resulting from successful modification.
Reasonable fees should be permitted for borrower’s attorneys relating to work on modifications.
The commission did not address the necessity of Amended Proofs of Claim to reduce capitalized arrearages; nor did it address the nuances of Trial Period Payments.

Improvements to Rule 3002.1 – Payment Change Notices (PCNs) and Notices of Final Cure

Untimely Filed PCNs:
- The commission recommends amending Rule 3002.1 to clarify the payment effective date for untimely filed PCNs to give the borrower the benefit of a lower payment early, and bar creditors from collecting a higher payment before they fully comply with the 21-day deadline.
Home Equity Line of Credit
- The commission recommends that only an annual notice be filed, provided that (i) the monthly changes are less than $10, (ii) the notice explains the monthly changes, and (iii) a reconciliation amount for any overpayment or underpayment received during the prior year is included.
- The monthly payment specified in the annual notice would be adjusted upward or downward to account for the reconciliation amount.
Reverse Mortgages
- The commission recommends amending Rule 3002.1 to clarify that reverse mortgages are subject to the rules’ requirements, except for PCN requirements.
Notice of Final Cure
- The commission recommends amending Rule 3002.1 to:
  - Convert the current notice process to motion practice, allowing for more certainty upon discharge.
  - Add a mid-case status review.
  - Emphasize and clarify that the creditor’s response is required and must include certain data points, including principal balance owed; date when next installment payment is due; amount of the next installment payment, separately identifying amounts due for principal, interest, mortgage insurance and escrow, as applicable; and amount, if any, held in a suspense account, unapplied funds account, or any similar account.
  - Allow the debtor or trustee to file a motion to compel creditor’s statement and for appropriate sanctions if the creditor does not comply with Rule 3002.1.

Conflicts between Proof of Claim and Chapter 13 Plans

The commission recommends an amendment to the rules to clarify the effect of proofs of claim and Chapter 13 plans with respect to the amount of claims and installment payments.
The rules should provide that the amount in a timely proof of claim should take precedence over a contrary amount in a Chapter 13 plan regarding:
- If the debtor proposes to cure defaults and maintain payments, the amount necessary to cure any default and amount of the current installment payment;
- The total amount of the creditor’s claim (including amount of a claim subject to lien avoidance under § 522(f)); and
- The amount of a secured claim excluded from § 506.

Upcoming Webinar

If these are areas you would like to learn more about, we encourage you to join us for “The ABI Commission’s Final Report on Consumer Bankruptcy Issues, Part II: What Mortgage Creditors Need to Know” webinar, which is scheduled for Thursday, May 23, from 11:30 a.m. to 12:30 p.m. CT. This webinar will focus on topics in the Final Report and Recommendations from the Commission of particular interest to mortgage creditors, as well as forecasting next steps and reactions from the industry.

United States Senate to Consider Legislation Expanding Fair Housing Protection to LGBTQ Community

By Heather Howell Wright, Christopher K. Friedman and Austin Holland on May 13, 2019 Posted in Affordable Housing, Disparate Impact, Fair Housing, Fair Lending, HUD

United States Senate to Consider Legislation Expanding Fair Housing Protection to LGBTQ Community A bipartisan measure was introduced in the United States Senate in late April to expand fair housing protections to LGBTQ persons. The Fair and Equal Housing Act of 2019, introduced by Senators Susan Collins (R-ME), Angus King (I-ME), and Tim Kaine (D-VA), would expressly include “sexual orientation and gender identity” as characteristics protected by the Fair Housing Act. If this bill becomes law, it will prohibit housing providers from denying individuals housing based on sexual orientation or gender identity. Co-sponsor Tim Kaine, in a press release announcing the introduction of the bill, says that this bill “is about ensuring all Americans have access to equal housing.” Sen. Collins echoed that sentiment, stating that “[t]hroughout my Senate service, I have worked to end discrimination against LGBTQ Americans, and it is time we ensure that all people have full access to housing regardless of their sexual orientation or gender identity. I urge our colleagues to join us in supporting this important legislation.”

Although the Fair Housing Act, in its current form, does not expressly extend its protections to LGBTQ individuals, some federal courts already have determined that such persons are entitled to protection under the statute. These federal decisions mainly stem from the United States Supreme Court’s decision in Price Waterhouse v. Hopkins. In Price Waterhouse, the Supreme Court considered whether the protections of Title VII extended to individuals based on stereotyping based on sex. The Supreme Court concluded that sex discrimination includes discrimination based on “gender stereotypes.” Plaintiffs alleging housing discrimination have successfully argued in a number of cases that the Price Waterhouse prohibition on gender discrimination applies to their LGBTQ status.

The federal appellate courts are divided on whether sexual orientation or gender identity is protected under analogous civil rights statutes. Moreover, the Supreme Court recently accepted three cases in which it will determine the scope of protections based on “sex” within Title VII of the Civil Rights Act, which prevents employers from discriminating on the basis of race, sex, color, national origin and religion.

Although the Fair Housing Act provides a potent remedy against housing discrimination in the form of damages claims, there are other avenues for protection. The United States Department of Housing and Urban Development (HUD), for instance, interprets the Fair Housing Act to protect individuals from discrimination on the basis of sexual orientation and gender identity based on the Price Waterhouse decision. HUD also adopted a rule prohibiting lenders that utilize the FHA mortgage insurance program, HUD-assisted or HUD-insured housing providers, and all other recipients of HUD funds from discriminating on the basis of “sexual orientation or gender identity.” HUD has also issued a rule protecting transgender individuals while enrolled in certain housing programs receiving HUD funds. Finally, in addition to HUD protections, 21 states and several hundred municipalities have enacted laws protecting individuals against housing discrimination based on sexual orientation and gender identity. All that being said, there have been multiple reports that HUD has considered rolling back these protections, and HUD has elected not to release previously drafted rules designed to enhance protections based on gender identity.

It is uncertain–at best–whether the Fair and Equal Housing Act of 2019 will clear both the Senate and the House and be signed into law. Even if this particular proposal is unsuccessful, however, there is at least some measure of bipartisan appetite for legislation regarding federal housing protection afforded to LGBTQ individuals. Moreover, the presence of state and local anti-discrimination laws, as well as HUD regulations prohibiting discrimination against LGBTQ individuals, means that lenders, property managers, and other housing providers subject to the Fair Housing Act must take great care to avoid discriminatory practices.

Disclosure and Cooperation Allow for Reduced False Claims Act Settlements According to New DOJ Guidance

By Brad Robertson and Scarlett Singleton Nokes on May 10, 2019 Posted in False Claims Act

Disclosure and Cooperation Allow for Reduced False Claims Act Settlements According to New DOJ Guidance This week, the Department of Justice (DOJ) formalized and expanded its guidance for how defendants can earn cooperation credit in False Claims Act (FCA) cases and thereby reduce settlement amounts. New section 4-4.112 of the Justice Manual outlines three ways entities and individuals facing FCA claims can potentially earn credit—through voluntary disclosures, cooperation, and remedial measures. The credit allotted can take the form of a reduced damage multiplier, reduced penalties, or DOJ assistance in dealing with agencies and relators.

Voluntary Disclosures

The policy values voluntary self-disclosure of false claims, both in the first instance as well as when additional misconduct is discovered during the course of the internal investigation. In announcing the new policy, Assistant Attorney General Jody Hunt stated, “The Department of Justice has taken important steps to incentivize companies to voluntarily disclose misconduct and cooperate with our investigations; enforcement of the False Claims Act is no exception. False Claims Act defendants may merit a more favorable resolution by providing meaningful assistance to the Department of Justice.” Hunt referred to voluntary disclosure as “the most valuable form of cooperation.”

Cooperation

The policy provides an illustrative list of measures FCA defendants can take in an effort to receive more favorable treatment. While noting that a “comprehensive list of activities that constitute . . . cooperation is not feasible because of the diverse factual and legal circumstances involved in FCA cases,” the list provides examples of 10 cooperative actions FCA defendants can take in an effort to obtain credit. The list includes:

Identifying individuals substantially involved in or responsible for the misconduct;
Disclosing relevant facts and identifying opportunities for the government to obtain evidence relevant to the government’s investigation that is not in the possession of the entity or individual or not otherwise known to the government;
Preserving, collecting, and disclosing relevant documents and information relating to their provenance beyond existing business practices or legal requirements;
Identifying individuals who are aware of relevant information or conduct, including an entity’s operations, policies, and procedures;
Making available for meetings, interviews, examinations, or depositions an entity’s officers and employees who possess relevant information;
Disclosing facts relevant to the government’s investigation gathered during the entity’s independent investigation (not to include information subject to attorney-client privilege or work product protection), including attribution of facts to specific sources rather than a general narrative of facts, and providing timely updates on the organization’s internal investigation into the government’s concerns, including rolling disclosures of relevant information;
Providing facts relevant to potential misconduct by third-party entities and third-party individuals;
Providing information in native format, and facilitating review and evaluation of that information if it requires special or proprietary technologies so that the information can be evaluated;
Admitting liability or accepting responsibility for the wrongdoing or relevant conduct; and
Assisting in the determination or recovery of the losses caused by the organization’s misconduct.

Not surprisingly, the government will also consider the additional factors of (1) the timeliness and voluntariness of the assistance; (2) the truthfulness, completeness and reliability of any information or testimony provided; (3) the nature and extent of the assistance; and (4) the significance and usefulness of the cooperation to the government in evaluating both voluntary disclosures and other methods of cooperation. The government does not require the waiver of attorney-client privilege or work product protection in order to receive cooperation credit.

Remedial Measures

In addition to cooperative acts, the policy mandates that the government consider remedial measures when determining whether and how much credit is warranted. Examples include:

Demonstrating a thorough analysis of the cause of the underlying conduct and, where appropriate, remediation to address the root cause;
Implementing or improving an effective compliance program designed to ensure the misconduct or similar problem does not occur again;
Appropriately disciplining or replacing those identified by the entity as responsible for the misconduct either through direct participation or failure in oversight, as well as those with supervisory authority over the area where the misconduct occurred; and
Any additional steps demonstrating recognition of the seriousness of the entity’s misconduct, acceptance of responsibility for it, and the implementation of measures to reduce the risk of repetition of such misconduct, including measures to identify future risks.

The inclusion of an existing compliance program is worth noting, especially in light of the revised corporate compliance guidance issued by DOJ on April 30, 2019. Having a robust and evolving compliance program remains vitally important to defending an FCA claim.

Credit Available

The policy explains that cooperation and/or remediation by FCA defendants will most commonly be rewarded with reduced penalties or damages multiple. Partial credit is explicitly authorized, and, regardless of the extent of the cooperation, the policy caps the credit available at a level not to “exceed an amount that would result in the government receiving less than full compensation for the losses caused by the defendant’s misconduct,” including damages, lost interest, costs of investigation and relator share. Therefore, even fully cooperating defendants should still expect to pay more than single damages. The government also outlines other avenues of relief potentially available to cooperating defendants, including proactive assistance from the government in parallel agency matters, public acknowledgement of disclosures, cooperation or remediation, and assistance with resolving qui tam litigation with a relator or relators.

The new policy provides a wide-ranging checklist for entities and individuals hoping for favorable treatment in FCA cases. Because government attorneys are purposefully left with broad discretion and flexibility in complying with DOJ policy, the door is open for cooperating defendants to use these factors to propose innovative settlements.

CFPB Requests Information on Remittance Rule

By Jared C. Searls and J. Riley Key on May 8, 2019 Posted in Banking, CFPB, Compliance, EFTA

CFPB Requests Information on Remittance Rule Last week, the Bureau of Consumer Financial Protection (Bureau) issued a request for information on its remittance rules, which are located in the Electronic Fund Transfers Act (EFTA). The request primarily seeks information and evidence related to two categories: (1) the temporary exception under the EFTA and (2) the scope of coverage of the remittance rules. Comments to this request must be received by the Bureau on or before June 28, 2019.

In sum, the remittance rules implement protections for consumers sending international money transfers (commonly referred to as “remittance transfers”). These protections include the general requirements for a remittance transfer provider to disclose the actual exchange rate and the amount to be received by the recipient, amongst others. However, EFTA currently provides a temporary exception to certain institutions that allows the institution to disclose estimates of the exchange rate, certain third-party fees, the total amount that will be transferred to the recipient inclusive of certain third-party fees, and the amount the recipient will receive after deducting third-party fees.

This exception is “temporary” in that it was originally enacted with an expiration date of July 21, 2015. The Bureau extended the temporary exception by five years to July 21, 2020; however, EFTA does not authorize the Bureau to extend the temporary exception any further.

With the expiration of the temporary exception just over a year away, the Bureau is seeking information to determine the impact of the expiration, which, based on the Bureau’s analysis, could affect hundreds of thousands of remittance transfers. The request for information also seeks evidence regarding whether the remittance rules’ current definition of “normal course of business” is appropriate. Under the current version of the remittance rules, an institution is exempt from the requirements of the rule if it provides 100 or fewer remittance transfers per year. However, the Bureau has found that more than half of the banks and around two-thirds of the credit unions covered by the rule sent fewer than 500 remittance transfers per year.

The assessment conducted by the Bureau also unveiled the following relationship: The smaller the asset size of a financial institution, the fewer total number of remittance transfers it offers on average. Ultimately, the Bureau is seeking information to determine whether the current definition of “normal course of business” should be adjusted and whether the creation of a “small financial institution” exception may be appropriate.

At the end of the day, the Bureau has no power to extend the temporary exception to the remittance rules. However, it is clear that the Bureau is interested in gathering as much information as possible to determine what effect the expiration of this exception will have on particular institutions and whether the Bureau should take any additional steps to counteract the potential negative consequences from the expiration of the exception.