The Effects of a Creditor’s Non-Participation in Bankruptcy Proceedings

The Effects of a Creditor’s Non-Participation in Bankruptcy ProceedingsIt’s essential for secured creditors, particularly those who deal with consumer debts, to have policies in place that address the effects of a borrower’s bankruptcy. A Texas bankruptcy court underscored this need by ruling that a secured creditor’s claim could be modified, lessening its total recovery from the bankruptcy estate, where the creditor did not participate in the borrower’s bankruptcy proceedings despite being notified.

In a recent Chapter 13 case, the court granted a discharge where the debtors’ plan modified and paid off a mortgage, over the creditor’s objection that it could not be bound by the confirmed plan because it had not participated in the plan confirmation process. Finding that the creditor had received constitutionally sufficient notice of its claim treatment, the court held that the creditor was bound to the terms of the confirmed plan and therefore barred by the res judicata doctrine from relitigating its claim value.

The Facts

The debtors owed approximately $23,000 on their first mortgage to secured creditor Montanaro Investments. As part of their plan of reorganization, the debtors proposed paying Montanaro’s claim pro-rata, making monthly payments on the claim at 5.25 percent interest over a period of 54 months. Montanaro received multiple bankruptcy notices, but did not file a proof of claim or otherwise participate in the confirmation process. The debtor’s plan was confirmed without objection, and a copy of the confirmation order was mailed to Montanaro.

Eleven months after confirmation, the debtors filed a proof of claim on Montanaro’s behalf, listing the $23,000 claim secured by the debtors’ home, paid at the 5.25 percent interest rate given in the plan. No party objected to the late-filed claim, and so the court allowed it as filed.

The debtors completed their plan payments and moved for a Chapter 13 discharge. Only then did Montanaro contact the debtors to advise that they owed a balance of more than $30,000 on the mortgage, due in part because the contract rate of interest (14 percent) was higher than the interest rate provided in the plan (5.25 percent). The debtors moved to deem the mortgage fully paid by the plan, pointing out that they filed a proof of claim on Montanaro’s behalf, which was fully paid by the trustee through the confirmed plan. Montanaro countered that it could not be bound by the confirmed plan because such treatment essentially voided its lien, an action only permitted if the creditor had participated in the bankruptcy proceedings.

Did the Chapter 13 Plan Attempt to Void Montanaro’s Lien?

Montanaro contended that the debtors’ plan attempted to void its lien, an action that is only permitted if the secured creditor participates in the reorganization proceedings. The debtors argued that the plan did not void Montanaro’s lien, but rather provided for payment of the claim until discharge pursuant to the debtor-filed proof of claim.

The court sided with the debtors, focusing on the threshold question of whether the plan voided Montanaro’s lien at all, as opposed to examining whether creditor participation is required to void liens. The court found that the debtor’s plan did not deprive Montanaro of any recovery, as would be consistent with voiding a lien, but rather sought to pay Montanaro its full claim value as stated in its proof of claim. The court also highlighted language in the confirmed plan that explicitly preserved Montanaro’s lien until the debtors’ discharge. As a result, the court held that the debtors’ plan did not void Montanaro’s lien, rendering arguments about Montanaro’s participation moot.

Does a Confirmation Order Bar Relitigating Claim Value?

The court next turned to the question of whether the debtors’ plan bound Montanaro such that res judicata barred the creditor from relitigating claim valuation issues. Montanaro argued that the debtor-filed proof of claim contravened the Bankruptcy Code by reducing the interest rate on a mortgage, and as a result, the plan failed to account for the entirety of its claim.

Section 1322(b)(2) of the Bankruptcy Code generally forbids modifying interest rates on claims secured by the debtor’s principal residence. Once a plan is confirmed, however, the confirmed plan provisions bind the debtor and each creditor, even if those provisions improperly modify an interest rate under section 1322(b) or otherwise contradict the Bankruptcy Code (see 11 U.S.C. § 1327(a)).

Relying on the Fifth Circuit’s res judicata test, the court found that Montanaro was barred from relitigating its claim value because (1) Montanaro and the debtors had been parties throughout the confirmation process and discharge proceedings; (2) the court had jurisdiction to issue the confirmation order; (3) the confirmation order was a final adjudication on the merits; and (4) both suits involved the same cause of action.

Although not required for the res judicata analysis, the court also found that Montanaro received constitutionally sufficient notice of the debtor’s bankruptcy, the plan, and confirmation order to be bound by the plan’s terms, even though it had not participated in the confirmation process.

Montanaro was ordered to release its lien on the debtor’s home upon entry of the debtor’s discharge.

The Takeaway

  • File timely proofs of claim: Creditors should aim to file their own proofs of claim, rather than relying on the debtor or trustee to file for them, to ensure the claim includes the proper interest rate, arrearage, and total claim amount. Notably, the upcoming amendments to the Federal Rules of Bankruptcy Procedure, effective December 1, 2017, require secured creditors to file a proof of claim for their claim to be allowed. Amended Rule 3002(a) also clarifies that failure to file a proof of claim does not, by itself, void the secured creditor’s lien.
  • Address claim valuation issues before plan confirmation: Creditors should establish procedures to timely process and respond to bankruptcy notices, particularly regarding confirmation hearings. If claim valuation issues arise, they should be addressed prior to the plan’s confirmation.

For additional discussion regarding upcoming changes to the Federal Rules of Bankruptcy Procedure, please see Christopher Hawkins’s May 2017 blog post on the new rules.

Revocation of Consent Under TCPA: Not So Fast

Revocation of Consent Under TCPA: Not So FastIn a recent case under the Telephone Consumer Protection Act (TCPA), the U.S. Court of Appeals for the Second Circuit held that the TCPA does not permit a consumer to revoke prior consent to be contacted by telephone when that consent was provided, “not gratuitously, but as part of a bargained-for consideration” in a contract.  In Alberto Reyes v. Lincoln Automotive Financial Services, Reyes leased an automobile from Lincoln and, as part of his lease agreement, consented to receive telephone calls from Lincoln. After Reyes defaulted on the lease agreement, Lincoln called Reyes in an attempt to cure the default. Reyes alleged that he mailed a letter requesting that Lincoln stop contacting him via telephone, thus revoking his prior consent. Reyes contended that a consumer may unilaterally revoke prior consent when that consent is given freely as part of a loan or insurance contract, and relied on case law from the Third and Eleventh Circuits, as well as a FCC ruling to support his position. The Second Circuit rejected Reyes’ argument and held that a consumer may not unilaterally revoke prior consent included as an express provision of a binding legal agreement. This decision provides insightful guidance on how banks and financial services companies might structure consent provisions in lease agreements and similar consumer contracts.

What You Need to Know: CFPB Issues Final Rule on Arbitration Clauses in Consumer Financial Services Contracts

What You Need to Know: CFPB Issues Final Rule on Arbitration Clauses in Consumer Financial Services ContractsThe Consumer Financial Protection Bureau (CFPB) issued its long-anticipated final rule on pre-dispute arbitration agreements on July 10. Clocking in at 775 pages, the final rule prohibits consumer financial services providers from including terms in arbitration agreements that limit a consumer’s ability to join or initiate a class action. While the rule falls short of prohibiting the use of all arbitration agreements in consumer financial services contracts, the rule’s class action waiver restriction will likely cause a sea change in how consumers, their attorneys, and the financial services industry resolve disputes. In announcing the rule, CFPB Director Richard Cordray opined that “this rule throws open [those courtroom] doors and allows harmed consumers to band together and seek justice for themselves and all others affected in the same way.”


Consumer financial services providers, like companies in a multitude of other industries, have long relied on pre-dispute arbitration agreements in consumer contracts to provide a degree of predictability as to how disputes with consumers would be settled. A hallmark element of many of these arbitration agreements is a clause that prevents a consumer from joining any class action arising out of the provider’s services. Proponents of arbitration agreements tout the fact that these clauses lead to lower costs for consumers as anticipated litigation expenses do not need to be baked into the cost of consumer financial products. Opponents believe arbitration agreements prevent consumers from having their day in court when the amount of one consumer claim is not significant enough to justify the expense of hiring an attorney.

What’s changing?

Once the rule takes effect, providers will be prohibited from including language in pre-dispute arbitration agreements that restricts a consumer’s ability to join a consumer class action. Covered providers will not only need to strip class-action restrictions from consumer financial services agreements, but will also need to expressly state in those agreements that consumers have the right to join class actions and are not required to settle their disputes solely through arbitration.

In addition to the class action restriction, providers that use pre-dispute arbitration agreements will be required to submit certain records from arbitrations and court proceedings to the CFPB. The CFPB will use these records to monitor how the rule is affecting consumers and will also publish redacted versions of the records on a public website. Providers will be required to report to the CFPB: 1) any court or arbitration filings that reflect that a party relied on a pre-dispute arbitration agreement entered into on or after the compliance date; 2) communications from an arbitrator to the provider that reflect the arbitrator’s determination that a pre-dispute arbitration agreement does not comply with the arbitrator’s due process or fairness standards; and 3) communications from an arbitrator to the provider regarding a dismissal of or refusal to administer a claim due to the provider’s failure to pay required filing or administrative fees.

Who’s covered?

The arbitration rule will generally apply to persons, and any of their affiliates, who offer or service a covered consumer financial product. While certain entities, including auto dealers, attorneys, merchants, and retailers are technically exempt from the CFPB’s rules, a covered person who services those entities’ products will not be able to enforce any terms in those entities’ arbitration agreements that limit consumers’ class action rights. Practically, this may cause organizations not actually covered by the CFPB’s rulemaking authority to comply with the arbitration rule so that their covered person providers can continue to service their contracts. As a point of example, the Bureau highlighted that indirect automobile lenders and debt collectors, who are covered persons, could not enforce any prohibited terms of an arbitration agreement issued by an automobile dealer, a non-covered person.

When does the rule take effect?

The final rule goes into effect 60 days from the date the rule is published in the Federal Register, but providers will not need to change the terms of their pre-dispute agreements until 241 days, or about eight months, from the date the rule is published. By providing a 60-day window between the date of publication and the effective date, the CFPB is acknowledging Congress’s authority to review the arbitration rule through the Congressional Review Act (CRA), without leaving a single additional day for opponents of the rule to postpone the effective date through other measures.

What to expect next

In the coming weeks and months, expect to hear vocal opposition from the financial services industry and vigorous statements of support from consumer advocacy groups. The upcoming debate about the merits and future of the arbitration rule is likely to become something of a partisan Rorschach test for members of Congress who will likely use the rule as a platform to hold a much larger debate over the merits of regulation and the future of the CFPB.

Through the CRA, Congress can disapprove of any regulations issued by executive agencies within 60 days of publication. If a disapproval resolution is enacted, the arbitration rule would not take effect and the Bureau would be prohibited from passing a similar rule in the future. While Congress did not utilize the CRA earlier this year to disapprove of the CFPB’s final prepaid rule, given the much broader effect the arbitration rule will have on the financial services industry, there may be much louder and more frequent calls for Congress to use the CRA to disapprove of the CFPB’s final arbitration rule. There will also likely be a renewed focus on whether the Administration can take any steps to address this or future CFPB actions.

Review previous coverage of the arbitration rule.

CFPB Finalizes Amendments to TRID Rule

CFPB Finalizes Amendments to TRID RuleThe Consumer Financial Protection Bureau (CFPB) released final amendments to its “Know Before You Owe” mortgage disclosure rule, which is also known as the TILA-RESPA Integrated Disclosure rule (TRID), on July 7, 2017. As stated in the accompanying press release issued by the CFPB, the amendments “are intended to formalize guidance in the rule, and provide greater clarity and certainty” and “will facilitate implementation of the Know Before You Owe rule by the mortgage industry.” These final amendments have been eagerly anticipated by the mortgage industry since the initial publication of the proposed amendments in July of 2016.

The amendments implement a number of clarifications and updates, in addition to technical corrections and commentary, to the TRID rule, including but not limited to:

  • Tolerance provisions related to the total of payments which parallel those for the finance charge;
  • Expansion of the partial exemption for certain housing assistance loans which excludes recording fees and transfer taxes from the cost limits for such loans;
  • Extension of the coverage of the TRID rule to include all cooperative units;
  • Commentary which clarifies how separate disclosures may be provided to the consumer, seller, and other third parties such as real estate agents; and
  • Guidance regarding the proper disclosure of construction and construction-permanent loans, including disclosures related to fee allocation, post-closing fees, and construction proceeds.

The amendments become effective 60 days after publication in the Federal Register, so creditors will have the option to begin applying the new rules on or after such effective date. Compliance will become mandatory for all loan applications taken on or after October 1, 2018, and the escrow cancellation notice and partial payment policy disclosure must be provided beginning on this date for all loans to which the disclosures apply, regardless of when the creditor received the consumer’s application.

While the amendments to the rule address and clarify various topics, notably they do not address the so-called “black hole” issue which relates to the circumstances in which a Closing Disclosure may (or may not) be used to determine whether certain estimated charges were disclosed in good faith. The industry had been hoping for much-needed clarity on this topic, but instead the CFPB simultaneously issued a separate proposed rule which addresses “when a creditor may use a Closing Disclosure, instead of a Loan Estimate, to determine if an estimated closing cost was disclosed in good faith and within tolerance.” Comments on the new proposal are due 60 days after its publication in the Federal Register.

Nevada HOA Super-Priority Litigation Update: Nevada Supreme Court Rules in Favor of Lenders on Standing Issue

Nevada HOA Super-Priority Litigation Update: Nevada Supreme Court Rules in Favor of Lenders on Standing IssueThe Government-Sponsored Enterprises (GSEs) and their servicers scored a significant victory last week in the Nevada Supreme Court. In Nationstar Mortgage, LLC v. SFR Investments Pool 1, LLC (Case No. 69400), the court held that mortgage servicers have standing to assert, on behalf of the GSE investor, that the Housing and Economic Recovery Act (HERA) preempts state law and prevents extinguishment of the GSE loan at an HOA foreclosure sale.

Since the Nevada Supreme Court’s decision in September 2014 that foreclosure of an HOA lien could extinguish a deed of trust, investors and servicers, on the one hand, and HOA foreclosure sale purchasers, on the other hand, have been litigating whether deeds of trust survive an HOA foreclosure sale under NRS 116.3116. One major defense for investors and servicers has been that HERA prevents extinguishment of a deed of trust at an HOA foreclosure sale when a GSE, such as Fannie Mae or Freddie Mac, owned the loan at the time of the HOA foreclosure sale.

By way of background, Congress passed HERA in July 2008, which established the Federal Housing Finance Agency (FHFA). FHFA is an independent federal agency with regulatory and oversight authority over Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In September 2008, FHFA placed Fannie Mae and Freddie Mac into conservatorships “for the purpose of reorganizing, rehabilitating, or winding up [their] affairs.” While FHFA acts as conservator, “[no] property of the Agency shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the Agency.”  In 2015, FHFA released a written statement providing that it “supports the reliance on [HERA] in litigation by authorized servicers of [the GSEs] to preclude the purported involuntary extinguishment of [the GSE’s] interest by an HOA foreclosure sale.”

One issue that has arisen frequently in the HOA litigation involving a GSE-owned loan is whether a servicer may assert the defense on behalf of the GSE or whether the GSE and/or FHFA must be joined as a party to the litigation. Investors and servicers have argued that the servicers have standing to assert HERA on behalf of the GSE. HOA sale purchasers have argued that HERA specifically requires FHFA be a party to the litigation to assert HERA and that, under Armstrong v. Exceptional Child Center, Inc., private litigants such as the mortgage servicer may not assert the Supremacy Clause as a basis for preempting state law.

In Nationstar Mortgage, LLC v. SFR Investments Pool 1, LLC, the Nevada Supreme Court held, as a matter of first impression, that servicers have standing to assert HERA on behalf of GSEs and FHFA. The court held that the plain language of HERA “explicitly allows the FHFA to authorize a loan servicer to administer FHFA loans on FHFA’s behalf.” Furthermore, the court rejected SFR’s reliance on Armstrong as “misplaced,” finding that Nationstar was asserting HERA preemption as a defense rather than a cause of action.

The court’s decision does not address, however, the dispositive question in these cases—whether HERA actually preempts state law and prevents extinguishment when a loan is owned by Fannie Mae or Freddie Mac at the time of the HOA sale—because the district court failed to reach this issue. In the meantime, this decision represents a major victory for GSEs and FHFA, which are currently flooded with hundreds of quiet title cases throughout Nevada.

FinTech Lenders on Notice: Congressman Launches Investigation into FinTech Lending

FinTech Lenders on Notice: Congressman Launches Investigation into FinTech LendingRep. Emanuel Cleaver II has begun an investigation into small business financial technology (FinTech) lending, expressing concern that “some FinTech lenders may be trapping small business owners in cycles of debt or charging higher rates to entrepreneurs of color.” Cleaver stated that his investigation is particularly interested in payday loans for small businesses because the payday loan industry has frequently “targeted communities of color with high rates and fees.”

According to Cleaver, “FinTech lending companies, also known as alternative small-business lending, are a fast growing industry offering a new wave of innovation – and also pose many new risks.” Although FinTech lenders must comply with anti-discrimination laws such as the Equal Credit Opportunity Act, they do not have to undergo supervisory exams like credit unions or community banks. Additionally, small business borrowers do not have the same level of protection, such as the Truth in Lending Act, which consumer borrowers have.

On March 15, 2017, Cleaver contacted the Consumer Financial Protection Bureau (CFPB) and requested that the CFPB investigate FinTech lenders. On June 22, 2017, Cleaver contacted the chief executive officers of several FinTech small business lenders, asking 10 questions related to each company’s general profile, each company’s approach to protecting borrowers from discrimination, and each company’s disclosures and transparency towards borrowers. The congressman also asked that the companies, which included Biz2Credit, Fora Financial, Lending Club, Lend Up, and Prosper, respond no later than August 10, 2017.

Regulatory Reformation: Treasury’s First Recommendations for Improving Financial Regulations

Regulatory Reformation: Treasury’s First Recommendations for Improving Financial RegulationsOn February 3, 2017, President Donald Trump issued Executive Order 13772, which identified seven Core Principles by which his administration would regulate the U.S. financial system. The Executive Order also directed the U.S. Department of the Treasury to generate reports to identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other government policies that inhibit federal regulation of the U.S. financial system in a manner consistent with those Core Principles.

On June 12, 2017, the Treasury released its first in a series of reports to President Trump in response to the Executive Order. This first report covered and discussed the depository system – consisting of banks, savings associations, and credit unions of all sizes, types, and regulatory charters. The Treasury consulted with a wide variety of firms, groups, experts, academics, and agencies to attempt to gather the widest range of information and perspectives to form its opinions and ultimate recommendations.

The report serves two basic functions: (1) to identify issues and problems with current banking regulations, and (2) to provide recommendations consistent with Trump’s Core Principles that seek to correct the current problems. The Treasury emphasized that realigning banking regulations in ways consistent with the identified Core Principles would help break America’s cycle of low economic growth. Recommendations for regulatory reform in the banking sector include:

  • Improving regulatory efficiency and effectiveness by critically evaluating mandates and regulatory fragmentation, overlap, and duplication across regulatory agencies;
  • Aligning the financial system to help support the U.S. economy;
  • Reducing regulatory burden by decreasing unnecessary complexity;
  • Tailoring the regulatory approach based on size and complexity of regulated firms and requiring greater regulatory cooperation and coordination among financial regulators; and
  • Aligning regulations to support market liquidity, investment, and lending in the U.S. economy.

Importantly, the recommendations consist of several common themes. First, there is a need for enhanced policy coordination among federal financial regulatory agencies. Second, supervisory and enforcement policies and practices should be better coordinated for the purposes of promoting both safety and soundness, as well as financial stability. Finally, financial laws, regulations, and supervisory practices must be harmonized and modernized for consistency. A complete list of recommendations and how they fit into President Trump’s Core Principles is found at Appendix B of the report, which is available through the U.S. Department of the Treasury website.

While the Treasury report outlines a broad array of problems with current regulations, the report focuses on and repeatedly criticizes various portions of the Dodd-Frank Act, which was signed into law by President Barack Obama in 2010. One specific issue that the Treasury criticizes is Dodd-Frank’s creation of the Consumer Financial Protection Bureau (CFPB) and its effectiveness. According to the report, “The CFPB was created to pursue an important mission, but its unaccountable structure and unduly broad regulatory powers have led to regulatory abuses and excesses.” The report goes on to emphasize that the CFPB’s overly burdensome enforcement and rulemaking has placed undue compliance burdens on institutions, limited innovation, and hindered consumer choice and access to credit. The report is especially critical of the CFPB’s focus on its own discretion and autonomy – stating that the CFPB has repeatedly made decisions that maximize its own discretion, rather than creating a stable regulatory environment. In response to this harsh characterization and evaluation of the CFPB, the report provides two important goals to help improve the Bureau: (1) adopting structural reforms to make the CFPB more accountable to the president, Congress, and the American people, and (2) ensuring that regulated entities have certainty regarding CFPB interpretations of the law before subjecting them to enforcement actions. These reforms will help the CFPB perform the functions that it was originally created to perform, as well as promote the overarching Core Principles provided by President Trump.

This Treasury report is the first of several reports that will be issued to President Trump. Ultimately, these reports will compile a vast number of reform recommendations. However, it will be up to Congress and other governmental agencies to take these recommendations and turn them into active laws and policies. Until then, these recommendations only provide a glimpse of potential actions that, if enacted, may drastically alter the U.S. financial system.

CFPB Issues Policy Guidance on Early Implementation of the 2016 Mortgage Servicing Amendments

CFPB Issues Policy Guidance on Early Implementation of the 2016 Mortgage Servicing Amendments The Consumer Financial Protection Bureau (CFPB) released “policy guidance” on June 27, 2017 related to the effective dates of the 2016 mortgage servicing rule amendments. In response to repeated requests from the mortgage servicing industry to change the two effective dates, the CFPB explained that it does not “intend to take supervisory or enforcement action for violations of existing Regulation X or Regulation Z resulting from” early implementation of the amendments. However, this “relief” technically only applies to a three-day window prior to each of the effective dates of the 2016 amendments. While this guidance may be useful for some areas of the new law, in some ways the CFPB may have injected additional considerations into the implementation process that must be worked through in the coming months.

The vast majority of the 2016 amendments are slated to go into effect on October 19, 2017, with certain sections of the law becoming effective on April 19, 2018. Both of those dates fall on a Thursday, which raises issues regarding implementing a new process mid-week. This is further complicated by the CFPB’s decision in the initial release of the amendments to not provide an early implementation safe harbor. While early implementation of some provisions will not raise any compliance issues, there are some areas where changing a process in response to the amendments prior to the effective date would likely violate existing laws.

The CFPB’s policy guidance—which is labeled as “non-binding”—explains that the CFPB does not intend to take supervisory or enforcement action for any violations that result from implementing the 2016 amendments up to three days early. This means that servicers can implement the new rules starting on October 16, 2017, and April 16, 2018, without any repercussions from the CFPB. This relief certainly will be helpful to servicers who have been hoping and requesting to have a weekend to implement and test certain processes associated with the new law. However, there are a couple of interesting points related to the CFPB’s choice that are worth consideration.

First, the CFPB chose to issue a “non-binding general statement of policy” rather than actually amend the effective dates of the rules. In that regard, it is worth noting that, in conjunction with the issuance of its policy guidance, the CFPB did release a handful of technical, non-substantive corrections to the original amendments. The CFPB did not explain why it chose to formally amend certain aspects of the rule but not to formally amend the effective dates, but the implications of this choice are important. For example, the CFPB’s policy only protects servicers from regulatory risk associated with the CFPB. It does not protect servicers from state regulators that have authority to supervise and enforce compliance with the federal servicing obligations. And, as has been alluded to above, it is not even binding on the CFPB.

Additionally, the CFPB’s choice to issue policy guidance rather than formally amend the rules also does not protect servicers from litigation risk. Many of the servicing requirements in Regulations X and Z are enforceable through private litigation, and the CFPB’s decision to refrain from taking supervisory or enforcement action does not in any way alleviate that risk. Admittedly, this leaves a relatively small window of time where a revised process could be subject to possible state action or private litigation. Nevertheless, the risk that remains must be taken into account by mortgage servicers as they schedule the roll-out of new processes to comply with the 2016 amendments.

As the first effective date quickly approaches, servicers should assess which provisions can be implemented early without violating another existing state or federal law. For those provisions that would violate applicable law, servicers should assess whether the benefits of implementing three days early outweigh any risk that may exist. The end result of this analysis likely will be a true rolling implementation calendar that will enable new processes to be put in place over time, with very few areas that will need to be addressed mid-week.

Military Consumer Enforcement Act Introduced in Senate Seeks to Enhance SCRA Enforcement

Military Consumer Enforcement Act Introduced in Senate Seeks to Enhance SCRA EnforcementSeveral U.S. Senators have introduced legislation for a Military Consumer Enforcement Act that would seek to empower the Consumer Financial Protection Bureau (CFPB) to oversee and enforce compliance with the Servicemember Civil Relief Act (SCRA). If passed and signed into law, the new act would amend the Consumer Financial Protection Act of 2010.

The SCRA, 50 U.S.C. § § 3901 – 4043, provides a range of civil and financial protections to eligible servicemembers, including capping interest rates, protecting against foreclosure and eviction without a court order, and requiring certain steps to obtain a default judgment against a protected servicemember. The CFPB currently does not have direct enforcement authority over the SCRA but has been indirectly enforcing the SCRA through referrals to the Department of Justice. The CFPB has established the Office of Servicemember Affairs, led by Assistant Director Holly Petraeus, to focus on consumer financial challenges affecting servicemembers, veterans, and their families. The Military Consumer Enforcement Act would give the CFPB enforcement power over 10 key provisions in the SCRA, including protections related to interest rates, foreclosure, eviction, installment contracts (including automobile loans), and default judgments.

Senators Jack Reed of Rhode Island and Charles Schumer of New York are co-sponsoring the act “in an effort to better protect members of the military and their families from abusive financial practices.”  According to Wisconsin Senator Terry Baldwin, another co-sponsor, “enforcement of this critical law has been inconsistent and subject to the discretion of financial regulators[,]” and that the proposed Military Consumer Enforcement Act “would ensure that SCRA enforcement will be a permanent priority for the CFPB.”  “Our servicemen and women and their families face unique challenges and they deserve strong consumer protections,” said Senator Baldwin. “Our Military Consumer Enforcement Act will ensure that the CFPB has the tools it needs to be able to protect the men and women who volunteer to protect our country.” Senator Reed noted that “[w]ithout a change in the law, SCRA enforcement will continue to be subject to the changing priorities of financial regulators. Prioritizing the consumer protection of our servicemembers should not be discretionary.”

The federation of state Public Interest Research Groups (PIRG) agreed that SCRA protections have been “unevenly enforced” and that “giving the CFPB the jurisdiction over key parts of the SCRA means that the law will actually be enforced.”

Co-sponsored by numerous U.S. Senators, the proposed legislation has the support of over 30 organizations that represent servicemember interests as well. Relatedly, the Department of Justice has also recently increased its efforts towards SCRA enforcement as seen through the DOJ’s Servicemember and Veterans Initiative and SCRA Enforcement Support Pilot Program. More information can be found at and

The new Military Consumer Enforcement Act legislation, if passed, will spurn increased SCRA-focused exams and enforcement actions.

CFPB Rolls Out Student Loan Servicing Campaign Focusing on Public Service Loan Forgiveness Program

CFPB Rolls Out Student Loan Servicing Campaign Focusing on Public Service Loan Forgiveness ProgramDespite the uncertain future of the Public Service Loan Forgiveness program, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray partnered with North Carolina’s Attorney General Josh Stein to roll out a new campaign focused on how student loan servicers should address borrowers applying for, and currently enrolled in, the Public Service Loan Forgiveness program (PSLF program). The 2018 White House budget currently calls for the elimination of the PSLF program for students taking out loans on or after July 1, 2018. Although Education Department officials have stated that the approximately 552,931 individuals currently enrolled in PSLF will not be impacted, the budget does not expressly provide that those they will be grandfathered into forgiveness.

Nonetheless, neither Cordray nor Stein made any mention of an uncertain future for the PSLF program at a hearing at North Carolina State University in Raleigh, North Carolina today. Stein and Cordray expressed an increased focus on correcting purported problems in student loan servicing at the state level and through the CFPB complaint process. The CFPB campaign, called “Certify Your Service,” emphasizes several steps borrowers can take to ensure compliance with the PSLF program, but Stein and Cordray’s public remarks placed the responsibility for keeping borrowers on track squarely on student loan servicers.

Cordray emphasized that the CFPB is updating its exam procedures to scrutinize how servicers apply payments and evaluate borrowers for loan forgiveness. The announcement comes at a time when complaints to the CFPB regarding student loan servicers are purportedly rampant. Cordray specifically highlighted processing errors which prevented borrowers’ payments from counting as qualifying payments towards forgiveness and the lack of clarity in the information student loan servicers provide to borrowers about the availability of modified payment plans as two major problem areas. Borrowers in public service careers gave first-hand testimonials at the morning event, speaking to attendees about their experiences with “sloppy servicing” which allegedly cost them money and indicated that borrowers “could not trust” their student loan servicers. Stein closed out the hearing by emphasizing that, “[f]or this program to work, the servicers have to pay a critical role in helping the people ensure they get the benefits that they are entitled to under the law.”

Student loan servicers have relationships with a large number of consumers across the country, and thus should take the comments by Director Cordray–but even more so Attorney General Stein–seriously in light of the recent role states have taken in regulating student loan servicers. In North Carolina alone, Stein noted that more than 60 percent of students graduating from college have student loan debt. He indicated that he will continue to enforce state consumer protection laws against student loan servicers and for-profit universities doing business in North Carolina and “aggressively” investigate companies charging what Stein called “illegal fees.” Stay tuned for updates on how this campaign by the CFPB and state initiatives nationwide play out.