CFPB Arbitration Rule Hits a Roadblock

CFPB Arbitration Rule Hits a Roadblock The Consumer Financial Protection Bureau (CFPB) issued a final rule on pre-dispute arbitration agreements on July 10, 2017. The final rule was published in the Federal Register on July 19, 2017, and as such, it is due to become effective on September 18, 2017 (60 days from the date the rule is published). 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 lawsuit.

The final rule sparked both praise and opposition from various groups around the country. While several groups quickly began publishing articles and writing letters, one group that has the power to stop the new regulation in its tracks decided to step in—Congress.

The House of Representatives elected to utilize the newly dusted-off Congressional Review Act (CRA) in an attempt to invalidate the recently adopted rule. The CRA allows Congress to disapprove of any regulations issued by executive agencies within 60 legislative days of publication in the Federal Register. Importantly, a “resolution of disapproval” under the CRA requires only a simple-majority vote, with no chance of amendment or filibuster. If the House, Senate, and president disapprove of the regulation, the regulation is effectively “killed” and cannot be reissued by the agency.

In this case, it took the House of Representatives only 15 of the allotted 60 days to vote in favor of striking down the CFPB’s final rule. The 231-190 vote, which took place on July 25, 2017, almost uniformly followed party lines. Meanwhile, Senate Banking Committee Chairman Mike Crapo (R-Idaho) has already introduced the Senate version of the resolution of disapproval. However, the date for the Senate vote has not yet been finalized.

With the Senate now in recess until September 5, we will have to wait to see what happens next. If Republicans can gather enough votes for a simple majority to vote for disapproval, then the resolution will only need President Trump’s blessing. Given the fact that the Trump administration has been adamant about its position on regulation, it is highly unlikely that we would see a veto from the president. Thus, the fate of the CFPB’s final rule will likely rest in the hands of a simple majority of the U.S. Senate once sessions resume on September 5, 2017. Under the language of the CRA, the Senate will have 60 legislative days from the date that the rule was published, July 19, 2017, to vote on the resolution for disapproval.

Oregon Regulates Home Equity Conversion Mortgage Originators and Servicers in New Law

By James W. Wright Jr. and Nathaniel M. Cartmell IV on August 10, 2017 Posted in Foreclosure, Mortgage Loan Originators, Reverse Mortgage, State Law Developments

Oregon Regulates Home Equity Conversion Mortgage Originators and Servicers in New Law Oregon’s legislature continues to add state level regulations to the Home Equity Conversion Mortgage (“HECM,” more commonly known as a reverse mortgage) marketplace. In 2015, the state imposed a series of content and presentation requirements on any “advertisement, solicitation, or communication” HECM lenders used to induce potential borrowers to apply for a HECM loan. When the clock strikes midnight on January 1, 2018, Oregon House Bill 2562 will usher in further requirements and HECM lenders need to be ready for them.

Contents of Tax and Insurance Disclosure

Oregon Revised Statute 86A.196 already required advertisements for a HECM to notify potential borrowers that they would continue to be liable for taxes and insurance and that failure to pay these sums would bring the loan immediately due. Under the new law, the ads must also disclose the potential consequences of a tax or insurance delinquency: tax liens or even foreclosure.

No Longer Just Originators

Additionally, the revised statute imposes new disclosure requirements related to taxes and insurance on HECM servicers. Come January 1, 2018, lenders—a term the statute does not define—must send an annual notice to every person with whom it has a HECM contract. The notice must contain the same information regarding taxes and insurance, including the consequences of delinquency, that originators must include in their advertisements. The statute also specifies what mailing address to use as well as when the notice should be sent.

Not All Entities Affected

The law does spare some lenders this burden. All lenders defined as a financial institution under Oregon’s Bank Act or as a licensee under Oregon’s Consumer Finance Act are exempted from compliance with either the origination or servicing requirements, while lenders holding a contract with loans that include a reserve account for taxes are excluded from the annual notice requirement.

Takeaway

While affected originators will need to review their ad copy to ensure the new disclosures are included, covered servicers will need to act soon to examine their processes and procedures and tracking systems to ensure that their Oregon portfolio receives the new required annual notice, where required.

CFPB Issues Pay-by-Phone Guidance with Far-Reaching Implications

By Jonathan R. Kolodziej and R. Aaron Chastain on August 1, 2017 Posted in CFPB, Compliance, Debt Collection, Dodd-Frank Compliance, FDCPA, UDAAP

CFPB Issues Pay-by-Phone Guidance with Far-Reaching Implications On July 31, the Consumer Financial Protection Bureau (CFPB) issued a public bulletin intended to provide guidance to covered persons and service providers who take payments from consumers using pay-by-phone services and charge the consumer a fee for such a service. The purpose of the bulletin was to highlight and re-emphasize the potential for violations of the Dodd-Frank Act’s prohibition on engaging in unfair, deceptive, or abusive acts or practices (UDAAP) and violations of the Fair Debt Collection Practices Act (FDCPA) when assessing phone pay fees. Given these risks, the CFPB warns that it “will closely review conduct related to phone pay fees for potential violations of Federal consumer financial laws.” While not the first time the CFPB has issued guidance on this topic, this is, perhaps, the most direct and obvious warning to financial services providers.

Bulletin 2017-01: Phone Pay Fees

In the bulletin, the CFPB specifically identified as unfair the practice of not specifically disclosing the amount of various transaction fees associated with different payment methods on written materials, and then failing to disclose all of the consumer’s payment method options, and the fees associated with each available payment method, when the consumer contacts the entity by telephone. The CFPB also identified a number of practices that could be deceptive. For example, the CFPB explained that it could be deceptive for an entity to misrepresent the availability of no-fee options or to misrepresent the purpose of a payment option that will result in a fee. The CFPB also explained that it could be a deceptive act or practice to fail to disclose that a fee will be charged when using a pay-by-phone service, or the amount of any such fees that will be assessed.

In the same bulletin, the CFPB noted that the collection of phone pay fees could constitute a violation of the FDCPA. The FDCPA bars a debt collector from using “unfair or unconscionable means to collect or attempt to collect any debt,” including “[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law” (14 U.S.C. § 1692f). Some courts have found that the collection of a “convenience charge” as a fee for expedited processing of a phone payment could be a “fee” that is not “expressly authorized by the agreement creating the debt or permitted by law,” thus creating the basis for a private cause of action under the FDCPA (see Wittman v. CB1, Inc., No. CV 14-105, 2016 WL 3093427, at *2-*3 (D. Mont. June 1, 2016)). However, at least one court has held that a $5 transaction fee charged by a debt collector to consumers seeking to pay by credit card did not violate the statute, when the consumer had to affirmatively choose to agree to the fee instead of paying by an alternative means (see Flores v. Collective Consultants of Cal., No. SA CV 14-0771, 2015 WL 4254032, at *9-*10 (C.D. Cal. Mar. 20, 2015)).

The CFPB did not expressly endorse either court’s position in the bulletin. However, it did note that its supervision arm had “found that one or more mortgage servicers that met the definition of ‘debt collector’ under the FDCPA violated the Act when they charged fees for taking mortgage payments over the phone to borrowers whose mortgage instruments did not expressly authorize collecting such fees and who reside in states where applicable law does not expressly permit collecting such fees.”

After outlining the various ways in which entities may violate applicable consumer financial laws, the CFPB then explains ways in which entities may minimize the associated risks. One thing is clear—the CFPB expects that entities will “review their practices on charging phone pay fees for potential risks of committing UDAAPs or violating the FDCPA.” The CFPB’s suggestions include, among other things, reviewing “underlying debt agreements to determine whether such fees are authorized by the contract,” reviewing policies, procedures, call scripts, and training materials, reviewing written disclosures to ensure adequate information is conveyed to consumers, and reviewing “service providers as to their pertinent practices.”

Takeaways

The first thing that becomes abundantly clear when reading the CFPB’s bulletin is that the issues they highlight are applicable to nearly all types of consumer financial products and services. Anyone who collects payments over the phone and charges a fee for that service likely is impacted by the CFPB’s views. Consistent with prior guidance on service providers, this bulletin also goes one step further and suggests that entities need to be mindful of the practices employed by service providers collecting payments on their behalf.

Additionally, it is important to keep in mind that this is not the first time the CFPB has issued guidance on phone pay fees. In the Fall 2014 issue of the CFPB’s Supervisory Highlights report, the CFPB highlighted potential FDCPA risks associated with these practices. Since that time, the CFPB has announced two public enforcement actions that included issues associated with pay-by-phone fees and claims of unfair and deceptive acts or practices. By releasing a guidance bulletin directly on these issues, the CFPB likely is signaling that it continues to uncover practices that may violate UDAAP restrictions or the FDCPA. For entities that do not react to the CFPB’s repeated attempts at putting the industry on notice, it is likely that the chances of leniency on the part of the CFPB are fading.

As the CFPB continues to take action against pay-by-phone practices it deems to constitute UDAAP or a violation of the FDCPA, it is hard not to wonder what the long-term implications might be. Much of the UDAAP risks noted by the CFPB likely can be minimized through disclosures and robust policies, procedures, scripting and training. However, if it is a violation to charge a pay-by-phone fee to a consumer who is protected by the FDCPA, minimizing the associated risks becomes extremely challenging. Will entities start adding clauses into debt agreements that specifically authorize pay-by-phone fees? Will some entities choose to stop offering expedited payment options to all consumers? These questions will be answered over time, but the implications spurred by the CFPB’s guidance could be far-reaching and substantial.

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

By Kristen E. Hawley on July 25, 2017 Posted in Bankruptcy, Secured Creditors

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

By Richard K. Vann Jr. on July 21, 2017 Posted in Automobile Finance, Debt Collection, Litigation Developments, TCPA

Revocation of Consent Under TCPA: Not So Fast In 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

By Nathan P. Viebrock on July 12, 2017 Posted in Automobile Finance, CFPB, Compliance, Dodd-Frank Compliance

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

Background

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

By J. David Dresher, Lesley Smith DeRamus and Kelley J. Hails on July 11, 2017 Posted in CFPB, Compliance, Mortgage Loan Originators, RESPA, TILA, TRID

CFPB Finalizes Amendments to TRID Rule The 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

By Benjamin William Perry and Heather Howell Wright on July 7, 2017 Posted in HOA Super Priority Liens, State Law Developments

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

By Amy E. Puckett on July 5, 2017 Posted in Disparate Impact, FinTech, Payday Lending

FinTech Lenders on Notice: Congressman Launches Investigation into FinTech Lending Rep. 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

By Jason R. Bushby and Jared C. Searls on June 29, 2017 Posted in CFPB, Compliance, Dodd-Frank Compliance

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