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

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

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

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

Disclosure and Cooperation Allow for Reduced False Claims Act Settlements According to New DOJ GuidanceThis 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.”


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

CFPB Requests Information on Remittance RuleLast 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.

The City Has My Vehicle. What Now?

The City Has My Vehicle. What Now? Chicagoans have found a new avenue through which to regain possession of their vehicle after it has been impounded by the City:  file a chapter 13 bankruptcy case. In 2018, 17,603 new chapter 13 bankruptcy cases were filed in the Northern District of Illinois. By comparison, in 2018, the Middle District of Florida, one of the busiest bankruptcy courts, saw 6,650 new chapter 13 cases filed, and the Southern District of California, another large bankruptcy district, saw 1,426 new filings.  The driving force behind the Northern District of Illinois’s skewed statistics appears to be Chicago residents utilizing bankruptcy filing to obtain an impounded vehicle from the City.

In Chicago, fines for traffic violations can result in mounting debt for residents. For example, Chicago’s red light camera tickets can cost over $100 per violation, and those charges are often exacerbated due to late fees.  If Chicago residents fail to pay, the city, or one of its contractors, can “boot” the residents’ vehicles. If residents do not pay the balance owed to the city within a certain amount of time of booting (sometimes as short as 24 or 48 hours), city contractors tow and impound the vehicles. Once a vehicle is impounded, residents again have a limited amount of time to pay fees and retrieve their vehicles before they are sold. Even if a resident’s vehicle is sold, the sale proceeds do not offset the resident’s fees owed to Chicago.

When residents lack the necessary funds to remedy this situation, some will file chapter 13 bankruptcy as an avenue to have the vehicle returned. That practice is so common that some local attorneys leave advertisements on booted vehicles and represent on their websites that they can help residents get their vehicles back for less money than they owe the city.

How Filing Chapter 13 May Help Get A Seized Vehicle Returned

Upon filing, a bankruptcy estate is created, which consists of the debtor’s “legal and equitable” interests in property. This includes the debtor’s right to redeem property. Under the Bankruptcy Code, chapter 13 debtors have the right to use estate property, and, therefore, have standing to pursue violations of the automatic stay against creditors and seek to have certain property returned. There is a circuit split as to how the automatic stay applies to personal property, particularly vehicles, when it was repossessed prior to the bankruptcy filing. That bankruptcy bench in the Northern District of Illinois is split, too.

Following seizure of their vehicles, many Chicagoans file for chapter 13 bankruptcy, relying upon the Seventh Circuit’s Thompson v. GMAC, to demand that the city, as a creditor, return the vehicle to them, the debtor. In Thompson, the court found that a secured creditor violated the automatic stay by failing to return the vehicle after the bankruptcy filing. In other words, the creditor “exercised control” over property of the bankruptcy estate in violation of the automatic stay, and was required to return it to the debtor. Once the vehicle is returned, many Chicago residents will abandon their bankruptcy cases to be dismissed by other parties or the court. If the case is dismissed immediately after the debtor retrieves the vehicle, the city may obtain a writ of replevin to retake the vehicle from the debtor.

But, in 2017, one Northern District of Illinois bankruptcy judge changed course, and did not require the city to return the vehicle. The court held that the city had a possessory lien on the vehicle. By keeping the vehicle, the city was maintaining perfection of its possessory lien and did not violate the automatic stay. Shortly thereafter, four other Northern District of Illinois judges ruled oppositely, each holding that the vehicles should be returned to the debtors. Chicago has  appealed those four decisions to the Seventh Circuit in a consolidated appeal, captioned City of Chicago v. Robbin L. Fulton, No. 18-2527.

Is This an Abuse of the Bankruptcy Process?

Filing for bankruptcy initiates a formal legal proceeding, which should not be taken lightly. The filing establishes certain rights and obligations for parties other than the debtor. In particular, creditors must adjust their treatment of the debtor’s account immediately to avoid violating the automatic stay. Other interested parties, including trustees, the U.S. Trustee, judges, and court personnel, must spend time and resources analyzing schedules and statements and attending initial hearings and 341 meetings, even if the case is quickly dismissed. The strain on the bankruptcy system caused by these bankruptcy filings is evidenced by the number of chapter 13 cases filed in the Northern District of Illinois as compared to other jurisdictions.

The ABI Suggests a Solution

The American Bankruptcy Institute’s Commission on Consumer Bankruptcy recently released a report of recommendations to improve the consumer bankruptcy system. The report recommends a statutory amendment to balance the debtors’ and creditors’ conflicting interests regarding collateral repossessed prepetition. Specifically, the Commission recommends a Bankruptcy Code amendment to expressly provide that retaining possession of estate property violates the automatic stay. To ensure adequate protection for creditors, property subject to potential loss in value due to accident, casualty or theft (i.e. vehicles) may be retained by the creditor unless the debtor fails to provide proof of insurance or other security for the value of the property.

The Commission further recommends amending the Bankruptcy Code to protect the “status quo” for creditors with statutory liens dependent upon possession. For example, if the resident provided proof of insurance, presumably the city would be required to release the vehicle. Any statutory lien dependent upon possession that the city had would continue in the same amount and priority as if the creditor had retained possession of the vehicle. If the debtor dismissed the case immediately after retrieving the vehicle, the city would have the right to obtain a writ of replevin.

Finally, the report recommends amending the Federal Rules of Bankruptcy Procedure to provide that the debtor could enforce the turnover right by motion instead of adversary proceeding. This allows the debtor a more expedient and cost-effective resolution.

What’s Next?

For now, all eyes remain on City of Chicago v. Robbin L. Fulton, the consolidated appeal of the four Northern District of Illinois cases that held against Chicago. The issues are briefed and the matter will be set for oral argument. In the meantime, the circuit split on the issue remains, with the minority of decisions finding that vehicles do not need to be released upon bankruptcy filing unless the court orders otherwise.

ABI Commission’s Final Report on Consumer Bankruptcy Issues, What Creditors Need to Know

The American Bankruptcy Institute’s Commission on Consumer Bankruptcy  released its Final Report and recommendations on April 12, 2019. The commission was created in 2016 to research ABI Commission’s Final Report on Consumer Bankruptcy Issues, What Creditors Need to Knowand develop recommendations to improve the consumer bankruptcy system. During its review, the commission focused on new trends regarding how Americans are incurring debt. At the conclusion of its review, the commission created a Final Report which includes recommendations for amendments to the Bankruptcy Code and Rules to make the bankruptcy system more approachable and efficient.

Some of the issues addressed in the Final Report include:

  • Remedies for discharge violation: Most courts only allow motions to enforce a discharge through a contempt proceeding. Therefore, in an effort to make it easier to seek relief, the commission recommends that a statutory private right of action be created for violations of the discharge. For example, a private right of action would be created for violations of the automatic stay, which would include sanctions consisting of costs, attorneys’ fees, and punitive damages. The commission further recommends amendments to the Bankruptcy Code that would allow motions to determine which creditor violated the discharge.
  • Protection of Interests in Collateral Repossessed Prepetition: Circuit courts are currently divided as to whether collateral seized prepetition must be returned to the party entitled to possession afterward. To balance the competing interests of the debtor and creditor, the commission recommends that § 362(a)(3) be amended to provide that a creditor’s retention of estate property violates the automatic stay, but only if proof of insurance or other security is provided for the property subject to loss of value.
  • Credit Counseling and Financial Management Course: The commission recommends amending the Fair Credit Reporting Act to mandate that consumer reporting agencies report the debtor’s successful completion of a financial management course, so that the impact of the course may be measured by changes in the debtor’s credit score.

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 I: What Creditors Need to Know” webinar, which is scheduled for Thursday, May 9, from 11:30 a.m. to 12:30 p.m. CT.  Given the depth of topics covered in the Final Report, we will be doing a two-part series. Our first webinar will provide an overview of the Final Report and recommendations from the commission, with a targeted focus on areas of interest to creditors. We will also forecast next steps and reactions from the industry. The second webinar is scheduled for Thursday, May 23, from 11:30 a.m. to 12:30 p.m. CT and will target areas of interest for residential mortgage creditors.

Fourth Circuit Strikes Down TCPA Exemption for Collection of Government Debt, Putting Loan Servicers and Debt Collectors at Risk

Fourth Circuit Strikes Down TCPA Exemption for Collection of Government Debt, Putting Loan Servicers and Debt Collectors at RiskA recent decision by a panel of the United States Court of Appeals for the Fourth Circuit interpreting the Telephone Consumer Protection Act (TCPA) has significant – and possibly costly – implications for loan servicers and debt collectors seeking to collect on loans owed to or guaranteed by the United States. On April 24, the Fourth Circuit issued its published decision in American Association of Political Consultants, Inc. v. Federal Communications Commission, holding that the TCPA’s exemption for automated phone calls to cell phones related to the collection of debts owed to or guaranteed by the United States violated the First Amendment because it caused the statute to unconstitutionally discriminate against other forms of speech, which did not enjoy the same exemption. Servicers and debt collectors relying on the TCPA’s government debt collection exemption for their calls to borrowers living in the states of Virginia, West Virginia, Maryland, North Carolina, and South Carolina now need to make sure that their practices comply with the statute.

If the panel’s decision stands, the order striking down the exemption will require any loan servicers or debt collectors for debts owed to or guaranteed by the United States to reevaluate their practices for contacting borrowers by telephone in order to avoid potential liability for significant statutory damages. Most notably, the decision affects collection of pre-2010 federally guaranteed student loans and post-2010 federal student loans under the William D. Ford Federal Direct Loan Program, as well as federally guaranteed mortgage loans.

The TCPA, as enacted in 1991, contained only two statutory exemptions for automated phone calls made to cell phones using an Automatic Telephone Dialing System (commonly called an “autodialer”): calls made for “emergency purposes” and calls made with “the prior express consent of the called party.” In 2015, Congress created a third statutory exemption for calls made “solely to collect a debt owed to or guaranteed by the United States.”

In American Association of Political Consultants, four entities that engaged in political activities and contacted individuals by telephone for the purposes of furthering political causes sued the Federal Communications Commission (FCC) and the attorney general, arguing that that the TCPA’s ban on the use of autodialers to make phone calls to cell phones without prior consent was an unlawful content-based restriction on speech, in light of the regulatory and statutory exemptions permitting such calls in certain circumstances (including the statutory exemption for the collection of debts owed to or guaranteed by the United States). The plaintiffs claimed that the ban on the use of autodialers was “underinclusive” and thus not narrowly tailored in light of the regulatory and statutory exemptions. Notably, the plaintiffs requested that the proper remedy was for the court to strike down the entire autodialer ban.

On cross motions for summary judgment, the district court ruled in favor of the government. The district court first accepted the plaintiffs’ position that the TCPA’s government debt exemption was a “content-based speech restriction,” which invoked the rigorous strict scrutiny standard (meaning that the government had to demonstrate that “the restriction furthers a compelling interest and is narrowly tailored to achieve that interest,” and that the government had to use the “least restrictive means” to achieve that interest). The district court divided its strict scrutiny analysis into two steps. First, the district court identified a compelling interest justifying the autodialer ban: the privacy rights of individuals who are protected by the statutory ban on the use of autodialers without prior consent. Second, the district court identified a governmental “compelling interest” in “collecting debts owed to it.” The district court concluded that the autodialer ban was narrowly tailored to achieve the compelling interest of protecting consumer privacy, and that the exemption for calls made for the purpose of collecting debts owed to or guaranteed by the United States was not impermissibly “underinclusive” in a way that constituted unconstitutional discrimination. The district court declined to address the regulatory exemptions to the autodialer ban, noting that it lacked jurisdiction to review the propriety of the FCC’s rules interpreting the TCPA, as the Administrative Procedures Act provided the exclusive procedure for review of those rules.

On appeal, the Fourth Circuit reversed. The Fourth Circuit agreed with the district court’s determination that the TCPA’s ban on the use of autodialers for calls made to cell phones for purposes other than the collection of debts owed to or guaranteed by the United States was content-based discrimination that triggered strict scrutiny. But the court rejected the district court’s conclusion that debt-collection exemption was narrowly tailored to serve a compelling interest. The Fourth Circuit specifically identified the volume of federal student loan debt (noting a report from the FCC that reported that there were over 41 million borrowers who owed over $1 trillion on federal student loans) as evidence that the government debt exemption was not “narrow.” The Fourth Circuit further concluded that the government debt exemption was different in both scope and effect from the other statutory exemptions allowing autodialer calls with prior consent and in the event of an emergency.

Having accepted the plaintiffs’ arguments that the TCPA autodialer ban was unconstitutional in light of the government debt exemption, the court then addressed the proper remedy. The Fourth Circuit first noted the Supreme Court’s “strong preference for a severance in these circumstances,” as opposed to an order striking down the entire provision. The court further noted the express severance provision in the original 1934 Communications Act, of which the TCPA became a part when it was enacted. In light of the “strong preference” for severability and the express severability provision, as well as the fact that the statute had operated for 24 years without an exemption for the collection of government debts, the court succinctly concluded that the proper remedy was striking only the government debt exemption and leaving the autodialer ban intact.

Although not wholly surprising, the outcome of the case could not have possibly been what the plaintiffs wanted. The plaintiffs may have been vindicated on their arguments that the government debt exemption caused the statute to discriminate based on the content of calls, but they are in the same position after the Fourth Circuit’s decision as they were before: subject to the autodialer ban. Thus, instead of the outcome they really wanted – an order striking down the autodialer ban in full, which would have been widely celebrated by the business community – the plaintiffs ended up with an order striking down a broad statutory exemption relied upon by numerous companies.

The Fourth Circuit issued its decision on April 24. Because a government agency is a party, the parties have until June 10 to seek rehearing or rehearing en banc.

As of now, the case does not appear to be a strong candidate for further review on a petition for a writ of certiorari to the Supreme Court. But the Ninth Circuit is currently considering the same issue in Gallion v. Charter Communications Inc., No. 18-55667 (as well as a few other cases that have been stayed pending the decision in Gallion). The Ninth Circuit heard oral arguments in Gallion on March 11; if it issues a decision creating a circuit split with American Association of Political Consultants, then either case becomes a much stronger candidate for review on a writ of certiorari.

The most significant question about the effect of the Fourth Circuit’s ruling was not addressed in the decision: whether the court’s holding would have a retroactive effect. In other words, if prior to the decision companies had been seeking to collect federally owned or guaranteed debts by using autodialers or prerecorded audio recordings can they now be held liable under the TCPA for that conduct (at least to the extent it falls within the statute of limitations)? Unfortunately, the opinion is silent on that question, and the guiding decisions from the Supreme Court regarding the retroactive effect of an order striking a statutory provision as unconstitutional are far from a model of clarity. But one possible articulation of the applicable rule was stated in Justice Thomas’ majority opinion in Harper v. Virginia Department of Taxation:

When this Court applies a rule of federal law to the parties before it, that rule is the controlling interpretation of federal law and must be given full retroactive effect in all cases still open on direct review and as to all events, regardless of whether such events predate or postdate our announcement of the rule.

Shortly after the Harper decision, the Fourth Circuit expressed some confusion as to whether the Harper Court had overruled the Supreme Court’s earlier decision in Chevron Oil Co. v. Huson, which laid out a more flexible balancing test for determining when a ruling would be given retroactive effect (see Fairfax Covenant Church v. Fairfax County School Board). Neither the Supreme Court nor the Fourth Circuit appears to have settled on a final explanation of the appropriate guiding principle. We anticipate that the TCPA plaintiffs bar will be ready to put that issue to the test very soon.

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

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

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

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

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

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

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

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

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

Upcoming Webinar

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

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

Part IV: Navigating the Maze of Servicing Discharged Debt

Part IV: Modifications Post-Discharge

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

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

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

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

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

2. Evaluate treatment of borrowers who have surrendered.

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

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

3. Beware of court-specific loss mitigation requirements.

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

4. Conduct specialized training for customer-facing employees.

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

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