No Foreclosures or Evictions on Federally Backed Mortgage Loans until 2021

By Christy W. Hancock on Posted in COVID-19 (Coronavirus), Federal Agencies, FHA, HUD, Mortgage Servicing

No Foreclosures or Evictions on Federally Backed Mortgage Loans until 2021Borrowers with federally backed mortgage loans facing financial difficulty can breathe a little easier today. All of the federal agencies regulating such loans have announced that they will extend the moratoriums on foreclosure and evictions for single-family properties until December 31, 2020. Federal Housing Finance Agency (FHFA) issued a press release on August 27, 2020 regarding Fannie Mae and Freddie Mac that was followed by a Lender Letter and an Announcement from the agencies. The similar pronouncements from the Department of Housing and Urban Development (HUD) and the Department of Veterans Affairs (VA) were announced via HUD Mortgagee Letter 2020-27, VA Circular 26-20-30 (foreclosures) and VA Circular 26-20-29 (evictions).

The current moratoriums were all set to expire on August 31, 2020. Each agency confirmed that the extended moratoriums are focused on keeping borrowers in their homes during the COVID-19 pandemic.

Consistent with prior guidance, vacant and abandoned properties are excluded from the moratoriums. HUD’s Lender Letter also confirmed that “Deadlines for the first legal action and reasonable diligence timelines are extended by 90 days from the date of expiration of this moratorium for FHA insured Single Family mortgages, except for FHA-insured mortgages secured by vacant or abandoned properties.”

Borrowers with federally backed mortgage loans continue to have the right to request forbearance of up to a year’s payments under the Coronavirus Relief and Economic Security Act (CARES) Act from their mortgage servicer. Although the federal agencies believe continued assistance is needed for their borrowers, we note that the number of borrowers taking advantage of their forbearance rights continues to decline. On August 17, 2020, The Mortgage Bankers Association’s (MBA) advised that their latest Forbearance and Call Volume Survey showed that “the total number of loans now in forbearance decreased by 23 basis points from 7.44% of servicers’ portfolio volume in the prior week to 7.21% as of August 9, 2020. According to MBA’s estimate, 3.6 million homeowners are in forbearance plans.” However, the MBA also recently reported a spike in the delinquency rate for mortgage loans on 1-4 residential properties and noted that the 2020 second quarter results “also mark the highest overall delinquency rate in nine years.” That data indicates growing problems for American homeowners and that the federal moratoriums on foreclosure and evictions are needed.

After the Waters Recede: The Mortgage Servicer’s Role in Navigating Insurance Claims, Part I

By Heather Howell Wright and Brian R. Epling on Posted in Compliance, Foreclosure, Insurance, Vendor Management

Part I: Assessing the Damage and Applying the Proceeds

After the Waters Recede: The Mortgage Servicer’s Role in Navigating Insurance Claims, Part IFollowing the recent hurricanes that have damaged many homes beyond repair, borrowers may seek to apply any available insurance proceeds to satisfy the outstanding balance on their loans rather than repair the property. Servicers should take certain precautions to ensure they comply with the terms of mortgage agreements to protect against liability.

Fannie Mae’s and Freddie Mac’s standard mortgage agreements contain the same clause regarding application of insurance proceeds to the balance on a loan:

Unless Lender and Borrower otherwise agree in writing, any insurance proceeds . . . shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible . . . . If the restoration or repair is not economically feasible . . . the insurance proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due.

As interpreted by courts, this language requires lenders to apply insurance proceeds to an underlying loan within a reasonable time after discovering that repair of the mortgaged property is not economically feasible. Servicers who routinely place insurance proceeds in a suspense account should take the following steps to ensure proper application of these funds:

  1. Pay attention to communication from the borrower, especially if it is in writing. If borrowers advise they do not plan to repair the mortgaged property or request that insurance proceeds be applied directly to their loan, servicers and their insurance vendors should treat this request as potential notice that repair is not economically feasible. Courts have indicated that even unilateral written communication from the borrower may start the clock ticking for the “reasonable time” analysis.
  2. Reach out to the insurance company for a repair estimate. While servicers or their insurance vendors are not necessarily expected to conduct their own investigations into whether repair is not feasible, proactively seeking an estimate from the insurer can help servicers and their vendors stay on top of how to apply the proceeds. If the estimated repairs surpass the insurance proceeds, lenders should expect to apply those proceeds to the loan.
  3. Monitor accruing interest on the underlying loan while proceeds are in suspense. If the feasibility of repair is unclear, insurance proceeds may be kept in suspense for a limited time. Since courts seem concerned with loans accruing interest while a borrower’s proceeds sit unapplied in suspense, however, maintaining accurate records on the accounts and monitoring the length of time the funds remain unapplied may help demonstrate good faith on the part of the servicer.

By implementing the above practices, servicers should be able to ensure they are applying hazard insurance proceeds in compliance with mortgage agreements.

Individuals Can Restructure Personal Guaranties of Defunct Business’s Debt in New Bankruptcy Subchapter V

By Lauren G. Raines and Elizabeth R. Brusa on Posted in Bankruptcy, Debt Collection, Secured Creditors, Secured Debts

Individuals Can Restructure Personal Guaranties of Defunct Business’s Debt in New Bankruptcy Subchapter VEarlier this year, Chapter 11’s new Subchapter V became a part of the Bankruptcy Code when the Small Business Reorganization Act of 2019 (SBRA) became effective. Very shortly thereafter, the CARES Act expanded the debt limits for a business or individual to qualify as a debtor under the SBRA. In the wake of these new laws, certain individual debtors have begun seeking Subchapter V bankruptcy relief as a means to restructure personal guaranties of defunct business debts.

Section 101(51D) of the Bankruptcy Code provides the requirements for an entity or individual to qualify as a debtor in bankruptcy. To qualify as a debtor under the SBRA, a business or individual must be “engaged in commercial or business activity” with debts no greater than $7.5 million (as amended by the CARES Act) and “not less than 50 percent of which arose from the commercial or business activities of the debtor.” Within these parameters, bankruptcy courts have recently found that individuals with debts comprised of at least 50% of business debts, such as individual guaranties, qualify to be small business debtors under the SBRA.

For instance, the Bankruptcy Court for the District of South Carolina held in In re Charles Christopher Wright that an individual debtor whose debts were connected to his ownership of now defunct businesses met the requirements to be a small business debtor under the SBRA. In that case, the court found that 56% of the debts owed by the debtor constituted business debt associated with the debtor’s defunct businesses, and the total debt owed was within the statutory limit for the SBRA. Finding that the SBRA does not require debtors to be “currently engaged in business or commercial activities,” the bankruptcy court held that the debtor qualifies as a small business debtor because “he is ‘engaged in commercial or business activities’ by addressing residual business debt….”

Similarly, the Bankruptcy Court for the Eastern District of Louisiana in In re Andrew and Christine Blanchard held that individual debtors’ guaranties of business loans constituted business debt such that the debtors qualified to be small business debtors under the SBRA. As with the Wright Court, this court found that the Bankruptcy Code does not expressly designate that a small business debtor under the SBRA must be currently engaged in commercial or business activities. Accordingly, because the majority of the debtors’ debts arose from operation of the debtors’ currently operating businesses, as well as their now defunct businesses, and were in an amount below the SBRA’s statutory debt limits, the court held that the debtors qualified to be debtors under the SBRA.

Looking Ahead: What Creditors Can Expect as Individual Debtors with Business Guaranties Seek Subchapter V Bankruptcy Relief 

The SBRA provides a new avenue for individual debtors to restructure and discharge their personal guaranties of business debts. As bankruptcy courts are interpreting the SBRA to allow individual debtors with business debts connected with defunct businesses, even more individuals will qualify as debtors under the SBRA. Thus, creditors should familiarize themselves with what to expect when getting involved in a Subchapter V bankruptcy case.

After successful completion of a Subchapter V plan, individual debtors will receive a discharge of their remaining debts. Individual debtors who would not qualify for relief under Chapter 7 due to higher monthly income or who would want to avoid Chapter 7 to prevent the liquidation of assets may now qualify as debtors under the SBRA and consequently be able to restructure or discharge their guaranties of business debts through Subchapter V.

As small business debtors under the SBRA, individuals can restructure personal guaranties of business debts without fulfilling the more rigorous requirements of confirming a plan in a typical Chapter 11 case. Among other things, Subchapter V debtors will have the assistance of a Subchapter V trustee, whose role is to promote, and possibly mediate, confirmation of a consensual plan. Additionally, Subchapter V debtors will not need to file a disclosure statement and can delay administrative expense payments. These differences from typical Chapter 11 cases should make it easier for individual Subchapter V debtors to successfully confirm their bankruptcy plans and, in turn, be able to restructure or discharge their personal guaranties of business debts.

Perhaps the most significant aspect of Subchapter V bankruptcy cases is the quick pace at which they progress. While creditors may better be able to take their time considering their options in a typical Chapter 11 case for an individual debtor, creditors must be alert right from the beginning of a Subchapter V case. Bankruptcy courts will hold a status conference in Subchapter V cases within 60 days, and sometimes sooner, of the date the case was filed. Additionally, the debtor must file its plan within 90 days of the date the Subchapter V bankruptcy case was filed. Accordingly, creditors should begin reviewing their files, monitoring the bankruptcy case, and developing a case strategy very shortly after receiving notice of a Subchapter V case to prevent missing these quick deadlines and important filings.

DOJ Tells Investment Adviser that Payment to Foreign Government-Owned Bank Will Not Prompt FCPA Enforcement Action

By Erin K. Sullivan and Anna M. Lashley on Posted in Banking, Compliance, FCPA, Federal Agencies, Investigations / Enforcement

DOJ Tells Investment Adviser that Payment to Foreign Government-Owned Bank Will Not Prompt FCPA Enforcement ActionOn August 14, 2020, the Department of Justice (DOJ) issued its first Foreign Corrupt Practices Act (FCPA) Opinion Procedure Release in six years. In the opinion, DOJ advised that it would not bring an enforcement action against a U.S.-based investment adviser if the firm moved forward with paying an advisory fee to a foreign investment bank owned by a foreign government because the “FCPA does not prohibit payments to foreign governments or foreign government instrumentalities,” and DOJ found no corrupt intent to influence a foreign official.

The advisory opinion does not break new ground. Like all Opinion Procedure Releases, this one was limited to the question of whether the payment would merit enforcement action under FCPA’s anti-bribery provisions. Payments directed to foreign government entities rather than individual foreign officials may still generate liability under the FCPA’s accounting provisions if inaccurately recorded, as the Oil-for-Food Program settlements a decade ago made clear.

Under 28 C.F.R. § 80.1, domestic concerns may “obtain an opinion of the Attorney General as to whether certain specified, prospective – not hypothetical – conduct conforms with the Department’s present enforcement policy regarding the antibribery provides of the Foreign Corrupt Practices Act…” A multinational investment adviser headquartered in the U.S. submitted its opinion request to the DOJ on November 5, 2019, and provided supplemental information at DOJ’s request between January and July 2020.

In 2017, the investment adviser sought to purchase a portfolio of assets from a foreign investment bank and engaged a foreign subsidiary of the same bank to assist with the purchase. A foreign government is an indirect majority shareholder in the bank.  After the successful purchase of assets, the bank subsidiary that assisted with the purchase sought $237,500 —0.5% of the value of the portfolio acquired — as compensation for its services. Because the bank is majority-owned by a foreign government, the purchaser sought an opinion from DOJ as to whether the payment would result in an enforcement action under the FCPA.

DOJ’s determination that the proposed fee payment would not run afoul of the FCPA was based on three principal considerations. First, the payment at issue is to be made to an entity, not to a foreign official. Second, although the bank is indirectly owned by a foreign government, there is no indication that the investment adviser intends its payment to the foreign investment bank to be diverted to corruptly influence an individual official. Finally, the foreign investment bank provided “specific, legitimate services” to the investment adviser, and the bank subsidiary’s compliance officer certified that the payment “is commensurate with the services that [the bank] provided and is commercially reasonable.”

It remains to be seen whether the advisory opinion heralds a resurgence in the use of DOJ’s Opinion Procedure Release program, particularly given the nine-month wait between submission of the request in this case and release of DOJ’s opinion.

New FAQ Responses to Small Dollar Rule Address Auto and Mortgage Lending, Payment Transfers and Notices Inclusion

By Jennifer L. Galloway, Preston H. Neel and Brian R. Epling on Posted in Automobile Finance, Banking, CFPB, Compliance, Federal Agencies, Installment Lending, Short-Term Loans, Small-Dollar Lending, Unsecured Lending

New FAQ Responses to Small Dollar Rule Address Auto and Mortgage Lending, Payment Transfers and Notices InclusionOn Tuesday, August 11, 2020, the CFPB issued a second round of answers to frequently asked questions related to the Small Dollar Rule. The FAQ responses range from addressing more nuanced provisions of the payment provision portion of the rule to the overall coverage of the rule.

Covered Loan Coverage

For the most part, auto loans are specifically excluded from the Small Dollar Rule. However, in the recent FAQs, the CFPB clarified that the exclusion only applies if “(a) the credit is extended solely and expressly for the purpose of financing a consumer’s initial purchase of a good; and (b) the credit is secured by that good.” Specifically, in the context of auto loans, this means that the auto loan exclusion “does not apply to an automobile loan that finances an extended warranty or service contract as well as the purchase price of the automobile.” Possibly, this could impact certain subprime products with an interest rate exceeding 36% with a leveraged payment mechanism.

Additionally, the CFPB indicated that if “an open-end loan becomes a covered longer-term loan because the cost of credit exceeds 36 percent at the end of a billing cycle, the lender must begin complying with the Payday Lending Rule at the beginning of the next billing cycle.” In other words, following origination, a loan can subsequently become subject to the Small Dollar Rule.

Finally, the CFPB addressed a potential issue arising for mortgage lenders refinancing a mortgage loan. Specifically, the CFPB answered the following: “Does the exclusion for real estate secured credit apply to a refinance if the mortgage or other security instrument is not re-recorded during the term of the refinance?” In responding “maybe” to the question, the CFPB explained that the exclusion for real estate secured credit applies only if the lender “records or otherwise perfects the security interest within the term of the loan.” While this clarification is unlikely to impact most mortgage lenders, it does emphasize the importance of mortgage lenders confirming their mortgage liens are properly recorded or perfected, especially in their subprime products and those that may have a balloon payment.

Payment Transfers

With respect to payment transfer, the FAQs clarified that a failed single immediate payment transfer at the consumer’s request counts as the first or second failed payment transfer for purposes of the Small Dollar Rule’s prohibition on two consecutive failed payment transfers. In other words, a single immediate payment transfer at the consumer’s request is still a “payment transfer” for purposes of the Small Dollar Rule. However, as the FAQs note, “a single immediate payment transfer at the consumer’s request that fails does not itself violate the Rule’s prohibition, even if the lender has previously initiated two failed payment transfers in connection with the consumer’s covered loan(s).”

The CFPB also finally addressed what a “business day” means. The CFPB noted that while “business day” is not defined by the Small Dollar Rule, a “lender may use any reasonable definition of business day, including the definition of ‘business day’ from another consumer finance regulation, such as Regulation E.” However, the CFPB explained that lenders must consistently apply one definition of “business day” in the handling of its loans. This will help lenders to structure their operating procedures to comply with the many timing requirements of the three new notices under the rule.

For lenders that are account holding institutions, there is a specific conditional exclusion related to the prohibition against attempting to collect after two consecutive failed payment transfers. Specifically, a transfer initiated by the institution does not count as a “payment transfer” if the institution does not charge the consumer a fee for the account lacking sufficient funds and the institution does not close the account in response to the account having a negative balance due to the attempted transfer. The CFPB explained that because this conditional exclusion removes the lender’s attempt to collect from the definition of “payment transfer,” it also means that a successful collection does not reset the clock on the prohibition against collecting after two consecutive failed payment transfers.

Notices

Finally, the CFPB responded to a question regarding the unusual payment withdrawal notice. In particular, the CFPB made clear that the unusual payment withdrawal notice is required “even if the difference [in the payment amount] is only a few dollars from the regular scheduled payment amount and is within a range authorized by the consumer.” As the CFPB explained, the Small Dollar Rule “does not provide an exception for small variations in the amount from the regularly scheduled payment amount.”

Takeaways

The CFPB is serious about moving forward with implementation of the Small Dollar Rule. In the past two months, not only has the CFPB issued the revised final rule (which left the payment provisions largely unchanged) and issued two rounds of FAQs, but it is also seeking to lift the stay issued by a district court in Texas related to the implementation date of the rule. Given the push by the CFPB, the Small Dollar Rule is likely to become a reality sooner rather than later. As such, this is the perfect time to evaluate loan products, compliance management systems, and employee training to ensure compliance with the rule.

Alabama Bankruptcy Court Substantially Reduces Award of Attorney’s Fees

By Jay Bender and Elizabeth R. Brusa on Posted in Bankruptcy, Debt Collection, Financial Sanctions, Litigation Developments, Secured Creditors

Alabama Bankruptcy Court Substantially Reduces Award of Attorney’s FeesIn practice, it is not uncommon for bankruptcy debtors to file suit against creditors or debt collectors for stay and discharge injunction violations. Often, they will do so before making any meaningful attempt to communicate with the creditor or debt collector to request that they stop their improper collection efforts. The Bankruptcy Court for the Southern District of Alabama recently held in Glenn v. Army & Air Force Exchange Services that attorneys for debtors have a duty to mitigate their damages prior to filing such suits. Because the debtor’s counsel in Glenn failed to contact the defendant or otherwise mitigate damages, the Bankruptcy Court significantly reduced the amount of attorney’s fees awarded.

The Stay Violation, Failure to Mitigate, and Adversary Proceeding

In Glenn, the debtor filed for Chapter 13 bankruptcy relief in April 2018. Before bankruptcy, Army & Air Force Exchange Services (AAFES) had been offsetting the debtor’s retirement benefits against amounts the debtor owed AAFES. After the debtor filed his case, in recognition of the automatic stay in the debtor’s case, AAFES ceased this offsetting in May 2018. However, without requesting or obtaining relief from the automatic stay, AAFES resumed offsetting against the debtor’s retirement benefits beginning in July 2018 and continuing through January 2019.

The debtor or his spouse called AAFES’s phone number listed on their billing statements on five occasions between November 2018 and January 2019 to ask AAFES to stop the setoffs. However, the debtor did not attempt to contact AAFES at the phone number on the proof of claim AAFES filed in the bankruptcy case. More significantly, prior to filing suit, the debtor’s counsel made no attempt whatsoever to contact AAFES, the entity that had filed AAFES’s proof of claim, or the U.S. Attorney’s Office regarding AAFES’s stay violation.

In December 2018, the debtor filed an adversary proceeding against AAFES alleging stay violations. Immediately upon receiving the complaint, AAFES ceased offsetting against the debtor’s retirement benefits, and in January 2019, AAFES issued a refund check of the offset funds to the debtor.

The parties ultimately resolved the debtor’s claims except for the issue of fees and costs due to the debtor’s counsel. The debtor’s counsel sought fees totaling $8,580 for 28.6 hours of work in handling the adversary proceeding. AAFES disputed liability for the fees, asserting that hours the debtor’s counsel expended were excessive because counsel had failed to take any steps to contact AAFES or mitigate damages before filing the suit.

Reduction of Fees Due to Failure to Mitigate Prior to Filing Suit

Under section 362(k)(1), a debtor who is injured by a stay violation is entitled to recover actual damages, including costs and attorney’s fees. Notwithstanding the foregoing, bankruptcy courts enjoy discretion to determine the necessity and reasonableness of fees sought. Courts have previously applied section 330’s standard and the Johnson v. Georgia Highway Express, Inc. factors to determine the reasonableness of attorney’s fees under section 362(k)(1).

In applying the “reasonable and necessary” standard to the attorney’s fees sought by debtor’s counsel in Glenn, the Bankruptcy Court held that a downward adjustment was warranted. Noting that AAFES had initially ceased offsetting the debtor’s retirement benefits and promptly took action during the holiday season and a government shutdown to refund the offsets that had allegedly violated the stay, the Bankruptcy Court found that it was unnecessary for debtor’s counsel to have spent 28.6 hours on this matter. Additionally, the Bankruptcy Court found that the Johnson factors weighed in favor of decreasing the award of attorney’s fees.

Ultimately, the Bankruptcy Court held that, if debtor’s counsel had communicated with AAFES regarding the stay violations, debtor’s counsel would have reasonably spent only seven hours on the matter. Although section 362(k)(1) did not require debtor’s counsel to mitigate damages prior to filing the adversary proceeding, the Bankruptcy Court noted multiple instances in which it and other Eleventh Circuit bankruptcy courts had limited attorney’s fee awards for failure to mitigate. Ultimately, the Bankruptcy Court held that the “debtor’s counsel has an obligation to attempt resolution,” and the “actions of debtor’s counsel in hastily instituting litigation without first attempting resolution of the stay violation justifie[d] a reduction of attorney’s fees.” The Bankruptcy Court noted that its decision is further supported by public policy, which disfavors rewarding unnecessary litigation.

Take Away

Because attorney’s fees are statutorily provided under section 362(k)(1) in connection with stay violations, non-prevailing parties will likely be taxed with fees and costs when they are unsuccessful in defending against allegations of stay and discharge injunction violations. However, under Glenn and the authority cited therein, creditors may limit their liability for such fees if debtor’s counsel failed to take reasonable out-of-court measures to deter the creditor’s continuing stay violation and to mitigate the debtor’s damages prior to seeking judicial relief for the stay or discharge injunction violation.

CFPB Releases Small Business Lender Compliance Cost Survey to Aid in Dodd-Frank 1071 Rulemaking

By Christopher K. Friedman, Judea S. Davis and Brian R. Epling on Posted in CFPB, Commercial Lending, Compliance, Consumer Protection Act, Dodd-Frank Compliance, Fair Lending, Federal Agencies, Small-Dollar Lending

CFPB Releases Small Business Lender Compliance Cost Survey to Aid in Dodd-Frank 1071 RulemakingRecently, the CFPB released an online survey designed to collect information from “institutions engaged in small business financing” regarding one-time costs of compliance with Dodd-Frank 1071. Section 1071 of the Dodd-Frank Act, which we have discussed in detail on this blog, creates robust reporting requirements for lenders engaged in lending to women-owned, minority-owned, and small businesses that are similar to requirements created by the Home Mortgage Disclosure Act (HMDA). The CFPB has made several recent statements that shed light on its rulemaking timeline. This survey, which expires on October 1, 2020, provides yet another indication that the CFPB is pressing ahead with its implementation of Rule 1071, and any institution engaged in financing small businesses should consider submitting a survey response.

The CFPB’s survey “is part of an overall effort in the consideration of costs and benefits in the implementation of Section 1071 of the Dodd-Frank Act.” Importantly, the CFPB notes that this will be the main opportunity for industry stakeholders to give the CFPB information about cost-of-compliance with Section 1071 as it engages in policy decisions related to enforcement of 1071.

Interestingly, the CFPB’s survey collects information related to several issues that have already proven to be controversial. For instance, how the CFPB will define “small business” for the purpose of Rule 1071 compliance is an open question, and the issue received considerable time during the November 2019 Dodd-Frank 1071 Symposium. The survey delves into this issue by asking respondents how their institutions define “small business” – either by using the Community Reinvestment Acts or the Small Business Administration’s definitions, or through an in-house definition based on the borrower’s revenue, loan amount, number of employees, NAICS code, or some other metric.

Another interesting aspect of the survey appears at the very beginning, where the CFPB asks respondents to self-identify. Specifically, the survey contains an option for “[i]nstitution[s] focused on offering Merchant Cash Advances.” However, a merchant cash advance is, by its very nature, not a loan. As such, it is doubtful whether merchant cash advance companies would be subject to the requirements of Dodd-Frank 1071. Nevertheless, this has not prevented commenters from urging the CFPB to extend the reach of Section 1071 to merchant cash advance and factoring companies.

In general, the survey asks a broad range of questions in an apparent effort to understand (1) what types of data potential Section 1071 reporters are currently collecting, and (2) how much money it will cost potential reporters to come into compliance with the final version of the rule. While all interested parties will have an opportunity to provide commentary to the CFPB during the formal notice and comment period in the coming months, this survey gives stakeholders an early opportunity to let the CFPB know how costly Section 1071 compliance will be for their respective institutions. Moreover, this should also serve as an important prompt for institutions to begin having internal discussions about developing data collection policies and procedures for business lending. We will continue to monitor the CFPB for developments on the implementation of Dodd-Frank 1071.

Bad News for Sixth Circuit Creditors as Court Adopts Expansive Definition of Autodialer with Supreme Court Review Pending

By Alex McFall and Benjamin William Perry on Posted in Compliance, Consumer Protection Act, Debt Collection, TCPA

Bad News for Sixth Circuit Creditors as Court Adopts Expansive Definition of Autodialer with Supreme Court Review PendingThe Sixth Circuit has weighed in on an issue with the power to change the course of TCPA litigation nationwide: What constitutes an automatic telephone dialing system, more commonly known as an autodialer? Since the FCC’s 2015 order, which stated that any device with the potential ability to generate a list of numbers was an autodialer, was struck down by the D.C. Circuit as overly broad, the interpretation of “autodialer” has been left to the courts, with two competing interpretations emerging. The first approach, adopted by the Second Circuit and the Ninth Circuit, broadly interprets “autodialer” to be any equipment capable of storing and subsequently dialing a list of stored numbers. The second, much narrower interpretation, adopted by the Third, Seventh, and Eleventh Circuits, requires that the autodialer system itself actually have the ability to randomly or sequentially generate the telephone numbers it calls.

In a surprise decision last week, the Sixth Circuit (in a 2-1 split) sided with the Second and Ninth Circuits in Allan v. Pennsylvania Higher Education Assistance Agency. The statutory definition of an autodialer is as follows: “[E]quipment which has the capacity – (A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.” As a matter of statutory interpretation, the majority held that an autodialer is any system that can create and store a list of numbers and then dial those numbers from the list. The specific autodialer at issue in Allan was the Avaya Proactive Contact dialer, which is a popular dialing system among creditors that lacks the ability to randomly or sequentially generate random lists of numbers. In other words, the Avaya system would be considered an autodialer in the Second, Sixth, and Ninth Circuits, but not in the Third, Seventh, and Eleventh Circuits.

The majority addressed the concerns of the Court of Appeals for the D.C. Circuit (that the FCC’s order was overly broad because it made any device with the potential to store and dial from a list of numbers an autodialer) by explaining that autodialers must actually be used to store and dial numbers, as opposed to just hypothetically having that capacity.

Interestingly, the Allan majority relied heavily on the fact that the TCPA contains various exceptions, one of which is the prior consent of the called party. If there is prior consent, the majority reasoned, the calling party would have this person’s number stored somewhere, as opposed to randomly generating numbers. Stated differently, the existence of the exception implies that the TCPA applies to devices autodialing sets of stored numbers; if the stored numbers were randomly generated, prior consent would be an impossibility.

Allan is hardly the end of the road on this issue. For starters, the parties in Allan may still seek en banc review by August 12. But more importantly, the Supreme Court granted a certiorari petition on July 9 to presumably resolve the circuit split and decide this issue once and for all. Nonetheless, that may prove to be little comfort to debt collectors in the Sixth Circuit, as a decision is not expected on the pending Supreme Court case until next spring. In the meantime, creditors operating nationwide should continually review their policies, procedures, and litigation strategy on a regional basis to effectively navigate the TCPA minefield.

State Attorneys General Challenge OCC Madden Fix

By Christopher K. Friedman and Brian R. Epling on Posted in Banking, Credit Card, Federal Agencies, FinTech, OCC, Regulatory Supervision, Small-Dollar Lending, Unsecured Lending

State Attorneys General Challenge OCC Madden FixLast Wednesday, the attorneys general of Illinois, California, and New York filed a lawsuit in the United States District Court for the Northern District of California challenging the Office of the Comptroller of the Currency’s proposed “Madden Fix.” This proposed rule, which we have discussed in detail, is designed to resolve some of the legal uncertainty introduced in 2015 by the Second Circuit Court of Appeals’ decision in Madden v. Midland Funding by confirming the “valid when made” doctrine. Although not unexpected as Illinois, California, and New York joined 19 other states in filing a comment opposing the OCC’s proposal, this lawsuit represents the first major challenge of a rule that is expected to bring long-awaited certainty to the secondary credit market, bank-partnership, and fintech spaces.

The OCC’s proposed rule, like its counterpart issued by the FDIC (which is not a subject of the pending lawsuit), is relatively simple. The proposal amends 12 C.F.R. 7.4001 and 12 C.F.R. 160.110 to state that “[i]nterest on a loan that is permissible [under either 12 U.S.C. § 85 or 12 U.S.C. § 1463(g)(1)] shall not be affected by the sale, assignment, or transfer of the loan.” The AGs’ legal complaint challenges this amendment on both procedural and substantive grounds.

First, the complaint alleges that the OCC neglected to comply with procedures required by the Administrative Procedures Act, as well as procedures relating to the preemption of state law under Title X of the Dodd-Frank Act. Second, the complaint asserts that the OCC lacks authority to issue the rule under the National Bank Act (NBA) because the rule allegedly purports to govern the terms and conditions of loans held by non-banks. Finally, the AGs challenge the proposed rule as generally arbitrary and capricious. Notably, the AGs’ complaint contains a broad-side attack against the valid when made doctrine itself, contending that the doctrine lacks both the historical bona fides and practical benefits asserted by its defenders.

Of course, we anticipate that the OCC will contest these characterizations, especially given the existence of case law stretching back to the early 19th century that lays the groundwork for the valid when made doctrine. Moreover, existing research suggests the Madden decision negatively affected access to credit within the states comprising the Second Circuit (Connecticut, New York, and Vermont). Additionally, the AGs’ argument that the OCC lacks authority to confirm the valid when made doctrine is undermined by the NBA’s express grant of authority allowing nationally chartered banks to enter contracts, sell loan contracts, and “exercise . . . all such incidental powers necessary to carry on the business of banking.” Taken together, there is fertile ground for the OCC to mount a robust defense of this lawsuit.

Nevertheless, this lawsuit means that there will be continued legal uncertainty surrounding the fintech industry, the bank partnership model of lending, and the general assignment of loans within the state in the Second Circuit. Fortunately, there are practices available to reduce the risk posed by Madden and its effective “cousin:” the True Lender doctrine. Banks, fintechs, and other interested parties should continue to structure deals and partnerships in ways that reduce the risk of a challenge under Madden. We will continue to monitor this litigation for developments and will keep a lookout for additional relevant litigation.

The Rapidly Changing Fair Housing Landscape: HUD Rescinds Obama-Era AFFH Fair Housing Rule

By Christopher K. Friedman, Benjamin William Perry and Alex McFall on Posted in Affordable Housing, Compliance, Disparate Impact, Fair Housing, Fair Lending, HUD, HUD Requirements

The Rapidly Changing Fair Housing Landscape: HUD Rescinds Obama-Era AFFH Fair Housing RuleThe Trump administration recently announced that it has rescinded Affirmatively Furthering Fair Housing (AFFH), an Obama-era regulation intended to ensure compliance with the Fair Housing Act (FHA). AFFH requires cities and towns to analyze local housing data for discriminatory patterns and submit plans to address those issues in order to continue receiving federal funding. This rescission represents a major rollback of a fair housing enforcement mechanism.

This rescission is not altogether unexpected: HUD effectively suspended the rule in January 2018, when it issued a notice delaying the requirement that municipalities submit proposed plans until after October 31, 2020. The AFFH will be replaced with the “Preserving Community and Neighborhood Choice” rule, which defines fair housing much more broadly as “affordable, safe, decent, free of unlawful discrimination, and accessible under civil rights laws.” Most importantly, the new rule would allow municipalities the ability to self-certify compliance.

The rollback of the AFFH, and its replacement, is part of the current administration’s efforts to ease regulatory burdens on certain stakeholders. For instance, and as we have previously discussed, HUD has proposed a rule that may make it more difficult for litigants to make a prima facie case of disparate impact housing discrimination. Despite opposition from consumer and some industry members, it appears that HUD is moving forward with a final rule implementing this change.

Despite this trend, the fact remains that we are in an election year, and there’s a chance that a new administration will take office in January 2021. And while it would take time and effort for a Joe Biden-era HUD to reverse some of these trends through formal rulemaking, there are already indications that political will exists to do so. For instance, Rep. Alexandria Ocasio-Cortez has introduced amendments to a pending appropriations bill restricting the use of federal funds to support HUD’s implementation of the new proposed rules, which would effectively nullify them.

Given the current election-year uncertainty, it remains to be seen whether the new disparate rule will go into effect, and if so, how long it will last. In the meantime, lenders and other stakeholders should continue to monitor the rapidly evolving fair housing and fair lending landscape to ensure compliance with federal regulations and to anticipate upcoming changes. We will also continue to monitor the space and provide timely updates.

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