Don’t Let A Natural Disaster Cause Financial Disaster

Don’t Let A Natural Disaster Cause Financial DisasterIn light of the potential for future national disasters such as Hurricane Dorian and all the damage that they can cause, the Consumer Financial Protection Bureau (CFPB) has provided advice on measures to take to secure your financial situation. In recent years we have seen catastrophic damage caused by hurricanes, tornadoes, flooding and landslides, which can be extremely costly and stressful. Of course, as with any natural disaster, your most urgent needs should be addressed first and foremost. However, after that, there should be great consideration given to the financial obligations that you may incur. Further, the CFPB provided some warnings related to scams that unfortunately tend to pop up at times of disaster. This blog post, similar to a post we have written previously, will provide an overview of some of the ways to ensure that your financial situation stays intact following a natural disaster.

Once you begin to think about your financial obligations, particularly if you have had damage to your home or any other property following a natural disaster, the CFPB has provided five steps you can take to keep your financial obligations in check:

  1. Contact your insurance company.  If you have had damage to any of your property and you have insurance coverage, then reaching out to your insurance company or broker is crucial to start the claims process. Unfortunately, many of those affected by flooding from natural disasters do not have flood insurance. It is necessary to obtain a copy of your policy to review what types of coverage you have or request a copy of your policy from your insurance company. Further, take plenty of pictures and/or video of all the damaged property in order to preserve the damage at the outset.
  2. Register for assistance. You can always register for assistance with the Federal Emergency Management Agency (FEMA) or online with the Disaster Assistance Improvement Program (DAIP).
  3. Contact your mortgage servicer. Many people may not know who their mortgage servicer is. If you do not, you can always contact the Mortgage Electronic Registration System (MERS) to find out the company that services your mortgage. Once you contact your mortgage lender and explain your situation, it will not completely eliminate your responsibility to pay the mortgage; however, your lender may be able to provide forbearance or an extension in which to make those payments.
  4. Contact your credit card companies and other lenders. The key to this step is contacting those companies before your next payments are due to explain why your income has been interrupted and that you may not be able to pay your loans and/or credit cards on time.
  5. Contact your utility companies. If you are unable to remain living in your home, ask your utility companies to suspend services for the time being. Keep in mind that if you are planning to move back into your home at some point, you may want to keep air flowing in order to prevent mildew and mold from growing or spreading.

CFPB also has provided good information on scams to be aware of. To avoid being a victim of a scam following a natural disaster, it is imperative to ask questions to make sure that the goods or services offered are legitimate.

Five things that should cause alarm:

  1. People who want you to pay upfront fees for any type of services, including obtaining loans.
  2. Contractors selling repairs door to door. Again, when a contractor asks to receive upfront payments or offers huge discounts, that should be a red flag. My practice is always to contact the Better Business Bureau to find out if the contractor is legitimate.
  3. Any person posing as a government employee, insurance adjuster, law enforcement official or a bank employee. Even if those people are in uniforms and have badges, never give out any of your personal information until you confirm whether that person is legitimate. For instance, government employees will never ask for payment or financial information from you.
  4. Be cautious of fake charities, particularly any that ask for donations over the phone. If you want to contribute following a natural disaster, it is always good to do your research and/or contact your local Red Cross or United Way for the best way to contribute.
  5. Be wary of any “limited time offers.” If someone is trying to pressure you to make a decision quickly or to sign anything without having time to read over it thoroughly, it should raise a red flag. Contact an attorney to help you review any type of documents or contracts. Many cities provide free legal services during times such as these. You can reach out to your local bar association to find out if these types of services are available in your area.

Further, following past natural disasters such as hurricanes, several mortgage backers have offered forbearance to borrowers in the affected areas. In recent years, Freddie Mac, Fannie Mae and the Federal Housing Administration have all offered forbearance for at least 90 days to borrowers in affected areas. These entities have also extended some cases for up to a year, depending on severity. That means borrowers did not have to make their monthly payments, and no penalty fees will be charged. (Note that interest still accrued during that time.) It is likely other mortgage providers have done the same as well. I would suggest that anyone affected by a natural disaster reach out to their provider to find out if a forbearance is being offered and how to take advantage of it.  Be sure to contact your specific servicer to ensure you follow the proper protocol to obtain a forbearance.

The Federal Emergency Management Agency’s (FEMA) website,, provides helpful tips and checklists to prepare for an emergency.  It also provides links to several other helpful websites.

Finally, the CFPB has provided a checklist that you can review in order to make sure that your financial records are secure. Here is the link to that checklist. You can also contact the CFPB directly by calling (855) 411-2372.

The Small Business Reorganization Act – A New Subchapter for Small Businesses

CFPB Issues Policy Guidance on Early Implementation of the 2016 Mortgage Servicing AmendmentsSince the 2005 amendments to the Bankruptcy Code, small business debtors have continued to struggle to reorganize effectively under Chapter 11 of the Bankruptcy Code. On Friday, August 23, 2019, President Trump signed the Small Business Reorganization Act of 2019 into law in an effort to address some of these issues.

The act aims to make small business bankruptcies faster and less expensive by creating a new subchapter of Chapter 11 of the Bankruptcy Code specific to small businesses. At this time, the act only applies to business debtors with secured and unsecured debts, subject to certain qualifications, less than $2,725,625. The act includes the following provisions:

  • Appointment of a Trustee. The act provides that a standing trustee will serve as the trustee for the small business’s bankruptcy estate. Similar to Chapter 12 family farmer and fisherman bankruptcies, the act provides that the trustee shall facilitate the small business debtor’s reorganization and monitor the debtor’s consummation of its plan of reorganization.
  • Streamlining the Reorganization Process. The act streamlines small business reorganizations and removes procedural burdens and costs associated with typical corporate reorganizations. Notably, only the debtor can propose a plan of reorganization. Small business debtors do not have to obtain approval of a separate disclosure statement or solicit votes to confirm a plan. Unless the court orders otherwise, there are no unsecured creditors’ committees. The act further requires that the court hold a status conference within 60 days of the petition date and that the debtor file its plan within 90 days of the petition date.
  • Elimination of the New Value Rule. The act removes the requirement that equity holders of the small business debtor provide “new value” to retain their equity interest in the debtor without paying creditors in full. For plan confirmation, the act instead only requires that the plan does not discriminate unfairly, is fair and equitable, and, similar to Chapter 13, provides that all of the debtor’s projected disposable income will be applied to payments under the plan or the value of property to be distributed under the plan is not less than the projected disposable income of the debtor.
  • Modification of Certain Residential Mortgages. Notably, the act also removes the categorical prohibition against individual small business debtor’s modifying their residential mortgages. The act now allows a small business debtor to modify a mortgage secured by a residence if the underlying loan was not used to acquire the residence and was primarily used in connection with the small business of the debtor. Otherwise, secured lenders have the same protections as in other Chapter 11 cases.
  • Delayed Payment of Administrative Expense Claims. The act removes the requirement that the debtor pay administrative expense claims – including those claims incurred by the debtor for post-petition goods and services – on the effective date of the plan. Unlike a typical Chapter 11, a small business debtor may now stretch payment of administrative expense claims out over the term of the plan.
  • Discharge Limitations. The court must grant the debtor a discharge after completion of all payments due within the first three years of the plan, or such longer period as the court may fix (not to exceed five years). The discharge relieves the debtor of personal liability for all debts provided under the plan except any debt: (1) on which the last payment is due after the first three years of the plan, or such other time as fixed by the court (not to exceed five years); or (2) that is otherwise non-dischargeable. All exceptions to discharge in Section 523(a) of the Bankruptcy Code apply to the small business debtor. This is a departure from a typical corporate Chapter 11 which has limited exceptions to discharge set forth in section 1141.

The benefits of Chapter 11 reorganization have been elusive to small business debtors given their size and limited financial resources. The act attempts to remedy many of these obstacles to successful small business reorganizations. If the act proves to be beneficial to small business debtors, there may be a legislative push to increase the debt limitations and provide even more businesses access to the new subchapter.

The act takes effect in February 2020. Small business and consumer lenders should be prepared to protect their interests in this new subchapter of the Bankruptcy Code. Bradley attorneys are experienced in all aspects of bankruptcy, and will continue to monitor the development of the law and bankruptcy practice under the act.

FHA Rule Reduces Barriers to Reverse Mortgages for Condominium Owners

FHA Rule Reduces Barriers to Reverse Mortgages for Condominium OwnersAfter a nearly three-year delay, the U.S. Department of Housing and Urban Development (HUD) has finally released an update to its FHA condominium rules. The new rules, which take effect October 15, 2019, allow for FHA insurance approval on individual condominium units and ease burdensome FHA-insured reverse mortgage application requirements on condos, expanding access to the product for the many senior citizens living in condominium projects.

In 2008, FHA eliminated approval on individual condominium units, and HUD required a condominium owner to receive FHA approval on the entire condominium project to allow a HECM on the owner’s single unit. This process was time-consuming and expensive, causing many condominium owners to not pursue a reverse mortgage and, if a condominium owner did decide to seek a reverse mortgage, many condominium associations refused to go through the FHA approval process. Under the new “individual unit approval” rule, these burdensome requirements are reduced, and FHA estimates that it will qualify an additional 20,000 to 60,000 condominium units per year for FHA-insured financing, some of which will be HECMs.

Under the new rules, a condominium owner may be eligible for FHA individual unit approval if the condominium unit is in a building where no more than 10% of the units are FHA-insured or, if in a building with fewer than 10 total units, no more than two units hold FHA insurance. HUD also adjusted the owner-occupancy rules, now only requiring that 50% be owner-occupied. In addition to these changes, the rule also expands financing for mixed-use projects, permitting condominium projects to have up to 35% of the total floor area to be dedicated to commercial space.

The reverse mortgage industry has been advocating for the new condominium rules for several years. The new rules will allow seniors who own condominium units to more easily access equity in their homes. In addition to the benefits the updated condominium rules provide to forward mortgages, HUD Secretary Ben Carson highlighted that the reverse mortgage portion of the rule change will assist seniors “who are hoping to live independently and to age in place.” In conjunction with the released final rule, HUD also released an updated version of the FHA Single Family Policy Handbook, reflecting the new condominium rules. If your reverse mortgage company intends to increase business in the condominium market, be sure to update your company’s policies and procedures by October 15, 2019, to meet HUD’s new rules.

The Family Farmer Relief Act of 2019: Will the Increased Debt Limit Lead to an Uptick in Chapter 12 Filings?

The Family Farmer Relief Act of 2019: Will the Increased Debt Limit Lead to an Uptick in Chapter 12 Filings?The United States Senate passed the “Family Farmer Relief Act of 2019” (H.R. 2336), which substantially increases the debt limit for agricultural producers seeking to file for relief under Chapter 12 of the United States Bankruptcy Code. The bipartisan legislation, which passed the U.S. House of Representatives in June and is expected to be signed into law by President Trump, raises the debt limit for Chapter 12 bankruptcy filings from approximately $4.3 million to $10 million.

The debt limit increase will dramatically expand Chapter 12 bankruptcy eligibility at a time of turmoil for the U.S. agriculture industry, precipitated by years of depressed farm income, crop overproduction, increased debt loads, natural disasters, extreme weather events, and, more recently, retaliatory tariffs on many U.S. agricultural products as part of a renewed trade war. As noted by the American Farm Bureau Federation, even before passage of the Family Farmer Relief Act, Chapter 12 bankruptcy filings were up 13% over the past year, and farm loan delinquency rates were at a six-year high. Farm bankruptcies under Chapter 12 can only be expected to rise sharply now that farmers with debts as high as $10 million dollars are eligible to file for Chapter 12 relief.

A farm seeking to reorganize its operations, restructure its debt, and continue as an ongoing business may consider relief under several chapters of the Bankruptcy Code:

Chapter 13

In a Chapter 13 proceeding, the debtor commits all of his or her future disposable income to pay all or part of the debtor’s outstanding debts under the terms of a confirmed Chapter 13 plan. Certain debts, including residential mortgages, must be paid in accordance with the terms of the mortgage, either through or outside the plan (any pre-petition arrearage on the mortgage can be provided for and paid through the plan). Chapter 13 eligibility is limited to individuals (i.e., not corporations, LLCs or partnerships) with unsecured debts of less than $419,275 and secured debts of less than $1,257,850.

Chapter 11

Chapter 11 bankruptcy is most commonly used to reorganize large corporations. Chapter 11 has some provisions aimed at small business debtors, and individuals whose debts exceed the limits for Chapter 13 may be eligible to file for Chapter 11. As a practical matter, however, Chapter 11 cases are costly and complex, which frequently limits its availability to larger debtors with the means to fund a case. In Chapter 11, the debtor will typically reorganize its debts in accordance with a confirmed Chapter 11 plan, which must classify the types of claims against the estate and provide for treatment of each class. The plan must be accompanied by a detailed disclosure statement containing sufficient information for creditors to make a determination as to whether to vote to accept the plan. Creditors whose claims are “impaired” under the plan may vote on the plan.

Chapter 12

Chapter 12, which was initially enacted during the farm debt crisis of the 1980s, provides many benefits for small to medium-sized family farming operations as compared to Chapter 11 or Chapter 13. Chapter 12 is reserved for “family farmers” or “family fisherman” with “regular annual income.” A “family farmer” may be an individual (or an individual and spouse), or a corporation or partnership (with certain restrictions), so unlike the case with Chapter 13 bankruptcies, which is limited to individuals, a family farm that is structured as a corporation or partnership may be eligible for relief under Chapter 12.

Chapter 12 has numerous other benefits over both Chapter 11 and Chapter 13 for parties who are eligible. Like Chapter 13, Chapter 12 contemplates that the debtor will use future disposable income to fund a plan; however, a Chapter 12 reorganization plan can provide for payments to be made seasonally, when the farm earns most of its income. Moreover, a Chapter 12 debtor has 90 days from the petition date to file a proposed plan and need not begin making plan payments prior to plan confirmation, in contrast to Chapter 13 debtors who must propose a plan and begin making plan payments much more quickly. Therefore, Chapter 12 debtors have a longer breathing spell before they must start funding the plan.

Chapter 12 is considerably less expensive than Chapter 11 — the Chapter 11 filing fee alone is $1,717, versus $275 for a Chapter 12 case. Moreover, if the debtor does not qualify as a “small business debtor,” as defined in the Bankruptcy Code, an official committee of unsecured creditors will be appointed in a Chapter 11 case, with the costs of the committee’s professionals (in addition to its own professionals) to be borne by the debtor. The unsecured creditors’ committee has broad authority to investigate the assets, liabilities, financial condition and transactions of the debtor, which can substantially increase the costs of the case, even if the scope of such investigation is limited.

A typical business reorganization will often include the sale of underperforming or unneeded assets. Asset sales in Chapter 12 have many advantages for the debtor over those in over Chapter 11. In order to sell assets “free and clear” of liens, claims, and encumbrances in Chapter 11, the debtor must satisfy the stringent requirements of section 363(f), which can be hotly contested by stakeholders. The Chapter 12 debtor, on the other hand, may sell any property free and clear of liens under section 1206 so long as the property is “farmland or farming equipment.” With narrower statutory grounds for objecting to an asset sale in Chapter 12, the process is typically less contentious and less expensive. Also, asset sales in Chapter 12 have significant tax advantages over those in Chapter 11. Any tax liability for capital gains generated by a sale in Chapter 11 is treated as a priority claim that must be paid in full at plan confirmation. By contrast, in Chapter 12, any tax arising from the sale of property used in the debtor’s farming operation is treated as an unsecured claim of the debtor that may be discharged in bankruptcy. This allows the debtor to retain the upside from the sale of farming assets.

Finally, one of the biggest advantages of Chapter 12 over Chapters 11 or 13 is that Chapter 12 debtors may modify any secured loan — including residential mortgages, nonresidential mortgages, equipment loans and vehicle loans — through a so-called “cram down.” In a cram down, the debtor pays secured creditors based on the current value of collateral rather than the amount owing on the loan. In Chapter 11 and Chapter 13 cases, a debtor cannot cram down the mortgage on the debtor’s principal residence.  Chapter 12 does not contain this restriction, so a Chapter 12 debtor may cram down his residential mortgage along with any other secured debts. This can be a powerful tool for family farmers who frequently live and farm on the same land.

Given the clear advantages of Chapter 12 over Chapters 13 and 11 for family farmers seeking to reorganize under the Bankruptcy Code, the newly expanded eligibility for Chapter 12 bankruptcy – combined with the troubled economic climate for U.S. farmers – may well lead to a proliferation of Chapter 12 filings. If the current problems facing the U.S. agricultural industry are transitory in nature, Chapter 12 may well provide small to mid-sized farmers with the relief they need to weather the temporary downturn. If, on the other hand, the downturn is symptomatic of a more fundamental reordering of the industry and its place in the global economy, then expanded eligibility for Chapter 12 may not solve the long-term problems facing smaller farming operations.

HUD Proposed Rule Demands More Disparate and More Impact to Establish Disparate Impact Liability

HUD Proposed Rule Demands More Disparate and More Impact to Establish Disparate Impact LiabilityThe United States Department of Housing and Urban Development (HUD) released a sweeping proposed rule on August 1 seeking to amend HUD’s interpretation of the Fair Housing Act’s disparate impact standard. According to HUD, the proposed rule is designed to better reflect the U.S. Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. HUD will submit the proposed rule to HUD’s congressional authorizing committees – the House Financial Services and Senate Banking Committees – for a 15-day review period. After the congressional review period, HUD will publish the proposed rule in the Federal Register where the public will have 60 days to submit comments. Comments may be submitted to HUD through or by physical mail.

The Fair Housing Act prohibits discrimination in many housing-related activities on the basis of race, color, religion, sex, disability, familial status, or national origin. For at least the past four decades, HUD and federal courts have read the Fair Housing Act to ban conduct that has a discriminatory effect even while not motivated by discriminatory intent. This theory of liability is known as “disparate impact.” In February 2013, HUD codified its long held view that the Fair Housing Act bans housing practices that disparately impact protected classes through a final rule entitled Implementation of the Fair Housing Act’s Discriminatory Effects Standard. The rule established a three-part burden-shifting test for determining when a housing practice with a discriminatory effect violates the Fair Housing Act.

In 2015, the U.S. Supreme Court decided Texas Dept. of Housing and Community Affairs v. Inclusive Communities, in which a non-profit organization claimed that policies of the Texas Department of Housing and Community Affairs regarding the distribution of low-income housing development tax credits resulted in discrimination against African Americans in violation of both 42 U.S.C. § 1983 and the Fair Housing Act. In Inclusive Communities, Justice Kennedy’s majority opinion did not rely on HUD’s disparate impact burden shifting test. Rather, the court undertook its own analysis resulting in standards that differed from the rule. While holding that the Fair Housing Act prohibited disparate impact discrimination, the decision also established several guard rails designed to “protect potential defendants against abusive disparate impact claims.” For instance, the court held that a disparate impact claim cannot be sustained solely by evidence of a statistical disparity. Rather, the court enacted a “robust causality” rule requiring that a plaintiff show that a policy or procedure actually caused the disparity.

HUD’s proposed rule seeks to align the department’s disparate impact analysis with the standards applied by the court in Inclusive Communities. Specifically, the proposed rule creates a new burden-shifting framework where a plaintiff raising a disparate impact claim under the Fair Housing Act would be required to establish, as a threshold matter, that a specific policy or practice caused the discriminatory effect, and that the policy or practice was “arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective.” If the plaintiff makes this prima facie case, then the burden shifts to the defendant to “identify a valid interest or interests which the challenged policy or practice serves…” Once the defendant makes that identification, the burden shifts back to the plaintiff to establish the following four elements:

  1. A “robust causal link between the challenged policy or practice…”
  2. That the “challenged policy or practice has an adverse effect on members of a protected class.” In other words, under the new rule, it is insufficient to allege merely that the individual plaintiff was harmed as a result of the policy.
  3. That the disparity caused by the policy or practice is “significant” or “material.”
  4. That the “complaining party’s alleged injury is directly caused by the challenged policy or practice.

In the proposed rule, HUD provides several detailed examples of particular defenses a defendant may use to rebut allegations of housing discrimination. The proposed rule also contains several clarifications related to issues such as vicarious liability, the rule’s impact on state insurance regulations, and the scope of remedies in state and federal court, among others.

The theory of disparate impact liability has always been complicated. Although HUD’s proposed rule appears to benefit defendants, the rule imposes additional layers of complexity to the burden-shifting analysis. Thus, while the proposed rule likely will come as welcome relief to businesses that have been vulnerable to disparate impact claims, it will likely not decrease the number of fair housing claims and may very well increase the cost to defend those claims.

Stay of Litigation and Compliance Date Continued in Payday Lending Rule Lawsuit

Stay of Litigation and Compliance Date Continued in Payday Lending Rule LawsuitFollowing the status report filed last week by the parties involved in the lawsuit challenging the CFPB’s Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule, the Texas district court faced with the case ordered that the stay of litigation and the stay of the compliance date for the rule’s payment provisions are continued. The court’s order, which was entered on August 6, requires the parties to “file a Joint Status Report informing the court about proceedings related to the Rule and this litigation as the parties deem appropriate, but no later than Friday, December 6, 2019.” (Emphasis in original)

The parties’ status report informed the court that the CFPB issued a final rule on June 6 delaying the compliance date for the underwriting provisions of the rule until November 19, 2020, and that the bureau continues progressing on its other rulemaking, which proposed to remove the underwriting provision. The order indicates that neither party requested that the court “lift the stay of litigation or the stay of the compliance date at this time.”

With the prior August 19 compliance deadline for the payment provisions looming, this order seems to solidify the delay of the compliance date until potentially as late as December 6.

Big Picture Loans Lands Big Win for Tribal Lenders in Sovereign Immunity Case

Big Picture Loans Lands Big Win for Tribal Lenders in Sovereign Immunity CaseIn a recent decision by the Fourth Circuit, Big Picture Loans, LLC, an online lender owned and operated by the Lac Vieux Desert Band of Lake Superior Chippewa Indians, a federally recognized Indian tribe (“Tribe”), and Ascension Technologies, LLC, the Tribe’s management and consultant company successfully established that they are each arms of the Tribe and cloaked with all of the privileges and immunities of the Tribe, including  sovereign immunity. As background, Big Picture Loans and Ascension are two entities formed under Tribal law by the Tribe and both are wholly owned and operated by the Tribe. Big Picture Loans offers consumer financial services products online and Ascension offers marketing and technology services solely to Big Picture Loans.

Plaintiffs, consumers who had taken out loans from Big Picture Loans, brought a putative class action in the Eastern District of Virginia, arguing that state law and other various claims applied to Big Picture Loans and Ascension. Big Picture Loans and Ascension moved to dismiss the case for lack of subject matter jurisdiction on the basis that they are entitled to sovereign immunity as arms of the Tribe. Following jurisdictional discovery, the U.S. District Court rejected Big Picture Loans and Ascension’s assertions that they are arms of the Tribe and therefore immune from suit.

The Fourth Circuit held that the U.S. District Court erred in its determination that the entities were not arms of the Tribe and reversed the district court’s decision with instructions to dismiss Big Picture Loans and Ascension from the case, and in doing so, articulated the arm-of-the-tribe test for the Fourth Circuit. The Fourth Circuit first confronted the threshold question of who bore the burden of proof in an arm-of-the-tribe analysis, reasoning that it was proper to utilize the same burden as in cases where an arm of the state defense is raised, and “the burden of proof falls to an entity seeking immunity as an arm of the state, even though a plaintiff generally bears the burden to prove subject matter jurisdiction.” Therefore the Fourth Circuit held the district court properly placed the burden of proof on the entities claiming tribal sovereign immunity.

The Fourth Circuit next noted that the Supreme Court had recognized that tribal immunity may remain intact when a tribe elects to engage in commerce through tribally created entities, i.e., arms of the tribe, but had not articulated a framework for that analysis. As such, the court looked to decisions by the Ninth and Tenth Circuits. In Breakthrough Management Group, Inc. v. Chukchansi Gold Casino & Resort, the Tenth Circuit utilized six non-exhaustive factors: (1) the method of the entities’ creation; (2) their purpose; (3) their structure, ownership, and management; (4) the tribe’s intent to share its sovereign immunity; (5) the financial relationship between the tribe and the entities; and (6) the policies underlying tribal sovereign immunity and the entities’ “connection to tribal economic development, and whether those policies are served by granting immunity to the economic entities.” The Ninth Circuit adopted the first five factors of the Breakthrough test but also considered the central purposes underlying the doctrine of tribal sovereign immunity (White v. Univ. of Cal., 765 F.3d 1010, 1026 (9th Cir. 2014)).

The Fourth Circuit concluded that it would follow the Ninth Circuit and adopt the first five Breakthrough factors to analyze arm-of-the-tribe sovereign immunity, while also allowing the purpose of tribal immunity to inform its entire analysis. The court reasoned that the sixth factor had significant overlap with the first five and was, thus, unnecessary.

Applying the newly adopted test, the Fourth Circuit held the following regarding each of the factors:

  1. Method of Creation – The court found that formation under Tribal law weighed in favor of immunity because Big Picture Loans and Ascension were organized under the Tribe’s Business Entity Ordinance via Tribal Council resolutions, exercising powers delegated to it by the Tribe’s Constitution.
  2. Purpose – The court reasoned that the second factor weighed in favor of immunity because Big Picture Loans and Ascension’s stated goals were to support economic development, financially benefit the Tribe, and enable it to engage in various self-governance functions. The case lists several examples of how business revenue  had been used to help fund the Tribe’s new health clinic,  college scholarships, create home ownership opportunities, fund office space for Social Services Department, youth activities and many others. Critically, the court did not find persuasive the reasoning of the district court that individuals other than members of the Tribe may benefit from the creation of the businesses or that steps taken to reduce exposure to liability detracted from the documented purpose. The court also distinguished this case from other tribal lending cases that found this factor unfavorable.
  3. Structure, Ownership, and Management – The court considered relevant the entities’ formal governance structure, the extent to which the entities were owned by the Tribe, and the day-to-day management of the entities by the Tribe. Here the court found this factor weighed in favor of immunity for Big Picture Loans and “only slightly against a finding of immunity for Ascension.”
  4. Intent to Extend Immunity – The court concluded that the district court had erroneously conflated the purpose and intent factors and that the sole focus of the fourth factor is whether the Tribe intended to provide its immunity to the entities, which it undoubtedly did as clearly stated in the entities’ formation documents, as even the plaintiffs agreed on this point.
  5. Financial Relationship – Relying on the reasoning from Breakthrough test, the court determined that the relevant inquiry under the fifth factor is the extent to which a tribe “depends . . . on the [entity] for revenue to fund its governmental functions, its support of tribal members, and its search for other economic development opportunities” (Breakthrough, 629 F.3d at 1195). The court reasoned that, since a judgment against Big Picture Loans and Ascension would significantly impact the Tribal treasury, the fifth factor weighed in favor of immunity even if the Tribe’s liability for an entity’s actions was formally limited.

Based on that analysis, the Fourth Circuit recognized that all five factors weighed in favor of immunity for Big Picture and all but one factor weighed in favor of immunity for Ascension, resulting in a big win for Big Picture Loans and Ascension, tribal lending and all of Indian Country engaged in economic development efforts. The court opined that its conclusion gave due consideration to the underlying policies of tribal sovereign immunity, which include tribal self-governance and tribal economic development, as well as protection of “the tribe’s monies” and the “promotion of commercial dealings between Indians and non-Indians.” A finding of no immunity in this case, even if animated by the intent to protect the Tribe or consumers, would weaken the Tribe’s ability to govern itself according to its own laws, become self-sufficient, and develop economic opportunities for its members.


Although the time for appeal to the U.S. Supreme Court has not expired in this case, needless to say, this is a major victory for tribal lending.   The order also restates an important principle from the U.S. Supreme Court case in Bay Mills that “it is Congress–not the courts–that has the power to abrogate tribal immunity” and that just because a court does not like the “business in which a tribe has chosen to engage,” it cannot seek to remove its right to immunity on that basis.

CFPB Extends the Comment Period for Proposed Debt Collection Rule in Response to Consumer Advocate and Industry Requests

CFPB Extends the Comment Period for Proposed Debt Collection Rule in Response to Consumer Advocate and Industry RequestsThe Consumer Financial Protection Bureau (CFPB) formally extended the comment period for its proposed debt collection rulemaking on Friday, August 2. Rather than requiring that all comments be submitted by August 19, 2019, anyone interested in submitting a comment now has an extra 30 days to do so. The official comment period for the debt collection notice of proposed rulemaking will now close on September 18, 2019.

The CFPB initially released its notice of proposed rulemaking to amend Regulation F on May 7, 2019, and published it in the Federal Register on May 21, 2019. From that point, the CFPB initially set out a 90-day comment period. However, numerous consumer advocacy groups and industry trade associations recently requested that the CFPB provide additional time for all interested stakeholders to opine on the proposed rule. In response to those requests, the CFPB decided that an additional 30 days is warranted.

As discussed in prior posts, the proposed debt collection rulemaking will have broad implications for consumers, entities that qualify as debt collectors, and first-party creditors. As such, engaging in the rulemaking process now and providing the CFPB with feedback is important and can pay dividends in the future. We have seen in the past with other significant CFPB rulemakings that it is extremely challenging to make substantive changes to the law after final rules are issued, and even more so after they become effective. Particularly if you believe that the current proposal will have unintended consequences on your business or that additional guidance in certain areas is needed, it would be prudent to utilize the extra time that is now being afforded and engage with the CFPB to let them know your thoughts on the proposed rule before it is too late.

Gambling on a DOJ Enforcement Action: State of the Wire Act

Gambling on a DOJ Enforcement Action: State of the Wire ActBanks and payment processors involved with acceptance or processing of funds relating to gambling or state lottery systems can breathe a sigh of relief—at least for now—based upon a New Hampshire district court judge’s recent interpretation of the Wire Act, which rejected a much broader Department of Justice (DOJ) position that initially sent shockwaves throughout the financial services industry. Although appellate review is sure to follow, these entities can rest assured that the DOJ will not initiate any prosecutions based upon its controversial interpretation in the meantime until the appeals process runs its course.

Background of The Wire Act

If you have placed a bet on a sporting event anytime in the last several decades, chances are the mob had no involvement (we hope, at least). But that was not always the case. In the 1960s, the mob largely controlled sports betting, and the enormous profits were the mob’s primary source of income. As the country’s telephone networks expanded, the mob began using telephones and telegraphs to accept bets remotely. This garnered the attention of the federal government, who responded by enacting the Interstate Wire Act of 1961.

The Wire Act was designed to target the means by which bets were placed with the mob. Specifically, the Wire Act prohibits the use of a “wire communication facility” to transmit information assisting in the placement of certain bets or wagers. For many years, it was unclear whether the Wire Act applied solely to sports gambling or to all forms of gambling. The DOJ issued its first formal guidance on the issue in 2011 (2011 Memo), when New York and Illinois requested clarification on the Wire Act’s applicability to the use of out-of-state transaction processors for the sale of in-state lottery tickets. Rather than limiting its response to the narrow question posed, the DOJ issued a much broader opinion, finding that the Wire Act applies to sports gambling only. In an unprecedented reversal of the 2011 guidance, the DOJ issued a new memo dated November 2, 2018, (2018 Memo) opining that the Wire Act does, in fact, apply to all forms of Internet gambling, as opposed to solely sports gambling.

New Hampshire Strikes Back

This marked policy change reflected by the 2018 Memo was met with resistance. In response to the 2018 Memo, the New Hampshire Lottery Commission (Commission) and its service provider filed a lawsuit in the U.S. District Court for the District of New Hampshire against Attorney General Bill Barr and the DOJ seeking an injunction to prevent enforcement actions based upon the 2018 Memo and declaratory relief regarding the scope of the Wire Act. On June 3, 2019, the court entered a memorandum opinion granting the Commission’s motion for summary judgment, holding that while the plain language of the Wire Act is ambiguous, the legislative history and “significant contextual evidence” support the Commission’s interpretation that the Wire Act applies solely to sports gambling. As a result, the court set aside the 2018 Memo and entered judgment in favor of the Commission on June 20, 2019. The deadline for the DOJ to appeal the judgment is August 29, 2019.

SCOTUS Raises Questions about Enforceability of Wire Act

While the U.S. Supreme Court has not squarely addressed the constitutionality of the Wire Act, it has decisively rejected an outright ban on sports gambling. The Professional and Amateur Sports Protection Act of 1992 (PASPA) banned sports betting nationwide while carving out certain exemptions for a handful of states. In May 2018, the Supreme Court issued a decision in Murphy v. Nat’l Collegiate Athletic Ass’n, holding that PASPA is unconstitutional because it dictates to the states what they may or may not legislate.

Although not central to the opinion, the Court briefly addressed the Wire Act, stating that it only applies “if the underlying gambling is illegal under state law.” The Court noted that it is federal policy to “respect the policy choices of the people of each state on the controversial issue of gambling.” With regard to sports gambling in particular, the Court held that Congress is free to regulate it—not ban it—and if Congress elects not to, states are free to step in.

Practical Implications

Ultimately, the extent of a financial institution or investor’s investment in this ever-evolving industry is a test of risk appetite. For banks and other financial institutions looking to get involved, the prevention of interstate routing of data related to these transactions is paramount. In order to remove themselves from the purview of the Wire Act, financial institutions should take extra precautions (i.e., specific contractual provisions in contracts with data processors, etc.) to ensure that all data related to sports betting is processed within the state. To that end, businesses considering entering the online sports betting market (provided sports gambling is legal under the relevant state’s laws) could partner with community financial institutions and intrastate payment processors to minimize the risk of interstate data transmission.

For those unable to completely insulate data transmissions, the good news is that the Wire Act’s days may be numbered. Tidbits such as the Supreme Court’s comments in the Murphy case indicate that the DOJ’s interpretation of the Wire Act (and, perhaps, the Wire Act itself) may not survive constitutional scrutiny in front of the Supreme Court. Stay tuned.

Data Modeling Remains Auto Finance Target in CFPB’s Fair Lending Governance

Data Modeling Remains Auto Finance Target in CFPB’s Fair Lending GovernanceThe Consumer Financial Protection Bureau made it clear that it will continue to target auto finance lenders as one of its top supervisory and enforcement priorities in the Fair Lending Report of the Bureau of Consumer Financial Protection , which was released in June 2019.  In addition to adding student loan origination to its watchdog list the CFPB will target model-use practices in auto servicing debt collection in an effort to more closely monitor discriminatory policies and practices based upon consumer data. The report specifically referenced the use of models that predict recovery outcomes.

In a world of increasingly available consumer data, lenders continue to augment the scope of information they may choose to evaluate to underwrite and service auto loans. Examples of alternative data include:

  • Data showing trends or patterns in traditional loan repayment data.
  • Payment data relating to non-loan products requiring regular (typically monthly) payments, such as telecommunications, rent, insurance, or utilities.
  • Checking account transaction and cash flow data and information about a consumer’s assets, which could include the regularity of a consumer’s cash inflows and outflows, or information about prior income or expense shocks.
  • Data that some consider to be related to a consumer’s stability, which might include information about the frequency of changes in residences, employment, phone numbers or email addresses.
  • Data about a consumer’s educational or occupational attainment, including information about schools attended, degrees obtained, and job positions held.
  • Behavioral data about consumers, such as how consumers interact with a web interface or answer specific questions, or data about how they shop, browse, use devices, or move about their daily lives.
  • Data about consumers’ friends and associates, including data about connections on social media.

In the report, the bureau devoted an entire subsection to a modeling discussion in its summary of steps taken to improve access to credit. In fact, the bureau directly acknowledged that “[t]he use of alternative data and modeling techniques may expand access to credit or lower credit cost and, at the same time, present fair lending risks.” The bureau also seemed to acknowledge that part of the purpose for its supervisory activities is to educate the bureau regarding modeling techniques, to “keep pace” with technological advances, and to “learn about the models and compliance systems” available via third-party vendors. In taking a hands-on approach to learning, the bureau can, at the same time, assess fair lending risks to consumers. It seems that education is leading the bureau beyond monitoring data use in credit applications to monitoring data use in all facets of auto finance servicing.

The move is particularly interesting, given the CFPB’s no-action letter to Upstart Network, Inc., which was issued in September 14, 2017, actively monitored in 2018, and referenced in the June 2019 Fair Lending Report. There, the scope of the no-action letter was “limited to Upstart’s automated model for underwriting applicants for unsecured non-revolving credit.” Upstart mixes both traditional underwriting factors, such as credit score and income, with non-traditional data points, such as education and employment history.

The CFPB made clear that its issuance of a no-action letter would not serve as an official endorsement of or expression of the bureau’s views on the use of any particular modeling techniques. While no-action letters are not binding on the bureau, the Upstart no-action letter, in conjunction with the June 2019 Fair Lending Report, seems to indicate that modeling techniques in general will receive heightened scrutiny from the bureau going forward.

Ultimately, it remains to be seen whether the bureau’s exploration into the impact of alternative data on credit access will result in an enforcement action involving model use within auto servicing. Given the bureau’s announcement that the issue is now squarely on its radar, in the least, CFPB investigations seem inevitable.

Notably, the bureau seems to recognize the potential benefits to using alternative data beyond traditional credit file data to provide access or better pricing for those consumers who face barriers to accessing credit or those that traditionally pay more for credit. However, the bureau seems to embrace the idea with caution, ever vigilant to protect nondiscriminatory access to credit, lest the techniques or the data itself present fair lending threats.

Accordingly, to the extent that auto finance companies are using modeling techniques via a third-party vendor or their own proprietary formula in their vehicle recovery processes, they would do well to proactively examine the methods and data used for any potentially discriminatory impact on consumers.