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24 state attorneys general reject CFPB’s time-barred debt proposal
On August 4, twenty-four state attorneys general responded to the CFPB’s request for comments on its proposed supplemental debt collection rule (the “Supplemental Proposed Rule”) arguing it does not “adequately protect[] consumers’ rights.” As previously covered by a Buckley Special Alert, the Supplemental Proposed Rule— which adds to the CFPB’s May 2019 proposed rule (InfoBytes coverage here) — proposes (i) certain disclosures required to be included in communications where a third-party debt collector knows or should know that a debt is time-barred; and (ii) model language and forms that debt collectors may use to comply with such disclosure requirements.
Among other things, the attorneys general disagree with the “know or should know” standard, arguing that the Bureau should “adopt a strict-liability standard, which would be in line with what the FDCPA intends to accomplish.” Moreover, the attorneys general assert that the model disclosures (i) were not adequately tested; (ii) do not account for the variations in state laws as to the potential revival of time-barred debt; and (iii) provide a safe harbor that is inconsistent with the FDCPA and the Dodd-Frank Act. Lastly, the attorneys general express concerns that the Supplemental Proposed Rule conflicts with state laws that require state disclosures to be on the front side of debt collection notices and fails to address “obsolete debt.”
2nd Circuit: Furnisher’s duty to investigate triggered only after it receives notice of dispute from CRA
On August 10, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal with prejudice of FCRA and related state law allegations against a state bank and trust company, concluding that the bank’s duty to investigate is triggered only after it receive a notice of dispute from a consumer reporting agency (CRA). According to the opinion, the plaintiffs obtained a mortgage from the bank but later defaulted on their payments. The bank initiated foreclosure proceedings, and in 2014 both parties agreed to a deficiency judgment. In February 2016, one of the plaintiffs notified the bank that his credit report “inaccurately indicated ‘that the mortgage. . .was still open and payments had not been made in more than two years.’” The bank acknowledged the error in March, said a correction had been made to report the loan as closed, and indicated that “information [would] be supplied to the credit reporting agencies.” However, the plaintiff claimed the bank did not correct the information until November 2016. In their amended complaint, the plaintiffs alleged the bank violated the FCRA by (i) “negligently and willfully fail[ing] to perform a reasonable reinvestigation and correction of inaccurate information”; and (ii) “engag[ing] in behavior prohibited by [the] FCRA by failing to correct errors in the information that it provided to credit reporting agencies.” The bank countered that its “duty of investigation is only triggered after a furnisher of information receives notice of a dispute from a consumer reporting agency” and that the plaintiffs failed to allege that the bank “‘ever received notice of a dispute from a consumer reporting agency.’” The district court granted the bank’s motion to dismiss with prejudice for failure to state a claim.
On appeal, the 2nd Circuit agreed with district court, concluding, among other things, that the plaintiffs “do not allege that a CRA notified [the bank] of their dispute concerning the information in the [r]eport.” According to the appellate court, the plaintiffs “do not even allege that they notified a CRA of the discrepancy. The [a]mended [c]omplaint alleges only that, after receiving the [r]eport, [the plaintiff] directly notified [the bank] of the [r]eport’s inaccuracy. This alone is insufficient to state a claim under Section 1681s–2(b).”
District court rescinds arbitration order in ATM and overdraft fee case
On August 10, the U.S. District Court for the Southern District of California agreed to reconsider a prior decision, which granted a bank’s motion to compel arbitration in connection with a lawsuit concerning the bank’s assessment of two types of fees. As previously covered by InfoBytes, the court compelled arbitration of a plaintiff’s lawsuit asserting claims for breach of contract and violation of California’s Unfair Competition Law due to the bank’s alleged practice of charging fees for out-of-network ATM use and overdraft fees related to debit card transaction timing. The court concluded that even if the California Supreme Court case McGill v. Citibank rule— which held that an arbitration agreement is unenforceable if it constitutes a waiver of the plaintiff’s substantive right to seek public injunctive relief (covered by a Buckley Special Alert here)—was applicable to a contract, it would not survive preemption as the U.S. Supreme Court has “consistently held that the Federal Arbitration Act (FAA) preempts states’ attempts to limit the scope of arbitration agreements,” and “the McGill rule is merely the latest ‘device or formula’ intended to achieve the result of rendering an arbitration agreement against public policy.”
The plaintiff moved for the court’s reconsideration after the U.S. Court of Appeals for the Ninth Circuit issued opinions in Blair v. Rent-ACenter, Inc. et al and McArdle v. AT&T Mobility LLC). In Blair (and similarly in McArdle), the 9th Circuit concluded that McGill was not preempted by the FAA. The appellate court found that McGill does not interfere with the bilateral nature of a typical arbitration, stating “[t]he McGill rule leaves undisturbed an agreement that both requires bilateral arbitration and permits public injunctive claims.” (Covered by InfoBytes here.)
The court granted the plaintiff’s motion, concluding that the public injunction waiver in the account agreement is “encompassed by McGill” and therefore, the arbitration agreement is “invalid and unenforceable,” and because the arbitration agreement includes a non-severability clause, the “clause plainly invalidates the entire arbitration agreement section as a result of the invalidity and unenforceability of the public injunction waiver provision therein.”
Fed announces new details of the FedNow Service
On August 6, the Federal Reserve Board (Board) announced details of its new payment clearing system, the FedNow Service, which the Board plans to implement through a phased approach with a target launch date sometime in 2023 or 2024. As previously covered by InfoBytes, in August 2019, the Board issued a request for information on a “round-the-clock real-time payment and settlement service,” seeking feedback on how the service might be designed in order to support payment system stakeholders and the general functioning of the U.S. payment system. The Board notes that the newly released details are based on the input received from stakeholders. The Federal Register notice discusses the phased released approach, noting that the “approach will ensure the core features and functionality are delivered as quickly as possible,” even if “certain desirable features” are not available in the initial release. Highlights of the core features of the “24x7x365” FedNow Service include, among other things, (i) a payment flow where the receiver’s bank has an opportunity to confirm that it holds a valid account for the receiver and intends to accept the payment message, before interbank settlement occurs; (ii) the use of the “widely accepted ISO 20022 standard and adopt other industry best practices” for payment message format; (iii) a transaction limit that will be “consistent with market practices and needs at the time” of the launch of service; and (iv) a liquidity-management tool that will allow participants to transfer funds to each other to support the liquidity needs of instant payments. After the initial launch, the Board intends to offer additional features related to fraud prevention, error resolution and case management.
SEC urges firms impacted by Covid-19 to review supervisory and compliance policies
On August 12, the SEC’s Office of Compliance Inspections and Examinations issued a risk alert to broker-dealers and investment advisers (firms) impacted by the Covid-19 pandemic addressing observations and recommendations related to several categories, including investor asset protection; personnel supervision; practices related to fees, expenses, and financial transactions; investment fraud; business continuity; and protecting sensitive information. The alert recommends firms review—and where appropriate—modify supervisory and compliance policies and procedures as they deal with market volatility and technological challenges brought by the Covid-19 pandemic. The alert notes that firms may need to update their practices to address, among other things, (i) unusual or unscheduled investor withdrawals; (ii) staffers communicating or executing transactions off-site or on personal devices, or making securities recommendations tied to market sectors experiencing high volatility or fraud; and (iii) supervisors having less oversight and interaction with staff in remote environments, leading to difficulties in maintaining effective due diligence, conducting background checks when hiring, or overseeing requisite examinations. Additionally, firms are instructed to monitor potential conflicts of interest and fee errors when informing investors about the costs of services, investment products, and related compensation, while also ensuring recommendations are made in the “best interest of investors.” The alert also recognizes that “times of crisis or uncertainty can create a heightened risk of investment fraud through fraudulent offerings,” and advises firms to “be cognizant of these risks when conducting due diligence on investments and in determining that the investments are in the best interest of investors.” Firms and investors who suspect fraud are advised to contact the SEC and report the potential fraud.
Fannie and Freddie announce new refinance fee
On August 12, Fannie Mae and Freddie Mac announced a new adverse market refinance fee of 50 basis points, or 0.5 percent, on certain refinance mortgages. According to Freddie Mac’s Guide Bulletin 2020-32, the refinance fee applies to cash-out and no cash-out refinance mortgages “except for Construction Conversion Mortgages that qualify for single-closing Interim Construction Financing and Permanent Financing.” The Bulletin notes that the fee is a result of economic and market uncertainty due to the Covid-19 pandemic. Fannie Mae’s Lender Letter LL-2020-12 notes that the new fee applies to limited cash-out refinances and cash-out refinances but provides a limited exception for certain single-closing construction-to-permanent loans.
The new fee is effective for applicable refinance mortgages with settlement dates on or after September 1.
Idaho Department of Finance extends temporary work from home guidance for licensees
On August 12, the Idaho Department of Finance extended temporary work from home guidance previously issued to Idaho mortgage brokers and lenders, mortgage loan originators, regulated lenders, title lenders, payday lenders, and collection agency licensees and registrants. The original guidance (previously covered here and here) permits employees to work from home where the residence is not a licensed branch. The guidance is extended through December 31, 2020. Licensees are expected to meet the requirements of the original guidance, and are reminded that the guidance does not amend the Idaho Residential Mortgage Practices Act, the Idaho Credit Code, or the Idaho Collection Agency Act.
Nevada enacts bill limiting civil liability of businesses with respect to Covid-19 transmission claims
On August 11, the Nevada governor signed SB 4, which, among other things, limits the civil liability of a business with respect to claims related to Covid-19 transmission on premises owned or operated by the business, or during an activity conducted or managed by the business, if the business was in substantial compliance with controlling health standards. The bill also empowers the secretary of state to suspend the state business license of a licensee that fails to comply with controlling health standards related to Covid-19.
Federal Reserve Board announces revised pricing for its Municipal Liquidity Facility
On August 11, the Federal Reserve Board announced revised pricing for its Municipal Liquidity Facility. The revised pricing reduces the interest rate spread on tax-exempt notes for each credit rating category by 50 basis points and reduces the amount by which the interest rate for taxable notes is adjusted relative to tax-exempt notes. The MLF, originally covered here, was one of several facilities intended to support the flow of credit in the economy.
Court rejects consumer’s RESPA claims against mortgage servicer
On August 5, the U.S. District Court for the Northern District of West Virginia granted a mortgage servicer’s motion for summary judgment, concluding that the servicer “maintained contact and regularly worked” with the consumer to complete her loss mitigation application and thus did not violate Regulation X. According to the opinion, after obtaining the rights to the property and assuming mortgage responsibilities pursuant to a divorce decree, the consumer stopped making mortgage payments in July 2018. The mortgage servicer confirmed the consumer as the successor in interest to the mortgage on March 7, 2019 and on March 14, 2019, the consumer sent the servicer an incomplete loss mitigation application. Between March 2019 and June 2019, the consumer submitted additional loss mitigation application materials and partial application materials for a loan assumption, with the servicer regularly contacting the consumer to obtain documents necessary to complete the applications. The consumer asserted that the servicer, in violation of §1024.41(b)(1), failed to exercise reasonable diligence in obtaining documents and information from her to complete her loss mitigation application and, in violation of §1024.41(c)(1) and §1024.41(c)(2), failed to evaluate her complete loss mitigation application for all loss mitigation options available.
The court granted summary judgment in favor of the servicer. The court reasoned that “undisputed evidence” establishes that the servicer “maintained contact and regularly worked” with the consumer to obtain the paperwork it needed. Moreover, the court noted that while Regulation X requires a servicer to “evaluate a borrower for all loss mitigation options available, that does not mean it must offer every option it considered—or any option at all.” The court rejected the consumers’ claims that the servicer should have offered a loan modification that did not require information from her ex-husband, concluding that Regulation X “required” her ex-husband’s inclusion and nonetheless, “[u]nder the regulatory framework, [the servicer] has discretion to determine which option(s), if any, it offers an applicant.” Lastly, the court disagreed that the mortgage servicer’s actions caused the consumer to incur “substantial damages,” concluding that “evidence of record is clear that her damages were not caused by or even attributable to [the servicer].”