CFPB Eliminates Class Action Waivers with New Arbitration Rule

By: Jonathan K. Moore, Edward W. Chang, Diana M. Eng, and Andrew Williamson

On July 10, 2017, the Consumer Financial Protection Bureau (“CFPB”) issued a final rule (“Arbitration Rule”) prohibiting banks, debt servicers, credit card companies, and a wide range of other businesses from using arbitration clauses to bar a consumer from filing a class action lawsuit to resolve any future dispute between the consumer and the consumer financial service provider. The full version of the final rule is available on the CFPB’s website:  CFPB Arbitration Agreements Final Rule.

Summary of the New Arbitration Rule

The Arbitration Rule is extremely broad and encompasses virtually any type of consumer financial services provider, including entities that do not lend money or service consumer debt. Notably, in addition to creditors, debt buyers, and other entities that directly lend, purchase, or service debt, the new rule applies to entities “participating in consumer credit decisions,” entities “providing services to assist with debt management or debt settlement . . . and [entities] providing products or services represented to remove derogatory information from, or to improve, a person’s credit history, credit record, or credit rating . . . .”

The Arbitration Rule will take effect 60 days after it is published in the Federal Register (“Effective Date”). In addition, the Arbitration Rule will only apply to agreements entered into more than 180 days after the Effective Date, which provides a short grace period for impacted businesses to comply.

Further, Congress may use the Congressional Review Act to invalidate the Arbitration Rule by voting to disapprove the regulation within “60 legislative days” of the Effective Date. Nonetheless, there is no guarantee that Congress will act.

Conclusion

Because the Arbitration Rule will apply prospectively to agreements entered into more than 180 days after the Effective Date, it would be prudent for consumer financial services providers to take steps to comply with the new rule and explore other ways to reduce litigation risks and costs. If the Arbitration Rule goes unchallenged by Congress, it will begin to apply to consumer financial service providers in early 2018.

District Court of New Jersey Holds No Duty Under FDCPA to Warn of Tax Consequences for Debt Settlement

By: Jonathan M. Robbin and Kyle E. Vellutato

In a case of first impression in the Third Circuit, Vincent Carieri v. Midland Credit Management, Inc., No. 17-0009 (D.N.J. June 26, 2017), the District Court of New Jersey held that that a debt collector does not have a duty to notify a debtor of potential tax consequences for settling a debt at a discount under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. (“FDCPA”).

As satisfaction for a debt in the amount of $4,491.47, Midland Credit Management, Inc. (“MCMI”) sent a notice to Carieri offering various debt settlement payment options resulting in savings from continued payments under the terms of the loan (the “Notice”).  Specifically, the Notice offered to extinguish the debt if a discounted total payoff was received by a certain date, resulting in savings of 40 percent (or $1,796.58). Carieri’s complaint alleged that the Notice violated the FDCPA by failing to inform the debtor of the potential tax consequences posed by the savings from the discounted payoff of the debt.[1]

In considering MCMI’s motion for judgment on the pleadings, the Court turned to other federal courts including the Second Circuit for guidance on whether the FDCPA expands a debt collector’s duties with regard to notifying a debtor of tax consequences of debt settlement. Specifically, the Court held that as in Altman v. J.C. Christensen & Assocs., Inc., 786 F.3d 191 (2d Cir. 2015), the Notice did not violate the FDCPA, even though the letter did not warn of potential tax consequences.

The Court granted MCMI’s dispositive motion, and confirmed that a debt collector’s failure to advise a debtor of the tax consequences for a discounted payoff does not serve as a basis for a claim under the FDCPA.[2]

[1] Although Carieri attempted to raise a second FDCPA violation purportedly posed by the Notice in his opposition to the dispositive motion under review, Chief Judge Jose Linares denied Carieri’s attempt to expand his claims, offering a stern reminder to plaintiffs that untimely efforts to amend pleadings—to survive disposition or otherwise—will be barred. Nonetheless, in dicta, the Court roundly rejected Carieri’s last-ditch effort to amend finding that the Notice was misleading to the least sophisticated consumer.

[2] The Court also relied upon the following cases in reaching his decision: Smith v. Nat’l Enter. Sys., Inc., No. 15-541, 2017 WL 1194494 (W.D. Okla. Mar. 30, 2017); Rigerman v. Forster & Garbus LLP, No. 14-1805, 2015 WL 1223760 (E.D.N.Y. Mar. 16, 2015); Landes v. Cavalry Portfolio Servs., LLC, 774 F. Supp. 2d 800 (E.D. Va. 2011); Schaefer v. ARM Receivable Mgmt., Inc., No. 09-11666, 2011 WL 2847768 (D. Mass. July 19, 2011), and rejected the holding in Ellis v. Cohen & Slarnowitz, LLP, 701 F. Supp. 2d 215, 219-20 (N.D.N.Y. Mar. 26, 2010).

 

Second Circuit Holds That TCPA Does Not Permit Consumer to Unilaterally Revoke Consent for Telephone Contact Provided in Binding Contract

By: Diana M. Eng and Andrea M. Roberts

In Reyes v. Lincoln Automotive Financial Services, the United States Court of Appeals for the Second Circuit recently held that the Telephone Consumer Protection Act (“TCPA”) does not permit a consumer to unilaterally revoke consent to be contacted by telephone when such consent is given as bargained-for consideration in a binding contract. Reyes v. Lincoln Automotive Fin. Servs., 2017 WL 3675363 (2d Cir. June 22, 2017).

Background

In 2012, Plaintiff-Appellant, Alberto Reyes, Jr. (“Plaintiff”), leased a car which was financed by Defendant-Appellee, Lincoln Automotive Financial Services (“Lincoln”). The lease contained a provision which expressly permitted Lincoln to contact Plaintiff. Plaintiff stopped making payments under the lease and, as a result, Lincoln called Plaintiff in an attempt to cure his default. Plaintiff disputed his balance on the lease and alleged that he requested that Lincoln cease contacting him. Despite Plaintiff’s alleged revocation of consent, Lincoln continued to call Plaintiff. As such, Plaintiff filed a complaint in the Eastern District of New York alleging violations of the TCPA.

The TCPA was enacted to protect consumers from “unrestricted telemarketing” which could be “an intrusive invasion of privacy.” See Mims v. Arrow Fin. Servs., LLC, 565 U.S. 368, 371 (2012) (internal citations omitted). Under the TCPA, any person within the United States is prohibited from “initiat[ing] any telephone call to any residential telephone line using an artificial or prerecorded voice to deliver a message without the prior express consent of the called party.” 47 U.S.C. 227(b)(1)(B).

Lincoln moved for summary judgment to dismiss the complaint, and the district court granted the motion, holding that (1) Plaintiff had failed to produce sufficient evidence to establish that he revoked his consent to be contacted and (2) the TCPA does not permit a party to a legally binding contract to unilaterally revoke bargained-for consent to be contacted by telephone. Plaintiff appealed both rulings.

The Second Circuit’s Decision

The Second Circuit affirmed the district court’s holding that under the TCPA, a consumer cannot unilaterally revoke its consent to be called when such consent was part of a bargained-for exchange.[1] In assessing whether a party can revoke prior consent under the TCPA, the Second Circuit agreed with the holdings of its sister courts that a party can revoke prior voluntary or free consent under the statute. See Gager v. Dell Financial Services, 727 F.3d 265 (3d Cir. 2013) (plaintiff permitted to revoke consent, where consent was provided in an application for a line of credit); Osorio v. State Farm Bank F.S.B., 746 F.3d 1242 (11th Cir. 2014) (plaintiff could revoke consent, where consent was provided in an application for auto insurance). The Second Court noted, however, that unlike in Gager and Osorio, Plaintiff’s consent was not provided gratuitously. Rather, Plaintiff’s consent was included as an express provision of a contract with Lincoln. Accordingly, the Second Circuit drew a distinction between the definition of consent under tort and contract law. Specifically, in tort law, the term “consent” is defined as a “voluntary yielding to what another purposes or desires.” Black’s Law Dictionary (10th ed. 2014). However, under contract law, “consent to another’s actions can ‘become irrevocable’ when it is provided in a legally binding agreement, in which case any ‘attempted termination is not effective.’” See Restatement (Second) of Torts 892A(5) (Am. Law Inst. 1979); see also 13-67 Corbin on Contracts 67.1 (2017).

The Second Circuit also determined that a contractual term need not be “essential” to be enforced as part of a binding agreement and that contracting parties are bound to perform on the agreed upon terms; a party who agreed to a valid term in a binding contract cannot later renege on that term or unilaterally declare that it no longer applies simply because the contract could have been performed without it. “[R]eading the TCPA’s definition of ‘consent’ to permit unilateral revocation at any time, as [Plaintiff] suggests, would permit him to do just that,” and the Second Circuit could not “conclude that Congress intended to alter the common law of contracts in this way.” (citation omitted).

Conclusion

This decision is significant, as it addressed the novel issue of whether consent that is given as part of a bilateral contract may be unilaterally revoked by a consumer under the TCPA. Based on Reyes, financial institutions that have consent provisions in binding contracts with consumers have a powerful defense against TCPA claims. In practice, if a contract with a consumer contains an express consent provision, the financial institution would need to agree to the consumer’s request to revoke. Financial institutions should also be cognizant that a consumer, who provides consent to be called in an application, may unilaterally revoke such consent.

[1] The Second Circuit also held that the district court erred in finding that no reasonable jury could find that Plaintiff revoked his consent, as Plaintiff had introduced sworn testimony of revocation. However, this error does not impact the ruling that Plaintiff nevertheless cannot unilaterally revoke his consent under the TCPA when such consent is part of a binding contract.

Florida Second District Court of Appeal Ruling Highlights the Possible Pitfalls of Relying on Prior Servicer Records

By: Michael R. Esposito

Florida’s Second District Court of Appeal (“Second District Court”) recently held that a mortgagee failed to demonstrate it satisfied the condition precedent in a residential mortgage foreclosure. Allen v. Wilmington Trust, N.A., 2D15-2976, 2017 WL 1325896 (Fla. 2d DCA 2016). In Allen, the underlying mortgage contained the standard provision which requires a lender/servicer to notify the borrower of a default prior to the loan being accelerated and a foreclosure filed. In addition to the foregoing provision, the mortgage specified that any notice mailed in relation to the instrument “shall be deemed to have been given to [b]orrower when mailed by first class mail or when actually delivered to [b]orrower’s address if sent by other means.” Prior to the commencement of the action, a notice of default was mailed to the borrower by the prior loan servicer, EMC Mortgage Corporation (“EMC”), in accordance with the provision. Thereafter, Wilmington Trust, N.A. (“Wilmington”) filed a complaint on or about November 21, 2012, seeking foreclosure of the subject mortgage. In response to the lawsuit, the borrower denied Wilmington satisfied all conditions precedent to filing the lawsuit and raised an affirmative defense that asserted Wilmington failed to establish that a notice of default was provided as required by the mortgage.

During the bench trial, a corporate representative of the current servicer testified on behalf of Wilmington. The witness testified as to the boarding process used to verify the accuracy of the records of EMC and specified the related business records included a notice of default that was addressed to the borrower and dated March 12, 2010. Further, the witness testified that because the letter existed, it had been sent to the borrower and there were no records indicating the notice was returned as undeliverable. More importantly, the witness confirmed the business records associated with the loan did not specifically show the notice was actually mailed to the borrower and she was unable to testify as to EMC’s mailing procedures. In response, the borrower objected to the witness’ testimony that EMC mailed the notice and argued Wilmington failed to establish the appropriate foundation for the testimony since she was unfamiliar with the prior servicer’s procedures. Despite the trial court’s denial of the objection, the borrower argued at the close of the bench trial that Wilmington neglected to demonstrate it satisfied the condition precedent of mailing the notice of default. Ultimately, the trial court held the witness’ testimony as to the boarding process was sufficient to show Wilmington satisfied the condition precedent and entered a final judgment of foreclosure in favor thereof.

In reviewing the matter, the Second District Court held the trial court incorrectly relied on the boarding process to prove the notice of default was actually mailed. Although the witness’ testimony as to the boarding process was sufficient to support the admission of the notice of default, the Second District Court concluded that the testimony and evidence proffered failed to establish the notice of default was mailed to the borrower. In support of its conclusion, the Second District Court cited to Burt v. Hudson & Keyse, LLC, 138, So. 3d 1193 (Fla. 5th DCA 2014) and held that while the notice of default was dated, it did not contain any proof that the notice was mailed to the borrower. Without proffering further evidence of proof of regular business practice, an affidavit swearing that the notice of default was mailed, or a return receipt, Wilmington was only able to rely upon the testimony of its witness, who was unable to show personal knowledge of EMC’s general practice in mailing letters. As a result, the Second District Court reversed and remanded the action for dismissal since Wilmington was unable to demonstrate the notice of default was mailed pursuant to an established business procedure of EMC and, therefore, could not prove the required condition precedent was satisfied.

This case highlights the litigation risks associated with service transferred loans and the importance of current loan servicers obtaining all relevant business records and/or education on prior servicer policies and procedures.

U.S. Supreme Court Excludes Banks Collecting Purchased Delinquent Debt from Definition of “Debt Collector” under the FDCPA

By: Diana M. Eng and Louise Marencik

Banks and other consumer finance firms that purchase delinquent debt and then collect on their own behalf are not “debt collectors” under the Fair Debt Collection Practices Act. However, this limitation still does not apply to those institutions that collect on behalf of another.

In a unanimous decision in Henson et al. v. Santander Consumer USA Inc., the United States Supreme Court held that the Fair Debt Collection Practices Act (“FDCPA”) does not apply to banks and other consumer finance firms that purchase and then collect on defaulted debt that they own. No. 16-349, ____ U.S. ____ (2017).

Please click here for the full alert.

U.S. Supreme Court Holds Debt Collectors Are Not Liable under the FDCPA for Pursuing Time-Barred Claims in Bankruptcy Court

By: Jonathan Robbin and Sholom Wohlgelernter

In a 5-3 decision in Midland Funding, LLC v. Johnson, No. 16-348, 2017 WL 2039159 (U.S. May 15, 2017), the United States Supreme Court held that a debt collector’s filing of a time-barred proof of claim in a Chapter 13 bankruptcy proceeding is not “false,” “deceptive,” “misleading,” “unfair,” or “unconscionable” within the meaning of the Fair Debt Collection Practices Act (“FDCPA”).

In overturning the Eleventh Circuit Court of Appeals, the Supreme Court held that the protections and remedies afforded to consumers under the FDCPA with respect to time-barred claims, are unavailable in Chapter 13 bankruptcy proceedings. The Supreme Court’s decision makes clear that debt collectors may pursue time-barred debts in a debtor’s bankruptcy proceeding.

Please click here for the full alert. 

CFPB Issues Proposed Amendment to Home Mortgage Disclosure Act

By: Jessica McElroy

On April 13, 2017, the Consumer Financial Protection Bureau (“CFPB”) issued a Notice of Proposed Rule Making[1] targeted at amending Regulation C to make technical corrections to and clarify certain requirements adopted by the CFPB’s Home Mortgage Disclosure final rule (“2015 HMDA Final Rule”), which was published on October 28, 2015.[2]

Regulation C implements the Home Mortgage Disclosure Act (“HMDA”).[3] HMDA has historically provided the public and public officials with information about mortgage lending activity by requiring financial institutions to collect, report and disclose certain data pertaining to mortgage activities. The Dodd-Frank Act amended HMDA and transferred rule-making authority to the CFPB.[4] The Dodd-Frank Act additionally expanded the scope of information that institutions must collect and disclose under HMDA.[5]

The 2015 HMDA Final Rule modified the types of institutions and transactions subject to Regulation C, the types of data that institutions are required to collect and the processes for reporting and disclosing the required data.[6] Most of the modifications take effect in January 2018.

The CFPB now proposes establishing transition rules for two data points: loan purpose and the unique identifier for the loan originator. According to the CFPB, the rules would allow financial institutions to report “not applicable” for these data points when reporting certain purchased loans that were originated before the regulatory requirements took effect. Additionally, the proposal would facilitate reporting the census tract of the property securing the covered loan required by Regulation C via a geocoding tool that the CFPB intends to make available on its web site. This tool would allow financial institutions to identify the census tract in which a property is located. The proposal also includes a safe harbor provision for institutions that obtain the incorrect census tract number from the CFPB’s geocoding tool, provided that an accurate property address is entered and the tool returned a census tract for the address entered.

Comments on the proposal are due 30 days after the Notice of Proposed Rulemaking is published in the Federal Register.

Click below for the proposal: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201704_cfpb_NPRM_HMDA.pdf.


 

[1] See https://www.consumerfinance.gov/policy-compliance/rulemaking/rules-under-development/technical-corrections-and-clarifying-amendments-home-mortgage-disclosure-october-2015-final-rule/ (last accessed April 17, 2017).

[2] See https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201704_cfpb_NPRM_HMDA.pdf.

[3] 12 U.S.C. § 2801 et seq.

[4] Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376, section 2097- 101 (2010).

[5] Id.

[6] October 2015 HMDA Final Rule, 80 FR 66128, 29.