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  • Caveat Emptor or Caveat Vendor? The Evolution of Unfairness in Federal Consumer Protection Law
    January 26, 2015
    Jeffrey P. Naimon, Kirk D. Jensen, Caroline M. Stapleton & Sasha Leonhardt

    Under the Federal Trade Commission’s original interpretation of unfair or deceptive acts or practices law, financial institutions could feel some sense of security that, if they provided a consumer with a clear understanding of a proposed transaction, the burden was on the consumer to determine whether the transaction was in his or her best interest. Recent actions taken by the Consumer Financial Protection Bureau and prudential regulators, however, suggest that regulators may be creating an expectation that institutions put some conception of consumers’ interests first, even when there is no clear assumption of fiduciary or quasi-fiduciary responsibility.

    This move away from traditional arms-length dealing would place financial institutions in a difficult position: not only would they have to investigate and weigh aspects of a consumer’s personal and financial life unrelated to the transaction, but they also may have to substitute their judgment for the consumer’s in determining the consumer’s best interest—a process almost certainly designed to lead to sub-optimal outcomes for all involved. The authors of this article explore the issues and advise financial institutions to carefully watch future regulatory guidance and enforcement actions for further signs that regulators are imposing quasi-fiduciary duties upon creditors.

    Originally published in The Banking Law Journal; reprinted with permission.

  • Deference in Decline: ECOA’s Regulation B and Agency Discretion Might Not Be Broad Enough to Include Spousal Guarantors
    January 20, 2015
    Valerie L. Hletko & Caroline M. Stapleton

    For more than 40 years, the Equal Credit Opportunity Act (‘‘ECOA’’)1 has prohibited lenders from discriminating against applicants for credit on various prohibited bases, including marital status. The policy reasons for such protections, including ensuring that married women have full access to credit, are plain. There is no indication, however, that the statute was intended to cover lenders’ interest in the transparency of their commercial debtors’ assets. Notwithstanding, since 1985, the Board of Governors of the Federal Reserve System’s (‘‘Board’’) Regulation B3 has extended its protection to spousal guarantors in credit transactions—and multiple federal circuit courts of appeals have affirmed. A recent Eighth Circuit decision rejected the Board’s interpretation for the first time, finding that the plain language of ECOA unambiguously excludes spousal guarantors from the statute’s purview. The circuit split created by this decision raises important questions not only about the scope of ECOA with respect to spousal guarantors, but also more generally regarding the degree of judicial deference that the Board and other federal agencies can expect going forward to their increasingly broad interpretations of fair lending laws.

    Originally published in BNA's Banking Report; reprinted with permission.

  • Updates to Mortgage Originator Licensing Rules in 2015
    January 5, 2015
    Jonathan Cannon

    In 2008, Congress passed the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The SAFE Act was intended to "increase uniformity, reduce regulatory burden, enhance consumer protection, and reduce fraud" in the residential mortgage industry. Among other things, it requires all individual mortgage loan originators to obtain a federal registration. Loan originators working for state-licensed mortgage companies must obtain individual state licenses as well. 

    But one obstacle to "reducing regulatory burden" was that state-licensed loan originators must pass a "qualified written test." While the act established minimum standards for the qualified written test, it allowed states to satisfy the test requirements through their own individual tests or through the Uniform State Test. 

    Originally published in the Los Angeles Daily Journal; reprinted with permission. 

  • A New Burden in the Digital Era
    January 1, 2015
    Margo Tank

    Financial institutions have a double burden when facing the digital era: keeping up with changing technology and keeping up with regulators’ attempts to respond to and encourage those changes. In response to consumer demands, financial institutions are developing mobile apps and mobile-responsive websites of their own. Their consumers want access to the goods and services they once got from brick-and-mortar stores (or their PCs) on their mobile devices. To provide the convenience they have come to expect, financial institutions need to utilize methods for creating the most attractive, responsive and effective mobile products possible. At the same time, regulators have focused significant attention on how banks and other entities they oversee can use Internet-based tools to impact consumers.

    A/B Testing

    A/B Testing is one standard protocol for developing and improving web products. It calls for presenting two versions of a product to different groups of users and measuring their reactions against a metric of success. Despite being “industry standard,” this approach is receiving increased criticism from consumers and may be risky for financial institutions.

    A/B testing recently dominated conversations regarding Facebook’s treatment of its users after it presented upbeat or depressing stories to different groups of users and then collected and shared the resulting data about the users’ behavior. This move caught tremendous flack in the media, including claims that Facebook may have manipulated consumers. Facebook and its defenders noted that this sort of testing is routine at technology companies. Presenting different versions of a product to different sets of users and comparing the result is an effective, common tool for evaluating potential development strategies. Such testing allows developers to treat qualitative factors quantitatively, providing clear evidence of what seemingly personal preference will actually have the greatest usability impact.

    As mobile products reach into ever more sensitive corners of consumers’ lives, this approach is gaining increased scrutiny.

    Click here to read the full article at progressinlending.com.

Knowledge + Insights

  • Special Alert: Supreme Court Hears Oral Arguments on Fair Housing Act Disparate Impact Case
    January 21, 2015

    This morning, the Supreme Court heard oral arguments in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, in which Texas challenged the disparate impact theory of discrimination under the Fair Housing Act (FHA). Twice before, the Court granted certiorari on this issue, but in both cases the parties reached a settlement prior to oral arguments.   

    As described further below, in their questions to counsel, the Justices focused on (i) whether the phrase “making unavailable” in the FHA provides a textual basis for disparate impact, (ii) whether three provisions within the 1988 amendments to the FHA demonstrate congressional acknowledgement that the FHA permits disparate impact claims, and (iii) whether they should defer to HUD’s disparate impact rule.  

    “Disparate treatment” discrimination under the FHA is defined as intentional discrimination in the provision of housing on the basis of a protected class, such as race, religion, or national origin. However, to assert a “disparate impact” claim, a plaintiff need not show any intent to discriminate by the defendant in order to establish a prima facie case. Although eleven federal courts of appeals have recognized disparate impact discrimination, all of these decisions were issued prior to the Supreme Court’s holding in Smith v. City of Jackson. In Smith, the Court held that language addressing “adverse effects” in the Age Discrimination in Employment Act (ADEA) provided textual support for disparate impact claims under the ADEA, as it does under Title VII. One of the issues addressed in Inclusive Communities is whether the FHA contains “effects-based” language permitting disparate impact claims.  

    Counsel for Texas argued that the Court’s holding in Smith required the Court to hold here that disparate impact claims were barred by the statutory text of the FHA, because the FHA lacks the “effects” language present in the ADEA and Title VII. Justices Scalia, Breyer, Sotomayor, and Kagan, however, focused on the language of Section 804 of the FHA which provides that it is unlawful to “otherwise make unavailable or deny a dwelling to any person because of race, color, religion, sex, familial status, or national origin.” These Justices asked whether the phrase “otherwise make unavailable” is the equivalent of the “adversely affect” language in other civil rights statutes. Counsel for Texas responded that “making unavailable” is an active verb, and therefore requires an affirmative action intended to make a dwelling unavailable. In response, Justice Scalia asked whether “adversely affects” similarly required action on the part of a defendant. 

    The Justices also focused on Congress’s 1988 amendments to the FHA, which created three exceptions from liability under the FHA for (i) appraisers under Section 805(c), (ii) decisions based upon an individual’s prior conviction for manufacturing or distributing illegal drugs under Section 807(b)(4), or (iii) the application of local, state, or federal restrictions regarding the maximum number of occupants permitted to occupy a dwelling under Section 807(b)(1).  Justice Scalia stated that the Court is required to read the statute as a whole, including these exceptions. Justice Scalia noted that “what hangs me up” is how these exceptions can be reconciled with the statutory text if the FHA does not permit disparate impact claims. Counsel for Texas responded that these exceptions also apply to disparate treatment claims, and do not suggest specific Congressional acknowledgement that the FHA permits disparate impact claims.  

    Next, the Justices asked counsel for Respondent Inclusive Communities whether the FHA’s “because of” language required intent to discriminate. Justices Kagan and Breyer specifically noted that the Court had recognized disparate impact claims under other civil rights statutes containing similar “because of” language. Counsel agreed and argued that there was no basis for treating the FHA’s “because of” language differently.    

    Justice Alito asked counsel for Respondents whether the 1988 amendments make disparate impact claims cognizable under the FHA if the original act did not. Justice Alito asked whether the 1988 amendments expanded the act. Counsel responded that the amendments did not expand the FHA—rather, that disparate impact was permitted in the original act.  

    Next, the Solicitor General directed the Court to HUD’s recent disparate impact rule and urged the Court to give deference to HUD’s interpretation under Chevron and noted that HUD issued its rule within days of the Court’s grant of certiorari in Magner v. Gallagher, a prior case raising the same issue. Justice Alito asked whether the Court should be “troubled” by the use of Chevron to “manipulate” the Court’s decisions. The Solicitor General responded that HUD had taken the position that the FHA permits disparate impact claims since 1992.  

    The Solicitor General further noted that defendants in disparate impact cases have protections under the burden-shifting framework, because claimants must point to a “specific practice” that gives rise to the alleged disparity to establish a prima facie case. Justice Breyer responded by asking whether it is necessary to eliminate disparate impact altogether given the protections provided by the burden-shifting framework.   

    NOTE: Quotations in this client alert are based on the notes of those who attended oral arguments, and not from any official transcript.

  • Special Alert: CFPB Finalizes Amendments to TILA-RESPA Integrated Mortgage Disclosures
    January 21, 2015

    On January 20, 2015, the CFPB finalized amendments to the TILA-RESPA Integrated Disclosure (“TRID”) rule that make a number of amendments, clarifications, and corrections, including:

    • Relaxing the redisclosure requirements after a rate lock.  The final rule permits creditors to provide a revised Loan Estimate within three business days after an interest rate is locked, instead of the current requirement to provide the revised Loan Estimate on the date the rate is locked (and instead of the proposed rule that would have allowed only one business day)
    • Creating room on the Loan Estimate for the disclosure that must be provided on the initial Loan Estimate as a condition of issuing a revised estimate for construction loans where the creditor reasonably expects settlement to occur more than 60 days after the initial estimate is provided
    • Adding the Loan Estimate and Closing Disclosure to the list of loan documents that must disclose the name and NMLSR ID number of the loan originator organization and individual loan originator under 12 C.F.R. § 1026.36(g)
    • Providing additional guidance related to the disclosure of escrow accounts, such as when an escrow account is established but escrow payments are not required with a particular periodic payment or range of payments
    • Clarifying that, consistent with the requirement for the Loan Estimate, the addresses for all properties securing the loan must be provided on the Closing Disclosure, although an addendum may be used for this purpose

    For your convenience, we have updated our summary of the TRID rule to identify the most significant changes.  Please visit our TRID Resource Center for additional information and analysis regarding all aspects of the TRID rule. 

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    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • Special Alert: Supreme Court Holds That Notice of Rescission Is Sufficient For Borrowers to Exercise TILA’s Extended Right to Rescind
    January 15, 2015

    The Supreme Court on January 13, 2015 held in Jesinoski v. Countrywide Home Loans, Inc. that a borrower seeking to rescind a loan pursuant to the Truth In Lending Act’s (“TILA’s”) extended right of rescission need only submit notice to the creditor within three years to comply with the three-year limitation on the rescission right.  TILA gives certain borrowers a right to rescind their mortgage loans.  Although that right typically lasts only for three days from the time the loan is made, 15 U.S.C. § 1635(a), it can extend to three years if the creditor fails to make certain disclosures required by TILA, 15 U.S.C. § 1635(f).  Petitioners in the case had mailed a notice of rescission to Respondents exactly three years after the loan was made and Respondents responded shortly thereafter by denying that Petitioners’ had a right to rescind.  A year after submitting their notice of rescission—four years after the loan was made—Petitioners filed a lawsuit seeking a declaration of rescission and damages.  

    The Court’s opinion resolved a circuit split over whether borrowers exercising their right to rescind certain loans pursuant to Section 1635(f) must file a lawsuit to rescind their loans within the three-year period set forth in that section or can satisfy the timing requirements by merely submitting notice of rescission to the creditor.  In his opinion for the unanimous Court, Justice Scalia stated that the statutory language “leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind.  It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely.”  The Court rejected Respondents’ argument that a court must be involved in a rescission under Section 1635(f).  

    As a result of the Court’s decision, we now expect that a creditor receiving a post three-day notice of rescission from a borrower would immediately file a lawsuit against the borrower to address the validity of the purported rescission in order to avoid ongoing ambiguity regarding the status of the loan, and, if the rescission were validly noticed, to condition the rescission on the return of the loan principal.   

    BuckleySandler submitted an amicus curiae brief in the case on behalf of industry groups, arguing that notice alone is insufficient to effectuate rescission under Section 1635(f).

  • Special Alert: CSBS Issues Policy, Draft Model Regulatory Framework, and Request for Comment Regarding State Regulation of Virtual Currency
    January 7, 2015

    On December 16, 2014, the Conference of State Bank Supervisors (“CSBS”) issued a Policy on State Regulation of Virtual Currency (the “Policy”), Draft Model Regulatory Framework, and a request for public comment regarding the regulation of virtual currency.  The Policy and Draft Model Regulatory Framework were issued through the work of the CSBS Emerging Payments Task Force (the “Task Force”). The Task Force was established to explore the nexus between state supervision and the development of payment systems and is seeking to identify where there are consistent regulatory approaches among states.    

    The Policy As a result of its work to date, the Policy recommends that “activities involving third party control of virtual currency, including for the purposes of transmitting, exchanging, holding, or otherwise controlling virtual currency, should be subject to state licensure and supervision.” The Policy states that state regulators have determined certain activities involving virtual currency raise concerns in three areas: consumer protection, marketplace stability, and law enforcement.   The Task Force’s intentional technology-neutral approach targets “licensable activities” – activities performed by one party, in a position of trust, acting on behalf of another.  It recommends that such licensable activities be regulated by amending current laws, or when necessary, enacting new legislation to cover the transmission, exchanging, and holding of value of currencies. The Policy recommends that those who service these transactions through mobile wallets, vaults, payment processors, and others should be appropriately licensed.   The Policy targets certain activities:

    • Transmission
    • Exchange (e.g., sovereign to virtual, virtual to sovereign, or virtual to virtual)
    • Services that facilitate third-party exchange, storage, and/or transmission of virtual currency through any medium (e.g., wallets, vaults, kiosks, merchant-acquirers, and payment processors).

    The Task Force notes that the Policy explicitly does not cover either merchants or consumers whose use of virtual currencies is solely to purchase goods or services; or for activities that utilize similar technologies, such as cryptography-based ledger systems, but are not financial in nature nor used for financial recordkeeping.  

    The Draft Model Regulatory Framework The Draft Model Regulatory Framework proposes a system for state licensing and supervision of certain virtual currency activities. The Draft Model Regulatory Framework addresses the following areas of concern regarding businesses engaged in virtual currency activities:  licensing requirements and systems, financial strength and stability, consumer protection issues, cybersecurity, compliance with Bank Secrecy Act and Anti-Money Laundering, recordkeeping, and regulatory supervision.     Request For Public Comment   The CSBS is looking for public comment on the Draft Model Regulatory Framework in two main areas:

    1. The Licensing Regime for the Virtual Currency Business. What should such a regime look like? How can states best streamline the process? How should laws that apply to regular money transmitters, such as escheatment or funds availability, be applied to the virtual currency business?  
    2. Risk Management. What is an appropriate level of identification for customers? How should BSA/AML regulations change to address virtual currencies? What role should cyber risk insurance play? What sorts of consumer protections will be necessary?

    The specific questions posed by the CSBS are found here.  The creation of a new licensing regime, in addition to laws that will govern future litigation structure, will influence the direction states take in regulating virtual currencies.

    Members of the industry have until February 16, 2015 to respond to the RFC. If BuckleySandler can be of assistance drafting a response to the proposed licensing regime, please feel free to contact: 

  • Special Alert: CFPB Takes Enforcement Action Against "Buy-Here, Pay-Here" Auto Dealer for Alleged Unfair Collection and Credit Reporting Tactics
    November 20, 2014

    On November 19, the CFPB announced an enforcement action against a ‘buy-here, pay-here’ auto dealer alleging unfair debt collection practices and the furnishing of inaccurate information about customers to credit reporting agencies. ‘Buy-here, pay-here’ auto dealers typically do not assign their retail installment sale contracts (RISCs) to unaffiliated finance companies or banks, and therefore are subject to the CFPB’s enforcement authority. Consistent with the position it staked out in CFPB Bulletin 2013-07, in this enforcement action the CFPB appears to have applied specific requirements of the Fair Debt Collection Practices Act (FDCPA) to the dealer in its capacity as a creditor based on the CFPB’s broader authority over unfair, deceptive, or abusive acts practices.

    Alleged Violations

    The CFPB charges that the auto dealer violated the Consumer Financial Protection Act, 12 U.S.C. §§ 5531, 5536, which prohibits unfair, deceptive, or abusive acts or practices, by (i) repeatedly calling customers at work, despite being asked to stop; (ii) repeatedly calling the references of customers, despite being asked to stop; and (iii) making excessive, repeated calls to wrong numbers in efforts to reach customers who fell behind on their auto loan payments. Specifically, the CFPB alleges that the auto dealer used a third-party database to “skip trace” for new phone numbers of its customers. As a result, numerous wrong parties were contacted who asked to stop receiving calls. Despite their requests, the auto dealer allegedly failed to prevent calls to these wrong parties or did not remove their contact information from its system.

    In addition, the CFPB alleges that the auto dealer violated the Fair Credit Reporting Act by (i) providing inaccurate information to credit reporting agencies; (ii) improperly handling consumer disputes regarding furnished information; and (iii) not establishing and implementing “reasonable written policies and procedures regarding the accuracy and integrity of the information relating to [customers] that it furnishes to a consumer reporting agency.” Specifically, the CFPB alleges that, since 2010, the auto dealer did not review or update its written furnishing policies, despite knowing that conversion to its third-party servicing platform had led to widespread inaccuracies in furnished information. Also, the consent order alleges that the auto dealer received more than 22,000 credit disputes per year, including disputes regarding the timing of repossessions and dates of first delinquency for charged-off accounts, but nevertheless furnished inaccurate information.


    The consent order requires the auto dealer to (i) end its alleged unfair collection practices; (ii) provide collection options to customers explaining how customers can limit the times of day that the auto dealer can contact them; (iii) provide affected customers with a free annual credit report from one or more of the credit reporting agencies which received inaccurate information; and (iv) pay an $8 million dollar civil money penalty.

    Further, the auto dealer must (i) cease reporting inaccurate repossession information; (ii) correct inaccurate credit reporting information; (iii) implement an audit program to assess the accuracy of information furnished to credit reporting agencies on at least a monthly basis; and (iv) retain an independent consultant to review the auto dealer’s collection and furnishing policies, procedures, and practices and then implement any recommendations or explain in writing why it is not implementing a particular recommendation.

    CFPB’s Continued Focus on Auto Finance

    This action is the latest CFPB enforcement effort in connection with auto finance. In August, the CFPB fined a Texas auto finance company $2.5 million for allegedly failing to have reasonable policies and procedures regarding the accuracy and integrity of customer information furnished to the credit reporting agencies. This action also comes on the heels of the CFPB’s October proposed rule defining the larger participants of the automobile financing market. The comment period on the proposed rule ends December 8th. We anticipate additional CFPB auto finance-related actions as its authority expands.