What to do now about the new CFPB rule on arbitration?  (1) begin planning now and (2) begin actual preparation after the 60 days runs.

Congress has 60 days after publication of the new CFPB rule to take action to stop the application of this rule.  Publication occurred on Wednesday (July 19th).  It is impossible to predict what Congress will do.  However, we can be virtually certain that absent such Congressional action, this new rule will apply 180 days after those 60 days expire.  While there are other possible hurdles for this rule (for instance, an expected lawsuit challenging the rule; a possible new CFPB Director in the future; a challenge to the CFPB’s structure, etc.), these other impacts are unlikely to prevent the rule from beginning to have application.

We suggest you use the next 60 days to plan but wait to make any substantial expenditures until it is certain what Congress will do.  Here are some key questions which financial institutions should consider during those 60 days:

Continue Reading What to do now about the new CFPB rule on arbitration?

The Dodd Frank Act expressly provided that any CFPB rule on arbitration would not apply to existing contracts.  12 U.S.C. § 5518(d).  Therefore, the CFPB rule released last week will only bar class action waivers for contracts “entered into after” the applicable date for the regulation (60 days after publication of the rule in the Federal Register and then 180 days after that date).

However, the CFPB has taken an aggressive position on what is an existing contract.  Therefore, for existing customers, lenders and other “covered persons” will need to examine every change in any product or services they offer that is subject to the arbitration rule. If any “new product or service” is given to an existing customer, the new regulation applies to that product or service even if it is covered by the terms of an existing contract (assuming that the new product or service is within the scope of the rule).  In such a case, the lender would need to amend the previous agreement or provide a new agreement for the new product and could not rely on the arbitration clause to avoid a class action.

Continue Reading Are existing agreements governed by the new CFPB Arbitration Rule?

The Consumer Financial Protection Bureau (CFPB) recently finalized various updates to its mortgage disclosure rule, often referred to as “Know Before You Owe” or the TILA-RESPA Integrated Disclosures (TRID).  The updates were proposed approximately one year ago.  They include technical corrections, formal guidance, and a few substantive changes.  Some of the changes include:

  • Adding tolerance provisions for total payments that track existing TILA requirements regarding finance charges
  • Expanding the scope of certain exemptions for housing assistance loans
  • Applying TRID to all cooperative units, regardless of whether the cooperative units are classified as real property under state law
  • Providing guidance on sharing information with third parties

The new rule takes effect 60 days after publication in the Federal Register, but compliance is not mandatory until October 1, 2018.  A copy of the final rule is available here.

Notably absent from the final rule is guidance on the “black hole”—the period of time between issuing the Closing Disclosure and the actual closing date when, in certain instances, lenders may be prevented from resetting tolerances (and passing on closing cost increases to the borrower).  The amendments as originally proposed included a potential fix for this problem.  However, the CFPB decided not to adopt the fix based on conflicting comments that it received.  Instead, the CFPB issued a new proposed rule (with a new comment period) to address the “black hole” issue.  A copy of the proposed rule is available here.

The Consumer Financial Protection Bureau (CFPB) issued a rule on Monday prohibiting class action waivers in arbitration provisions of certain consumer contracts. The rule—to be codified at 12 C.F.R. § 1040—also requires covered businesses to submit records to the CFPB regarding any arbitration filed by or against their customers regarding covered products and services. The provided records will be made public and hosted by the CFPB on a searchable database. The likely impact of this rule (should it be allowed to go into effect) will be significant for financial institutions and dramatically alter their relationships with their customers.

Continue Reading CFPB Kills Class Action Waivers for Consumers Contracts and Makes Arbitration Public

Last week, the Second Circuit Court of Appeals, in Reyes v. Lincoln Automotive Financial Services, held that contractual consent—once given—cannot be unilaterally revoked. The landmark Telephone Consumer Protection Act (TCPA) case gives a potent tool against the flood of TCPA cases based on the revocation of consent, at least for businesses with well documented relationships with their customers.

In reaching its ultimate conclusion, the Reyes court acknowledged the seemingly contrary case law from the Courts of Appeal for the Third and Eleventh Circuits. According to ReyesGager v. Dell Fin. Servs., LLC (Third Circuit) and Osorio v. State Farm Bank, F.S.B. (Eleventh), as well as the 2015 FCC Declaratory Ruling which relied on Gager and Osorio, “considered a narrow question: whether the TCPA allows a consumer who has freely and unilaterally given his or her informed consent to be contacted [to] later revoke that consent.” Reyes “present[ed] a different question . . . : whether the TCPA also permits a consumer to unilaterally revoke his or her consent to be contacted by telephone when that consent is given, not gratuitously, but as bargained-for consideration in a bilateral contract.”

The key to framing the question in this light comes from the distinction “between tort and contract law. In tort law, ‘consent’ is generally defined as a gratuitous action . . . .” On the other hand, “[i]t is black-letter law that one party may not alter a bilateral contract by revoking a term without the consent of a counterparty.” In addressing the policy arguments mounted by Reyes, the Court declined to step into a role it found more suited for Congress:

We are sensitive to the argument that businesses may undermine the effectiveness of the TCPA by inserting ‘consent’ clauses of the type signed by Reyes into standard sales contracts, thereby making revocation impossible in many instances. . . . But this hypothetical concern, if valid, is grounded in public policy considerations rather than legal ones; if the abuse came to pass, it would therefore be ‘for the Congress to resolve—not the courts.’

Reyes adds more weight to the already existing incentive for businesses to capture written consent. However, it is not panacea for TCPA liability. First, at present, it is confined to the Second Circuit. Second,  it applies to those businesses who have a contractual relationship with the plaintiff. Third, plaintiffs may argue—like they would in fighting arbitration—that the call must relate to or fall within the scope of the contract and the consent provision under which a business seeks to invoke Reyes. Fourth, certain scenarios, like debt collection, may fall outside of Reyes. While consent already transfers from a business relationship to debt collection activities, that is a revocable form of consent. Reyes arguably makes that consent non-revocable if contracted. However, a plaintiff may argue that a contractual default and the subsequent election to pursue default remedies terminates the contract.

In light of the above, businesses may want to consider just how broad their consent language is in their contracts and just how they may seek to capture a written relationship in as many instances as possible. Undoubtedly, TCPA defendants will look to Reyes when able and plaintiffs will push back. Monitoring how and if the decision gains traction across the country will be one of the more important TCPA trends for the second half of 2017.

Alabama law permits the creation of public corporations known as “improvement districts,” which can then issue bonds that are similar to bonds issued by a municipal corporation. These bonds can be used to finance improvements within the district. In Aliant Bank v. Four Star Investments, Inc., the Alabama Supreme Court allowed claims against the directors of one of these improvement districts to go forward despite claims of immunity. The Court also allowed certain fraud claims to go forward against the directors as well as other related individuals and entities. In addition to authorizing lenders to bring suit, the opinion also serves as a strong reminder that lenders should monitor their collateral and promptly investigate any signs of misconduct.

Continue Reading Alabama Supreme Court: Lender can sue directors of a public improvement district for negligence, breach of fiduciary duty

This week, the United States Supreme Court issued a key decision under the Fair Debt Collection Practices Act in a case litigated by Balch & Bingham lawyers, Jason Tompkins and Chase Espy. In Midland Funding, LLC v. Johnson, the Supreme Court resolved a circuit split over the issue of whether debt collectors who file bankruptcy proofs of claim for stale debts are subject to suit under the Fair Debt Collection Practices Act. Siding with Midland, one of the nation’s largest buyers of unpaid debt, the Supreme Court held that “filing a proof of claim that on its face indicates that the limitations period has run” is not actionable under the FDCPA, thereby avoiding a potential conflict between the FDCPA and the Bankruptcy Code. Although ostensibly limited to the bankruptcy context, the Johnson decision could potentially ripple into other FDCPA cases. In the meantime, though, Johnson will undoubtedly turn off the faucet for would-be FDCPA plaintiffs who had hoped to capitalize on what the Eleventh Circuit complained is a “deluge” of out-of-statute proofs of claim.

Continue Reading Supreme Court Sides With Balch Lawyers and Finds for Midland Funding, Rejecting FDCPA Lawsuits Based on Bankruptcy Proofs of Claim for Out-of-Statute Debts

The Eleventh Circuit recently clarified that sending periodic mortgage statements following a debtor’s bankruptcy discharge is not misleading to the “least sophisticated consumer.” In Helman v. Bank of America, 15-13672, 2017 WL 1350728 (11th Cir. April 12, 2017) Gayle Helman filed suit, alleging that Bank of America violated the Fair Debt Collections Practices Act (FDCPA), Florida Consumer Collection Practices Act (FCCPA), and other state laws when it sent Ms. Helman periodic mortgage statements after her mortgage loan was discharged in bankruptcy.  She claimed that the statements unlawfully attempted to collect a discharged debt and that such communications would be misleading to the least sophisticated consumer because it suggested she remained liable for the debt.

Continue Reading Eleventh Circuit Declines to Expand Reach of “Least Sophisticated Consumer” Standard In the Context of Sending Periodic Mortgage Statements Following Bankruptcy Discharge

In a victory for defendants, the Eleventh Circuit recently agreed that a mere procedural violation—the kind of injury that has become the favorite of the plaintiffs’ bar—is insufficient to confer Article III standing. More specifically, the Eleventh Circuit concluded that a certified return receipt will satisfy a lender’s obligation under Regulation X to provide written acknowledgment of a request for information within five days. Though this decision is unpublished, it is persuasive authority that may guide the district courts within the Eleventh Circuit.

In Meeks v. Ocwen Loan Servicing, LLC, No. 16-15536, Charles Meeks sent a Request for Information to his mortgage servicer via certified mail. The servicer’s agent signed the return receipt the same day the request was received. The receipt was then returned to the Meeks’ counsel. Several months later, Meeks sued the servicer and attached the certified receipt to his complaint.

Meeks asserted two claims against the servicer: (1) the servicer violated Regulation X by not sending him written acknowledgment of the Request for Information within 5 days and (2) that the servicer had shown a reckless disregard for the requirements of Regulation X. After the case was removed, the district court dismissed the first count for failure to state a claim and the second count for lack of standing. On appeal, the Eleventh Circuit affirmed.

The Court pointed out that no other circuit court has considered whether a certified receipt satisfies the written response obligation under Regulation X. Rather than engage in a lengthy legal analysis, the Court focused on the undisputed facts. Because there was no serious dispute that Meeks had received the certified receipt, Meeks had failed to state a claim under Regulation X. Put another way, a failure to send a notice of acknowledgment is unnecessary when the undisputed evidence shows that the borrower knew the request had been received.

More important, the Court concluded that Meeks lacked standing to bring a pattern or practice claim. Pointing to the Supreme Court’s decision in Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1548-49 (2016), the Court noted that an injury must be both concrete and particularized in order to confer Article III standing. Meeks had not suffered an injury because it was undisputed that he had received the return receipt. Even though Meeks argued that this receipt was deficient under Regulation X, the Eleventh Circuit held that this deficiency was nothing more than “a bare procedural violation” that was insufficient to create a “real, concrete injury.”

Meeks is important for two reasons. First, it holds that a procedural deficiency alone—here, the failure to send a written acknowledgment within five days—is insufficient to confer standing when the undisputed evidence shows that the deficiency caused no injury to the plaintiff. On this point, Meeks is in tension with another unpublished Eleventh Circuit decision, Church v. Accretive Health, Inc., 654 F. App’x 990 (11th Cir. 2016), which held that the FDCPA creates a statutory right to receive certain information and that a failure to include this information in the debtor’s letter to the plaintiff was a sufficient injury to confer standing. Because neither opinion is published, neither will be binding on a subsequent Eleventh Circuit panel. Moreover, it may be possible to reconcile the holdings in Meeks and Church. In Meeks, it was undisputed that the plaintiff had received the benefit established by the procedural right while in Church it was not clear that the plaintiff had actually received the information that the statute required.  It is also worth pointing out that many post-Spokeo courts have declined to extend Spokeo to its logical conclusions. At the very least, this apparent contradiction signals that the law on this issue is evolving. The Eleventh Circuit is likely to address this issue in a published opinion in the future.

Second and for purposes of Regulation X specifically, Meeks holds that a certified return receipt can satisfy a lender’s obligations under Regulation X when there is no dispute that the borrower received the return receipt. This holding may be somewhat limited however because plaintiffs’ counsel may not attach the receipts to their complaints or will deny receiving them. Meeks also leaves open the question of what happens if the receipt is received by the borrower more than five days after the lender signs it. Still, lenders should look for ways to bring their case within Meeks as doing so will create a strong argument for dismissal in district courts within the Eleventh Circuit.

Last month, the Eleventh Circuit rejected a plaintiff’s bid to keep her class action in state court even though CAFA’s local controversy exception would have required a remand. In Blevins v. Aksut, No. 16-11585, — F.3d —, (11th Cir. Mar. 1, 2017), the Court held that the “local controversy” exception to CAFA jurisdiction does not apply when the federal court has an independent basis for subject matter jurisdiction.

Elizabeth Blevins, on behalf of herself and a putative class, sued Seydi Aksut, M.D. and several affiliated persons and entities, alleging that they operated an unlawful scheme to defraud them. Dr. Aksut would allegedly falsely tell patients that they required heart surgery and would perform these unnecessary surgeries. The defendants would then bill patients for the procedures. After learning about the practice, Blevins filed suit in an Alabama state court, asserting that Dr. Aksut and his co-defendants violated the Racketeer Influenced and Corrupt Organizations Act. The defendants removed the case to federal court and moved to dismiss.

Blevins filed a motion to remand, contending that CAFA’s local-controversy provision prohibited the trial court from exercising jurisdiction. The local controversy exception directs federal courts to decline to exercise CAFA jurisdiction when certain criteria are met, including when two-thirds or more of the proposed class members are citizens of the state where the action was filed, the defendant is a citizen of the same state, and the principal injuries occurred in the same state.

The trial court denied Blevins’s motion to remand, and she appealed to the Eleventh Circuit, which affirmed. The Court explained that CAFA was one way to get class actions into federal court, not the exclusive way to do so. As such, the “local controversy” exception does not apply when a federal court has an independent basis for jurisdiction. In this case, the plaintiff asserted claims under a federal statute—RICO—which gave the district court federal question jurisdiction. The removal was proper on that basis. Interestingly, after affirming the denial of the motion to remand, the Eleventh Circuit reversed the district court’s dismissal of the lawsuit, holding that payments made to a medical provider are compensable injuries under RICO.

Blevins is a reminder that CAFA is not the only basis for removing a class action to federal court. Class actions could also be removed when they assert a claim under federal law, independently meet the requirements for diversity jurisdiction, the case relates to a bankruptcy proceeding, or there is some other independent basis for federal jurisdiction. Accordingly, when considering whether to remove, Defendants should remember to consider all possible bases for federal subject matter jurisdiction.