Photo of Gregory C. Cook

Gregory is a partner in Balch & Bingham’s Birmingham office and serves as chair of the Financial Services Litigation Practice Group.  His practice centers on commercial litigation, with a concentration on complex litigation. Since joining Balch & Bingham LLP in 1991, Mr. Cook has focused his practice in the area of business and financial services litigation, including concentrating on class action defense (he has been involved in defending over 60 class actions). More recently, Mr. Cook has defended a number of actions and class actions arising out of the mortgage and subprime crisis, including matters for loan servicers, lenders, title insurance agents and settlement services providers. Mr. Cook is listed in Best Lawyers in commercial litigation, has been rated "AV" by Martindale Hubbell and was selected by Super Lawyers in Business Litigation.

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) 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

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.

Since 2011, a Subcommittee of the Federal Rules Advisory Committee has been mulling changes to Rule 23 of the Federal Rules of Civil Procedure. On April 14, 2016, the Advisory Committee forwarded proposed changes to the Standing Committee on Rules of Practice and Procedure, recommending that they be published for public comment. On August 12, the Standing Committee published a draft. Any approved changes will be made effective December 1, 2018.

The most significant changes involve measures to deter “bad faith” objectors. Under the new Rule 23(e)(5)(B), the Court must approve any side payment to an objector or objector’s counsel associated with withdrawing an objection or abandoning an appeal from a judgment approving a settlement.

Continue Reading Federal Rules Advisory Committee Proposes Amendments to Rule Governing Class Actions in Federal Court

The Alabama legislature recently adopted legislation to prevent class actions in federal court under the Alabama Deceptive Trade Practice Act (“ADTPA”). As reported here last summer, the Eleventh Circuit held in Lisk v. Lumber One Wood Preserving LLC, 792 F.3d 1331 (11th Cir. 2015) that the ADTPA’s prohibition on class actions does not apply in federal court. Thus, a private plaintiff could bring a class action under the ADTPA by suing in federal court. Not surprisingly, several plaintiff counsel began bringing these previously unavailable class actions following the Lisk decision.

Continue Reading The Alabama Legislature Solves Problem Created by the Eleventh Circuit

Last week, the Consumer Financial Protection Bureau (“CFPB”) issued a proposed rule which would prohibit mandatory arbitration provisions in millions of banking contracts, including contracts with consumers for credit cards and bank accounts. While financial institutions would still be allowed to offer arbitration as an option to customers individually, they would no longer be able to require it be done individually for claims brought as class actions. The intended, and drastic, result of the rule is that consumers would be free to join together in class action suits against their financial institutions for grievances which they had previously only been able to negotiate individually.

Continue Reading New Proposed Rule from the CFPB Paves Way for Massive Increase in Class Actions Suits Against Financial Institutions

In December 2015, the Mortgage Bankers Association wrote to the Consumer Financial Protection Bureau for clarification regarding the implementation of the recent TILA-RESPA Integrated Disclosure (“TRID”) rule. In its letter to the CFPB, the Mortgage Bankers Association expressed concern that third-party due diligence firms are failing a high percentage of loans in the secondary market over minor TRID violations, in part due to uncertainty as to what errors in the Loan Estimate document may be remedied by the Closing Disclosure form.

Director Cordray of the CFPB responded to the Mortgage Bankers Association’s letter, hoping to quell concerns with TRID liability and enforcement. In his response, Cordray first assured the Mortgage Bankers Association that initial assessments of industry compliance with TRID will focus on good faith efforts to comply, rather than technical compliance. Cordray then emphasized the various cure provisions and limits on private liability available under the TRID rule:

  • A corrected Closing Disclosure may be used to remedy non-numerical clerical errors or to cure violations of the monetary tolerance limits that were present in the Loan Estimate.
  • Just as under TILA, creditors may remedy errors if they inform the borrower of the error and make adjustments prior to borrower discovering the error himself
  • Generally, there will be no assignee liability for non-high-cost mortgages unless the error is apparent on the face of the disclosure document
  • Formatting errors alone are unlikely to create private liability for non-high-cost mortgages unless the error interferes with one of the TILA disclosures that gives rise to statutory and class action damages (which (according to Cordray) does not include new Dodd-Frank disclosures such as Total Cash to Close and Total Interest Percentage or traditional RESPA disclosures)

Cordray noted that investors who are rejecting loans based on formatting errors are simply overreacting to TRID. Although it is not clear whether Cordray’s letter carries the force of law, his assurances are a good reminder that, while errors will happen, TRID provides many possible cures and limits on liability.

One key point for future litigation may be Cordray’s statement that “liability for statutory and class action damages would be assessed with reference to the final closing disclosures, not to the loan estimate, meaning that a corrected closing disclosure could, in many cases, forestall any such private liability.” It appears that the CFPB is likely to look more kindly on lenders that act in good faith in their attempts to comply with the new TRID requirements.

Banks already looking over one shoulder to maintain compliance with regulatory reforms coming at them from the Dodd-Frank Wall Street Reform and Consumer Protection Act may soon need to start looking over the other. Class action lawsuits by customers are likely coming, despite contracts to the contrary.

Many banks and other financial service providers include arbitration clauses in their consumer contracts; because arbitration is generally much less expensive (and quicker) than litigating in court, the cost of resolution is more in line with the minimal amounts often at issue. Class-action claims, however, can disrupt this balance—the cost to defend the most frivolous complaint is overshadowed by the potential exposure where these otherwise “minimal amounts” are aggregated.

In an effort to maintain the balance, lenders frequently require customers to waive any right to participate in a class-action lawsuit. In passing Dodd-Frank, Congress directed the Consumer Financial Protection Bureau (CFPB) to conduct a comprehensive study on the impact of mandatory arbitration clauses and class-action waivers in consumer financial products (including checking accounts, debit cards, auto loans, and payday loans). And going one step further, Congress authorized the CFPB to “prohibit or impose conditions or limitations on the use of” arbitration clauses if it finds that such actions are “in the public interest and for the protection of consumers” and are “consistent with the study.”

What did the CFPB find in its study? After spending over two years to review hundreds of consumer finance agreements and thousands of arbitration disputes, individual consumer lawsuits and class actions, the CFPB issued a 728-page report. Among the conclusions of the report:

  • Consumers rarely pursue claims—either in arbitration or court—for small disputes ($1,000 or less). In contrast, millions of consumers were eligible for monetary relief through class action settlements where such relief was permitted by the relevant contracts.
  • Lenders frequently waive the right to compel arbitration of individual lawsuits, but routinely invoke the arbitration clause to block class actions.
  • There was no statistically significant evidence of lower borrowing costs or increased access to credit for consumers by requiring arbitration and prohibiting class action lawsuits.
  • The vast majority of consumers do not know whether they agreed to arbitration, do not understand that they cannot file a lawsuit, and do not consider arbitration or dispute resolution when selecting financial service providers.

What can banks expect? Based on the CFPB’s report, banks should expect significant regulation—if not elimination—on their use of mandatory arbitration clauses and class action waivers. The CFPB clearly believes that these practices lead to an uneven playing field for consumers, and that the justifications are not supported by the evidence they gathered. Formal rulemaking is undoubtedly soon to commence.

What can banks do to prepare?

  • Be heard. In submitting public comment, trade groups and industry stakeholders will need to provide hard data evidencing a commitment to consumers.
  • Increase customer satisfaction efforts. Banks can expect fewer customer disputes—whether in arbitration, individual lawsuits, or class actions—if there are fewer unhappy customers. Increase employee training and internal resolution processes.
  • Monitor customer disputes. Although it is impossible to foresee and prevent every lawsuit, frequent and repetitious disputes of the same type can signal a larger problem that may require priority.
  • Stay informed. Many class-action lawsuits follow on the heels of smaller consumer victories that are under the radar. Work with counsel to stay abreast of developments, including whether your practices or contract terms should be modified to reduce exposure.
  • Do not overreact. Any regulation by the CFPB may be prospective as to future contracts and may provide for at least some field of operation for arbitration, depending on the rules of the arbitration forum (e.g., is the forum “consumer friendly”) and the contract formation (is the arbitration clause sufficiently prominent, and can the consumer “opt out”). If/when such regulations are finalized, banks should make a fully-informed decision on how to move forward.

Greg Cook and Conrad Anderson, partners in Balch & Bingham’s Birmingham office, represent banks and other institutions in financial services litigation. Mr. Cook is a former Co-Chair of the ABA Class Action & Derivative Suits Committee and has defended over 60 class actions. Both he and Mr. Anderson regularly handle matters involving lender liability, mortgage servicing, bank fraud, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and RESPA, among others.