As recently reported, the Washington, D.C. Department of Insurance, Securities, and Banking (DISB) published a Bulletin in late April reminding those who service student education loans in the District of Columbia of their obligation to file an annual report. The DISB has now released the required forms for both the 2018 and 2019 filings.

In an email to servicers, the Commissioner explained that the DISB was waiting to release the 2018 annual report form until Student Loan Servicing Alliance v. District of Columbia, et al. was resolved. Both the DISB and SLSA have now withdrawn their appeals of the decision. The Bulletin also explains that because of the litigation, the 2018 annual report form is now due by June 15, 2019 and no late fees will be assessed based upon the initial statutory deadline of January 30. The letter also informed servicers that the information collected in the annual report will be used to generate the annual assessment that is due on November 15, 2019. The 2019 annual report form is due by January 30, 2020, consistent with Section 3014 of the DISB regulations.

The annual report forms request information regarding the total number of borrowers and dollar amount of loans serviced in the District of Columbia, as well as the total number of borrowers and dollar amount of loans involving: delinquencies of 30 to 90 and 91 to 180 days; collections; modifications; deferments; loans sold, assigned, or transferred to the licensee; and loans sold, assigned, or transferred from the licensee.

Plans announced on May 15 by the FCC to empower voice service providers to offer more aggressive call-blocking programs could create significant problems for creditors and debt collectors.  In addition to allowing providers to block unwanted calls by default, the FCC plans to allow providers to offer opt-in blocking in which a consumer can elect to block calls from any numbers that are not on the consumer’s own contact list.  Such opt-in blocking could result in the blocking of legitimate communication attempts, such as collection calls from creditors or debt collectors.

The FCC’s press release and fact sheet indicate that FCC Chairman Pai has circulated a declaratory ruling that would allow voice service providers to start offering default call-blocking programs.  While many providers currently offer blocking programs, they do so only on an opt-in basis.  The default programs can be “based on any reasonable analytics designed to identify unwanted calls and will have flexibility on how to dispose of those calls, such as sending straight to voicemail, alerting the consumer of a robocall, or blocking the call altogether.”  The FCC ruling would allow consumers to opt out of call blocking and would provide that call blocking should not interfere with emergency communications.

In addition to allowing default blocking, the declaratory ruling would allow providers to offer opt-in blocking tools based on consumers’ contact lists or other “white list” options.  According to the fact sheet, the ruling “makes clear that carriers can permit consumers to use their own contact lists as a ‘white list,’ blocking calls not included on that list.  The white list could be updated automatically as consumers add and remove contacts from their smartphones.”

According to the FCC’s press release, the draft declaratory ruling is accompanied by a draft notice of proposed rulemaking that would provide a safe harbor for providers that implement network-wide blocking of calls that fail caller authentication under the “SHAKEN/STIR framework” once it is implemented.  SHAKEN is an acronym for “Signature-based Handling of Asserted Information Using toKENS” and STIR is an acronym for the “Secure Telephone Identify Revisited” standards.  Under the framework, “calls traveling through interconnected phone networks would have their caller ID ‘signed’ as legitimate by originating carriers and validated by other carriers before reaching consumers.”  In other words, “SHAKEN/STIR digitally validates the handoff of phone calls passing through the complex web of networks, allowing the phone company of the consumer receiving the call the verify that a call is from the person making it.”

Last year, Chairman Pai called on the nation’s largest voice service providers to adopt a robust call authentication system by the end of 2019 and indicated that he would consider regulatory intervention if necessary.  On May 13, the FCC issued a public notice announcing that Chairman Pai will convene a summit focused on the industry’s implementation of SHAKEN/STIR on July 11, 2019 in Washington, D.C.  The notice states that the summit “will showcase the progress that major providers have made toward reaching [the goal of deploying the SHAKEN/STIR framework in 2019] and provide an opportunity to identify any challenges to implementation and how best to overcome them.”

 

 

In a letter sent to Senator Elizabeth Warren regarding the CFPB’s supervision of student loan servicers, CFPB Director Kathy Kraninger discussed the Bureau’s relationship with the Department of Education.

In the letter, Director Kraninger responded to a question from Senator Warren regarding the guidance issued by the ED in December 2017 to student loan servicers about the application of the Privacy Act of 1974 to certain student loan records.  Director Kraninger stated that since December 2017, based on such guidance, student loan servicers have declined to produce information requested by the Bureau’s examiners in connection with exams related to Direct Loans and Federal Family Loan Program loans held by the ED.  (Under the ED’s guidance, servicers would have been required to obtain the ED’s permission to produce the information requested by the Bureau’s examiners.)

Director Kraninger also noted that the ED terminated a Memorandum of Understanding with the Bureau effective October 1, 2017.  She commented that because the Bureau is statutorily mandated to have an MOU with the ED, “it is a priority for us at the Bureau to make progress on a new MOU.”  Director Kraninger also indicated that she wants to have a Private Education Loan Ombudsman in place to work on a new MOU “and facilitate a productive relationship going forward with the Department so that we can carry out our responsibilities.”  (Seth Frotman, the former Ombudsman and now a vocal critic of the Bureau, resigned in August 2018.)

Director Kraninger noted that since the MOU was terminated, the ED has provided the Bureau “with the confidentiality assurances necessary for the Bureau to share confidential supervisory information with it.”

 

 

Tomorrow, the American Law Institute’s members are scheduled to vote on the Tentative Draft of the Restatement of the Law, Consumer Contracts at ALI’s annual meeting in Washington, D.C.  In this podcast, Alan Kaplinsky, who leads our Consumer Financial Services Group, interviews Steven Weise, a member of ALI’s Council, about the criticism of the Restatement from businesses and consumer advocates.  In addition to explaining the Restatement’s background and rationale, Steven responds to criticism of the research methodology and specific substantive provisions.

Click here to listen to the podcast.

In last week’s podcast, Alan interviewed Professor Adam Levitin of Georgetown University Law School about the reasons businesses and consumer advocates are both opposed to the proposed Restatement.  To listen to last week’s podcast, click here.

 

 

Last Friday, the CFPB announced that it had filed yet another meaningful attorney involvement lawsuit against a debt collection law firm – Forster & Garbus, P.C.  It’s notable enough that the Bureau continues to pursue these cases (even while proposing a “safe harbor” for meaningful attorney involvement in its proposed debt collection rules), but there are a number of very notable – and troubling – things about this particular case.

The primary thrust of the CFPB’s allegations was that the law firm filed lawsuits without receiving or reviewing underlying account-level documentation, or other documentation like debt sale agreements to debt buyers.  This probably comes as no surprise to most observers in this area, since the CFPB entered into consent orders with two law firms in December 2015 and April 2016, both of which required the law firms to possess, and review, “original account-level documentation” before filing a lawsuit against a consumer.  But the really strange thing about the Forster lawsuit is that the relevant period identified in the complaint is from 2014 through 2016.  In other words, it appears that the CFPB is attempting to hold the law firm responsible for not having complied with the two previous consent orders for a period of nearly two years before the first of those consent orders was entered into.

The relevant time period in the complaint also suggests that the Bureau did not find evidence of lack of meaningful attorney involvement after 2016.  In addition to the potential statute of limitations problems involved in bringing such stale claims (the FDCPA has a one-year limitations period, and Dodd-Frank borrows that limitations period for UDAAP claims based on an FDCPA violation), it also raises the policy question of why the Bureau would use enforcement – which its leadership has stated would be a “last resort” – in a case where the alleged violation ceased occurring more than two years ago.

But there’s something else really unusual – and disappointing – about the new complaint.  One section alleges that the law firm collected debts on behalf of clients who had entered into consent orders with the CFPB related to debt collection, and that the firm therefore should have been more attentive to understanding the basis for the debts it was collecting.  But in this section, the CFPB mischaracterizes two of its own consent orders, taking them out of context in a way that is, to say the least, surprising.

One order was against a large bank that acquired a portfolio of student loans from another bank, and the CFPB found in a consent order that the acquiring bank became a “debt collector” under the FDCPA because some of the acquired accounts were “in default” at the time the portfolio transfer occurred.  This finding was, of course, overruled by the U.S. Supreme Court’s decision in Henson v. Santander Consumer USA.  It seems strange that the Bureau would cite this consent order in its allegations, highlighting its own previous error of law, and especially since this aspect of its prior consent order had nothing to do with the accuracy of account information.

In another series of allegations in the new complaint, the Bureau notes that one of the law firm’s bank clients has entered into a consent order with the Bureau because it had “falsified court documents filed in debt-collection cases in New Jersey state courts.”  But those of us who remember those cases recall that the Bureau’s press release about that consent order recited that the bank’s outside counsel had falsified the documents; and that the bank itself had discovered the conduct by its outside counsel, informed the court, and voluntarily remediated affected consumers’ accounts.  Indeed, the Bureau specifically stated that no civil monetary penalty was being imposed on the bank because of this conduct.  But as retold in the Forster complaint, this consent order should have been some kind of warning sign to the law firm that the bank’s account records were suspect.  This is, at the least, a significant mischaracterization of the underlying consent order.

The takeaway from the Forster complaint seems to be that the CFPB still has a high level of motivation to bring meaningful attorney involvement cases, even though it litigated and lost such a case last year, and even when the facts are stale and the premise on which the lawsuit is based includes “warning signs” like the ones detailed above.  It makes us wonder what kind of “safe harbor” the Bureau is really offering in section 18(g) of its proposed debt collection rules.

 

Earlier today, I published a blog post explaining why I believe the American Law Institute’s members should not approve the Tentative Draft of the Restatement of the Law, Consumer Contracts (the “Restatement”) on which they will be voting at ALI’s annual meeting next Tuesday in Washington, D.C.  As I indicated in my blog post, the upcoming vote on the Restatement presents an unusual circumstance where both consumer and business groups find themselves in agreement that the Restatement should be rejected by ALI’s members.

On the consumer side, a group of 22 state Attorneys General joined by the D.C Attorney General have sent a letter to ALI’s members urging them to reject the Restatement because, in the AGs’ view, it does not adequately protect the interest of consumers.

We also note that a peculiar controversy has erupted involving Professor Adam Levitin of Georgetown University Law School, a critic of the Restatement, who I interviewed on Tuesday about the Restatement for our podcast.  Adam reportedly made a copy of the Restatement available online so that his blog readers could access the document and better understand the basis for his objections.  In response, he is reported to have received emails from ALI’s leadership demanding that he take down the Restatement and asserting that the Restatement is subject to ALI’s copyright, and that ALI finances its activities by selling copies of its Restatements.  ALI is further reported to have disabled Adam’s access to the ALI web site but, upon being challenged, to have restored his access.  While ALI has reportedly not yet withdrawn its demand that Adam take down the Restatement, ALI is reported to have posted the Restatement on its own web site, outside of the password-protected wall.

 

 

As we reported, a dark cloud is now hanging over the OCC’s decision to accept applications for special purpose national bank (SPNB) charters from fintech companies as a result of the opinion issued on May 2 by a New York federal district court in the lawsuit filed by the New York Department of Financial Services (NYDFS) seeking to block the OCC’s issuance of the charters.  In denying the OCC’s motion to dismiss, the court concluded not only that the NYDFS had established standing to sue and that its claims were ripe for decision, but also that the NYDFS had stated a claim under the Administrative Procedure Act.  In doing so, the court found that the term “business of banking” as used in the National Bank Act “unambiguously requires receiving deposits as an aspect of the business.”

For the reasons we discussed in our blog post, we commented that the court’s conclusion struck us as incorrect and outcome-oriented.  We also commented that in light of the importance of the issue and because the decision casts doubt on SPNB chartering, we would welcome a Second Circuit decision at the earliest opportunity and described two options available to the OCC: seeking an interlocutory appeal (which would require consent of both the district court and the Second Circuit) or agreeing to entry of judgment on the pleadings in favor of the NYDFS (which might make it difficult for the OCC to contest some of the NYDFS’ allegations as to the consequences of SPNB chartering).

Yesterday, the OCC submitted a letter to the district court in which it requested a two-week extension to answer the NYDFS’s complaint and stated that that NYDFS has consented to the request.  To explaining the reason for its request, the OCC stated:

“OCC believes the Court’s order likely renders the matter ripe for entry of a final judgment.  We therefore request additional time to complete our internal deliberations on this issue and confer with plaintiff’s counsel.”

The court has entered an order extending the date by which the OCC must answer or otherwise move with respect to the complaint until May 30, 2019.

 

 

The Federal Reserve Board has published in the Federal Register a notice of proposed rulemaking with request for comment on a proposal to simplify and increase transparency of its rules for determining control of a banking organization.  The proposal’s comment period closes on July 15, 2019.

The proposed revisions to the Board’s control regulations would significantly expand the number of presumptions used by the Board to determine control and would, in codifying those presumptions, provide transparency to investors (including private equity investors) regarding what types of relationships and what types of activities would constitute control of a financial institution or holding company under the Bank Holding Company Act (the “BHC Act”).  Under current regulations, private equity firms are ineligible to register as bank holding companies because they are control companies that are engaged in impermissible activities.

Unfortunately, it appears that the proposal will not expand the ability of an entity to control a bank or bank holding company without being presumed to control the bank or bank holding company or enhance the ability of private equity investors to invest in banks and bank holding companies.  As a result, it would not provide an alternative for fintech companies that are considering filing an application with the OCC for a special purpose national bank (SPNB) charter or for an industrial bank charter in a state such as Utah, that permits such charters

Earlier this month, the New York federal district court hearing the lawsuit filed by the New York Department of Financial Services (NYDFS) seeking to block the OCC’s issuance of SPNB charters dealt a blow to the charter.  In denying the OCC’s motion to dismiss, the court concluded not only that the NYDFS had established standing to sue and that its claims were ripe for decision, but also that the NYDFS had stated a claim under the Administrative Procedure Act.  In doing so, the court found that the term “business of banking” as used in the National Bank Act “unambiguously requires receiving deposits as an aspect of the business.”

As we previously commented, the court’s conclusion on this point strikes us as incorrect and outcome-oriented.  Nevertheless, because the decision makes clear that seeking an SPNB charter entails legal risk, companies in a position to do so may wish to consider other alternatives.  Since the Board’s proposal would not make it easier for a company to control a bank or bank holding company without being presumed to be in control, the two other “bank” alternatives would be to acquire or charter a full service national bank or state bank, where ownership would be subject to the BHC Act, or to acquire or charter an industrial bank under Utah law, where ownership would not be subject to the BHC Act.

A third alternative is to continue or revisit bank partnerships and address the risks created by the Madden decision and “true lender” issues.  Risks inherent in these partnerships could (and should) be mitigated by careful structuring and, potentially, OCC and/or FDIC rulemaking.

For more on the proposal, see the attached discussion.

The Office of the Comptroller of the Currency (OCC) has opened its own “sandbox” through a Proposed Innovation Pilot Program (Program) designed to promote its innovation initiatives, add value through proactive supervision, and continue its objective to lead fintech innovation expansion. The comment period for the Program is open until June 14, 2019.

The Program follows the Consumer Financial Protection Bureau (CFPB)’s Product Sandbox proposal announced September 2018, but the material differences proposed by the OCC limit the potential benefit for participants of its Program. The CFPB’s Sandbox intends to allow participants to test innovative financial products or services without the need to comply with otherwise applicable or potentially applicable statutory or regulatory requirements. There was some initial confusion regarding whether the Sandbox was limited to innovative products or services, such as those typically labeled “fintech,” or offered by “fintech companies.” The CFPB updated its proposal in February to clarify that any covered entities, regardless of its categorization as FinTech, bank, credit union, or otherwise, could apply to participants in the CFPB Sandbox. The OCC’s Program is intended to provide “a consistent and transparent framework for eligible entities to engage with the OCC on pilots, which are small-scale, short-term tests to determine feasibility or consider how a large-scale activity might work in practice.” The OCC contemplates tailoring the terms of each participant’s engagement, including the parameters for each pilot, and allow participants to use other OCC tools and resources with their pilot.

The OCC Program. To “foster constructive innovative ideas to improve the industry,” OCC-supervised financial institutions (i.e., national banks) may submit an expression of interest and propose a pilot individually or as a collaborative effort among multiple banks. The Program is also open to OCC-supervised institutions that have engaged a third party to offer an innovative activity. The use of regulatory tools for the Program would be considered on a case-by-case basis, and the OCC contemplates tools such as interpretive letters, supervisory feedback, and technical assistance from OCC subject matter experts. But regulatory tools will only be considered if their use would not violate existing laws or cause an unsafe or unsound condition. The Program leaves the door open for the OCC to address the legal permissibility of a proposed activity, but requires this determination before any live test.

The Key Difference from the CFPB Sandbox: No Safe Harbor or Immunity. Other than eligibility referenced above, the critical difference between the proposals is the OCC Program’s refusal to provide a statutory or regulatory waiver. Indeed, there is no safe harbor from consumer protection requirements.

CFPB Sandbox participants (only entities subject to CFPB enforcement and jurisdiction are eligible; banks with less than $10 billion in assets are ineligible) receive (i) relief that is substantially the same as that provided in a “no-action” letter (i.e., a statement that the CFPB will not make adverse supervisory findings or bring a supervisory or enforcement action under its UDAAP authority or otherwise), (ii) approvals, as applicable, under the provisions of the TILA, ECOA, and EFTA that provide a safe harbor from liability in federal or state enforcement actions and private lawsuits for actions taken or omitted in good faith in conformity with CFPB approvals, and (iii) exemptions granted by CFPB order (a) from statutory or regulatory provisions as to which the Bureau has statutory authority to issue exemptions by order (such as provisions of the ECOA, HOEPA, and FDIA), or (b) from regulatory provisions as to which the CFPB has general authority to issue exemptions. Such an exemption provides immunity from federal or state enforcement actions and private lawsuits. To learn more about the background and objectives of the CFPB Sandbox, see Ballard Spahr’s blog post and listen to our discussion with Paul Watkins, Director of the CFPB’s Office of Innovation, on Ballard Spahr’s Consumer Finance Monitor Podcast.

Unlike the CFPB Sandbox, entities accepted under the OCC Program will receive no immunity from complying with applicable laws and regulations. Proposals involving consumers are expected to include controls and safeguards to protect consumers from harm. Such controls and safeguards could include consumer notification or consent, suitable processes for complaint handling, and mechanisms for remediation, including timely and fair compensation for any harm to consumers caused during the pilot. CFPB Sandbox participants, however, must commit to compensate consumers “for material, quantifiable, economic harm” caused by the participant’s offering or providing the product or service within the sandbox program. Both the OCC and CFPB have procedures for publishing certain information, but the OCC proposes to maintain confidentiality of proprietary information, including identification of participating entities “to the extent permitted by law or regulation,” while the CFPB intends to publish information about its participants, denials of applications, and reasons for the denial.

Comments to the OCC Program will shed light on whether the OCC’s proposal includes the appropriate scope, protections, and tools to facilitate innovative efforts and provide value for eligible entities, but the outlook is not promising. Without providing safe harbors or waivers for innovative and forward-looking products, the Program stifles creativity and distinguishes itself from the CFPB Sandbox. Without substantial changes to the Program’s proposal, it is unlikely to convince national banks and related entities that the Program’s alleged benefits are worth pursuing. The OCC will review comments after June 14, 2019, consider any refinements to the Program, and announce an effective launch date. Comments on the OCC Program can be submitted at pilotprogram@occ.treas.gov.

Senator Bernie Sanders recently announced that he will be introducing a bill, the “Loan Shark Prevention Act,” that would amend the Truth in Lending Act (15 U.S.C. 1606) (TILA) to establish a “national consumer credit usury rate” that would limit the APR “applicable to any extension of credit” to the lesser of “15 percent on unpaid balances, inclusive of all finance charges” or “the maximum rate permitted by the laws of the State in which the consumer resides” (Sanders Bill).  Representative Alexandria Ocasio-Cortez reportedly will also be introducing the Sanders Bill in the House.

The Sanders Bill would also provide that fees that are not considered finance charges under TILA “may not be used to evade the [rate cap] and the total sum of such fees may not exceed the total amount of finance charges assessed.” Insured credit unions would not be subject to the rate cap.  There is one limited circumstance under which the 15% APR prong may be higher. The Federal Reserve Board “may establish, after consultation with the appropriate committees of Congress, the Secretary of the Treasury, and any other interested Federal financial institutional regulatory agency, an annual percentage rate of interest ceiling exceeding [a 15% APR] for periods of not to exceed 18 months upon a determination that :

  • Money market interest rates have risen over the preceding 6-month period; and
  • Prevailing interest rate levels threaten the safety and soundness of individual lenders, as evidenced by adverse trends in liquidity, capital, earnings, and growth.”

The Sanders Bill would implicitly repeal well-established doctrines under Section 85 of the National Bank Act (enacted in 1864) and its analogue provisions (enacted in 1980) that provide usury authority for other FDIC-insured banks and thrifts. These usury statutes have authorized banks to charge whatever interest rate is authorized under state law to any other lender located in the bank’s home state.  This authority, which is referred to as the “Most Favored Lender” doctrine, has also been interpreted by the U.S. Supreme Court in Marquette National Bank v. First of Omaha Corp., 439 U.S. 299 (1978), and its progeny to authorize banks to “export” throughout the country the interest rate permitted by the law of the state where the bank is located. This additional authority is referred to as the “Exportation” doctrine.

The Sanders’ Bill would implicitly repeal both doctrines which are the linchpin of the country’s robust bank interstate lending programs and have enabled more people to obtain credit than would otherwise be the case.  It would roll back the usury laws to those that existed more than 40 years ago when banks were not engaging in much interstate lending because of such restrictive usury laws.  In place of current law, the bill would substitute for the uniform interest rates that are now used interstate lending programs a patchwork quilt of usury laws and interest rate limits that would vary by state. That change would not only reduce the revenues from such lending programs but also increase the costs, inevitably causing banks to tighten their credit card underwriting standards.

The Sanders Bill is also unclear with respect to the meaning of the term “maximum rate permitted by the laws of the state in which the consumer resides.”  That might reasonably be construed to mean the general usury law of the borrower’s home state.  For borrowers whose home state is Pennsylvania, for example, that general usury rate would be only 6% per annum simple interest even though Pennsylvania law permits banks, credit unions, and consumer finance companies to charge more than 6% to Pennsylvania borrowers on certain types of loans.  If the term is construed to mean the general usury law, practically all lenders, other than credit unions, would be unable to engage profitably in consumer lending and would need to shut down their consumer lending operations.

It seems very unlikely that the Sanders Bill will gain traction in this session of Congress since Republicans control the Senate.  The Sanders Bill seems intended to be a political “talking point” more than a real effort to enact a national consumer usury ceiling.  We can only hope so.