On Monday, September 9, 2019, a group of 28 housing, consumer protection and community development organizations issued a letter to the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and Federal Reserve Board in advance of an anticipated Notice of Proposed Rulemaking regarding the Community Reinvestment Act (“CRA”) and in response to an Advance Notice of Proposed Rulemaking published in August 2018 (the “ANPR”). The letter encourages the agencies to issue uniform CRA regulations and advises that metric-based standards should not be focused solely on the bank’s CRA balance sheet.

The letter first addresses the importance of identical regulations across the regulators to establish consistency and to prevent the need to revise the regulations in the near future. Noting that CRA regulations have historically been uniform across the three prudential regulators, the agencies request that the same be true for the forthcoming regulations.

The letter continues by recognizing the need for clear, consistent, and transparent regulations and acknowledging that these goals can be achieved by improved performance metrics. The agencies then raise concerns that a metrics-based framework that relies primarily on the dollar volume of a Bank’s CRA balance sheet against its deposit or asset base would not necessarily best serve the goals of the CRA. The letter highlights six potential pitfalls of a metrics-based framework to support the agencies’ position. Foremost among them: (i) the possibility that the framework may incentivize banks to hit their targets in the fastest way possible rather than to focus on the goal of meeting community needs, and (ii) that the metrics could encourage certain types of CRA activities and discourage activities that may not produce the same metrics, but still serve the low- and moderate-income community needs.

Although it remains to be seen how regulators will respond to comments received in response to the ANPR, the letter issued by the community organizations demonstrates the challenges regulators will face delivering clear, consistent, and transparent regulations that can best address the goals of the CRA.

The Washington State Department of Financial Institution (DFI) has published proposed revisions to its student loan servicer regulations. This proposal would amend rules that went into effect earlier this year pursuant to Washington’s student loan servicing law.

While most of the proposed amendments relate to mortgage loan origination, and several of the changes are merely technical, there are several substantive additions relevant to student loan servicers, including:

  • An affirmative requirement that Consumer Loan Act licensees disclose to all service members, in connection with student loans, their rights under state and federal service member laws and regulations;
  • A requirement that student loan servicers must (1) scrub against the Department of Defense’s Manpower Database on a monthly basis, (2) apply borrower entitlements accordingly, and (3) maintain related written policies and procedures (though compliance with applicable federal requirements is sufficient); and
  • A provision that would allow Consumer Loan Act licensees servicing student loans for Washington state borrowers to apply to the DFI’s director to have annual assessments waived or adjusted.

Additionally, the proposed regulations also make compliance with federal law sufficient for purposes of complying with several Washington requirements applicable to student loan servicers, including provisions related to the timing of when payments received are credited and borrower requests for information.

A hearing is scheduled for September 24, with an intended adoption date of October 22 and effective date of November 24.

The FTC announced settlements of two lawsuits filed in a California federal district court alleging similar violations of the FTC Act, the Telemarketing Sales Rule (TSR), and the Truth in Lending Act by providers of student debt relief services, their principals, and a Minnesota-based company that provided financing to customers of the providers involved in both complaints.  One of the complaints was filed jointly by the FTC and the Minnesota Attorney General and included claims alleging violations of various Minnesota statutes, including the Minnesota Uniform Deceptive Trade Practices Act.

The lawsuits alleged that the debt relief companies charged illegal upfront fees that they led consumers to believe went towards payment of student loans, and falsely promised that their services would permanently lower loan payments or result in forgiveness of loan balances.  They also alleged that the debt relief companies had entered into arrangements with the financing company defendant pursuant to which the financing company would extend credit to qualified consumers to pay the debt relief companies’ fees.  The financing company allegedly ignored red flags in the form of direct complaints from consumers and complaints forwarded by the Better Business Bureau and CFPB that the debt relief companies had engaged in misleading sales tactics and consumers had not authorized the loans they received from the financing company.  The lawsuits alleged that the financing company violated the TILA by failing to provide required disclosures in connection with the loans and violated the TSR by providing substantial assistance or support to the debt relief companies which it knew, or consciously avoiding knowing, were engaged in deceptive and abusive telemarketing practices in violation of the TSR.

In one of the lawsuits, all of the defendants have agreed to entry of stipulated orders.  In the second lawsuit, only the financing company has agreed to settle the case.  In the fully-settled case, the settlement imposes a $4.2 million judgment on the student debt relief company and its principals which, except for $156,000, is suspended based on inability to pay.  The settlement also permanently bans the defendants from selling any kind of debt relief products or services, making unsubstantiated claims about financial products and services, and making material misrepresentations about any other kind of product or service.  The settlements with the financing company require it to pay judgments of approximately $28 million which, except for $1 million, are suspended based on inability to pay, bar it from collecting any amounts owed on loans made to customers of the debt relief companies, and permanently ban it from financing the purchase of debt relief services.





On the last day of California’s 2019 legislative session, by a vote of 61 to 8, the California State Assembly overwhelmingly passed Assembly Bill 539, the Fair Access to Credit Act. Governor Newsom has until October 13th to sign or veto the bill.

As we’ve previously covered, AB 539 makes significant amendments to the California Financing Law. Most importantly, the bill limits the rate of interest that may be imposed on loans of $2,500 – $10,000 to 36% plus the federal funds rate (which is currently hovering around 2%) per annum. These loans previously had no express interest rate limitation (although, some high interest loans have been attacked for price unconscionability.

In addition to capping the rate on loans of $2,500 to $10,000, the bill also:

  • Requires creditors to furnish credit information to at least one national consumer reporting agency;
  • Imposes an obligation on creditors to offer borrowers a Department of Business Oversight approved credit education program or seminar;
  • Prohibits prepayment penalties for loans that are not secured by real property;
  • Expands existing loan term restrictions to require that loans of $3,000 to $10,000 be repayable in no more than 60 months and 15 days; and
  • Establishes a minimum 12 month loan term for loans of $2,500 to $10,000.

If the bill becomes law it will impact nearly half of the $3 billion California loans that are originated under the CFL, and California will join approximately 40 other states that have express interest rate caps for these types of loans.

Last week, by a vote of 22-14 (with one Republican voting for the bill), the House Judiciary Committee passed H.R. 1423, the “Forced Arbitration Injustice Repeal Act.”  A Senate companion bill (S. 610) was introduced in February 2019 and referred to the Senate Judiciary Committee.  No action has been taken on the Senate bill.

The House bill would amend the Federal Arbitration Act to provide that “no predispute arbitration agreement or predispute joint-action waiver shall be valid or enforceable with respect to an employment dispute, consumer dispute, or civil rights dispute.”

The term “predispute arbitration agreement” is defined as “an agreement to arbitrate a dispute that has not yet arisen at the time of the making of the agreement.”  The term “predispute joint-action waiver” is defined as “an agreement, whether or not part of a predispute arbitration agreement, that would prohibit, or waive the right of, one of the parties to the agreement to participate in a joint, class, or collective action in a judicial, arbitral, administrative, or other forum, concerning a dispute that has not yet arisen at the time of the making of the agreement.”

A “consumer dispute” is defined as “a dispute between (A) one or more individuals who seek or acquire real or personal property, services (including services related to digital technology), securities or other investments, money, or credit for personal, family, or household purposes including an individual or individuals who seek certification as a class under rule 23 of the Federal Rules of Civil Procedure or a comparable rule or provision of State law, and (B) (i) the seller or provider of such property, services, securities or other investments, money, or credit; or (ii) a third party involved in the selling, providing of, payment for, receipt or use of information about, or other relationship to any such property, services, securities or other investment, money, or credit.”

We do not expect the House bill to move forward in the Senate.



In less than a year, pre-dispute arbitration agreements will be clearly permissible again now that the Department of Education has finalized its proposal to rescind the Obama administration’s “Borrower Defense” rule issued in November 2016 and replace it with “Institutional Accountability Regulations.”  The final regulations are effective July 1, 2020 and apply to loans disbursed on or after that date.

Loans disbursed before July 1, 2020 are subject to the borrower defense provisions in either the pre-November 2016 regulations, which did not prohibit arbitration or class action waivers, or the Borrower Defense rule, which purported to prohibit arbitration and class action waivers, in our view, in violation of the Federal Arbitration Act.  Because the Borrower Defense rule took effect in October 2018 after the D.C. federal district court refused to grant the renewed motion for a preliminary injunction filed by the California Association of Private Postsecondary Schools that sought to preliminarily enjoin the arbitration ban and class action waiver provisions in the Borrower Defense rule, the new final regulations, as a technical matter, amend but do not rescind the Borrower Defense rule.

The final Institutional Accountability Regulations include the following significant changes to the Borrower Defense rule:

  • A school receiving Title IV assistance under the Higher Education Act can require federal student loan borrowers to sign pre-dispute arbitration agreements or class action waivers as a condition of enrollment if it makes a “plain language disclosure” available to prospective and enrolled students and the public.  The ED did not provide a model notice for this disclosure.
  • A new federal standard for a “borrower defense” asserted with respect to Direct Loans and loans repaid by Direct Consolidated Loans is created.  (A Direct Loan is a federal student loan made by the ED under the Direct Loan Program and a Direct Consolidated Loan is a federal student loan made by the ED under the Direct Loan Program that repays multiple Direct Loans or other specified loans.)
    • A defense to payment (which can also support a request to recover payments previously made) must be based on a misrepresentation of material fact on which the borrower reasonably relied in deciding to obtain a Direct Loan, or a loan repaid by a Direct Consolidation Loan.
    • The misrepresentation must directly and clearly relate to (a) (i) enrollment or continuing enrollment at the school or (ii) the provision of educational services for which the loan was made.
    • The borrower must have been financially harmed by the misrepresentation.
    • A “misrepresentation” is defined as a statement, act, or omission by a school to a borrower that is false, misleading, or deceptive, and made with knowledge of its false, misleading, or deceptive nature or with reckless disregard for the truth, and that directly and clearly relates to enrollment or continuing enrollment at the school or the provision of educational services for which the loan was made.  The final regulations include examples of evidence that a misrepresentation may have occurred.
  • Claims to recover payments previously made, referred to as “affirmative” or “offensive” claims, will be permitted.  The ED sought comment on whether it should only allow “defensive” claims from defaulted borrowers who are in a collections proceeding or accept both “defensive” and “affirmative” claims, including claims from borrowers still in repayment.
  • The final regulations adopt a preponderance of the evidence standard for borrower defense claims.
  • Both affirmative and defensive claims must be filed within three years of the end date of the borrower’s enrollment at the school alleged to have made the misrepresentation.
  • The final regulations do not include a presumption of full borrower defense claim relief and instead give the ED flexibility to provide partial relief based on the amount of financial harm.  The final regulations include examples of evidence of financial harm.

Other provisions in the final regulations include those dealing with closed-school discharges, school financial responsibility (such as mandatory and discretionary events that have or could have a materially adverse impact on a school’s financial condition and warrant the school’s provision of financial protection to the ED), and capitalization of interest on FFEL loans and collection costs.

In its recently published Summer 2019 Newsletter, the Washington State Department of Financial Institutions (“DFI”) reported that it had interpreted the Servicemembers Civil Relief Act (“SCRA”) broadly to apply the SCRA’s 6% interest rate cap to a loan agreement entered into only by a servicemember’s spouse.  Generally, the SCRA provides for a 6% interest rate cap during the period of military service for non-mortgage obligations and liabilities “incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember enters military service[.]”  Washington has enacted its own version of the SCRA—the Washington Service Members’ Civil Relief Act (“WSCRA”), which incorporates the federal SCRA and provides additional protections to servicemembers who are residents of Washington.

In this case, the servicemember’s spouse received a loan offer in the form of a negotiable check in her maiden name, which after deposited, resulted in a loan that included interest in excess of 6%.  After the servicemember commenced active military service, he provided notice and documentation of his active duty service to the creditor and requested interest rate forgiveness for his spouse’s loan pursuant to the SCRA.  However, the creditor refused the request, reasoning that the loan was not taken out “jointly” because the servicemember’s name was not on the loan documents.  The DFI disagreed, stating that because Washington is a community property state, debts incurred during the marriage are presumed to be community debt.  To establish the debt was not community debt, the creditor would have been required to present clear and convincing evidence that the debt was not incurred for community benefit.  In other words, because the loan benefitted both spouses, it was subject to the 6% interest rate cap afforded by the SCRA.  Had the spouse obtained the loan for purely personal purposes, such as for her own business, the result here might have been different.

Although the DFI’s ruling is at odds with the plain language of the SCRA, the outcome is not surprising.  As we have repeatedly observed, the SCRA will be applied broadly by regulators to protect servicemembers and their dependents.  Accordingly, lenders should generally apply the interest rate cap to loans contracted for by servicemember spouses in Washington and should consider taking the same approach in all community property states.  The exception would be for loans taken out by spouses that do not in any way benefit the marital community.

The Colorado Attorney General reached a $175,263 settlement with a lender and a debt management company that are owned and operated by the same individuals. The Colorado Attorney General alleged the companies violated Colorado law when the lender issued loans to customers of the related debt management company. Colorado law prohibits debt management companies from offering loans through a related company due to the risk of a conflict of interest.

The settlement agreement requires the companies to issue refunds of $300 to all 315 of the debt management company’s customers and refunds to the 47 individuals who received a loan from the related lender. Additionally, both companies are now prohibited from lending or providing debt management services to customers in Colorado.

On September 6, 2019, the Bureau filed a complaint in federal court in the Central District of California against Certified Forensic Loan Auditors, LLC (CFLA) and Andrew Lehman (Lehman) in connection with their offering, advertising, marketing, and selling of purported financial advisory and mortgage assistance relief services, and against Michael Carrigan (Carrigan), who was CFLA’s sole auditor during the relevant time period.  Among the services offered were securitization audits, which included legal conclusions and recommendations, and litigation documents, which were templates of pleadings to be filed in connection with a homeowner’s response to a foreclosure proceeding.  According to the complaint, CFLA and Lehman charged and collected $1,495 from consumers before producing and delivering one of these packages of documents, and they had sold more than 2,000 securitization audits since 2014.

The Bureau alleges that CFLA and Lehman promoted these materials on its website, in marketing e-mails, and on marketing telephone calls with representations that the securitization audits would stop foreclosure and keep homeowners in their homes, as well as claims that the documents were prepared by the “Nation’s Most Well Respected Attorneys in the Foreclosure Defense Industry.”  According to the complaint, CFLA and Lehman made no effort to determine whether the audits and litigation documents actually led to the advertised outcomes and, in fact, knew that the audits were meritless.

The Bureau alleges that CFLA and Lehman violated Regulation O, which governs mortgage assistance relief services, by taking payment before consumers executed a written agreement with their loan holder or servicer that contained any offer of relief obtained by CFLA and Lehman, and by misrepresenting the benefits, performance, or efficacy of their services.  Additionally, the Bureau alleges the defendants violated the Consumer Financial Protection Act by misrepresenting the expertise of those involved in preparing the materials, by taking advantage of consumers’ inability to understand the material risks, costs, and conditions of the services CFLA and Lehman were selling, and by providing financial services that were not in conformity with federal consumer financial law.  Allegations against Carrigan include knowingly or recklessly providing substantial assistance to CFLA and Lehman in their violations of the CFPA and Regulation O.

The Bureau and Carrigan agreed to a stipulated final judgment and order that would permanently restrain Carrigan from, either directly or by assisting others, providing, advertising, marketing, promoting, offering for sale, selling, or producing any mortgage assistance relief service or financial product or service.  Additionally, the stipulated order imposes a $493,403.04 civil money penalty, which will be suspended other than $5000 because of Carrigan’s limited ability to pay.  The suit against CFLA and Lehman is still pending in federal court in the Central District of California.


The OCC and FDIC have filed a joint amicus brief in a Colorado federal district court arguing that the court should affirm the decision of a bankruptcy court holding that a non-bank loan assignee could charge the same interest rate the bank assignor could charge under Section 27(a) of the Federal Deposit Insurance Act, 12 U.S.C. § 1831d(a), despite the Second Circuit’s decision in Madden v. Midland Funding (which we have criticized.)

The loan in question was made by Bank of Lake Mills, a Wisconsin state-chartered bank, to CMS Facilities Maintenance, Inc. (CMS), a Colorado-based corporation.  It carried an interest rate just over 120% per annum.  In addition to personal property of CMS, the loan was secured by a deed of trust on real property owned by Yosemite Management, LLC (Yosemite).

About two months after the loan was made, the Bank assigned the loan to World Business Lender, LLC (the “Assignee”).  The Promissory Note provided that it was “governed by federal law applicable to an FDIC insured institution and to the extent not preempted by federal law, the laws of the State of Wisconsin without regard to conflict of law rules.”

Yosemite subsequently sold the real property to Rent-Rite Superkegs West, Ltd. (the “Debtor”), which subsequently filed for bankruptcy relief.  The Assignee filed a proof of claim asserting an in rem claim against the real property.  The Debtor filed a complaint in the bankruptcy court seeking to disallow the Assignee’s claim on the grounds that the interest rate on the loan was usurious under Colorado law.  While Wisconsin law permits loans to corporations at any interest rate, Colorado law prohibits interest rates above 45%.  The Assignee argued that Section 27(a) governed the permissible interest rate on the loan but the Debtor argued that the loan was subject to Colorado usury law.

The bankruptcy court agreed with the Assignee that: (1) pursuant to Section 27(a), the Bank could charge the contract rate because such rate was permissible under Wisconsin law; and (2) as a consequence of the “valid-when-made rule,” the Assignee could also charge that rate.  Even though it was not cited by the Debtor in support of its position, the bankruptcy court specifically noted its disagreement with Madden.  In Madden, the Second Circuit ruled that a purchaser of charged-off debts from a national bank was not entitled to the benefits of the preemption of state usury laws under Section 85 of the National Bank Act, the law upon which Section 27(a) was modeled.

The amicus brief filed by the OCC and FDIC presents a compelling argument in favor of the assignability of an originating bank’s rate authority under federal banking law when it assigns the underlying loan.  The brief first argues that, under the longstanding “valid-when-made rule,” an interest rate that is non-usurious when the loan is made remains non-usurious despite assignment of the loan.  In support of this argument, described by the U.S. Supreme Court as a “cardinal rule” of American law, the brief cites U.S. Supreme Court cases and other federal authority dating to 1828, cases from a dozen states and even English cases and commentary from the late 18th and early 19th Centuries.  It goes on to argue that, under another well-settled rule, an assignee steps into the “shoes of the assignor” and succeeds to all the assignor’s rights in the contract, including the right to receive the interest permitted by Section 27(a).  Again, the brief cites considerable authority for this proposition.

To our mind, however, the brief concludes with its strongest argument—that the “banks’ authority to assign their usury-exempted rates was inherent in their authority to make loans at those rates.”  In support, it quotes a Senate report addressing another usury exemption, applicable to residential mortgage loans by specified lenders, which was enacted at the same time as Section 27(a): “[L]oans originated under this usury exemption will not be subject to claims of usury even if they are later sold to an investor who is not exempt under this section.”  The brief argues that, in light of the “disastrous” consequences to banks of limits on loan assignability, a bank’s right to charge the interest permitted by its home state would be “hollow” and “stunted” if a loan assignee could not charge the same interest as its bank assignor.

This is not the first time the OCC has taken issue with Madden.  Indeed, the OCC and Solicitor General previously criticized Madden in connection with Midland Funding’s unsuccessful certiorari petition to the Supreme Court.  The new brief, however, is far more detailed and powerful.  After reading the brief, it is hard to disagree with its ultimate conclusion that Madden “is not just wrong: it is unfathomable.”

With this brief, the OCC and FDIC have done a great service to the proper development of the law on an issue of critical importance to the national banking system.  We look forward to further contributions of this type in other cases raising similar issues.