The Department of Justice recently announced it had entered into an agreement with the City and County of Honolulu, Hawaii (Honolulu) and its general contractor for towing services to settle a lawsuit filed by the DOJ alleging that Honolulu and the general contractor violated the Servicemembers Civil Relief Act (SCRA) by auctioning or otherwise disposing of motor vehicles owned by servicemembers that were deemed abandoned without first obtaining court orders.

The SCRA requires a person holding a lien on the property of an active-duty servicemember to obtain a court order before enforcing the lien.  The DOJ’s complaint alleges that Honolulu and the general contractor violated the SCRA in connection with the towing of vehicles belonging to three active-duty servicemembers identified in the complaint and the subsequent disposition of such vehicles without court orders.  The settlement agreement states that a DOJ investigation (which was launched in response to information provided by military attorneys), revealed that between 2011 and 2016, Honolulu auctioned 1,440 vehicles registered to individuals who had identified themselves as servicemembers on City forms during the motor vehicle registration process.

The settlement agreement requires Honolulu to compensate the three servicemembers identified in the complaint and to establish a $150,000 settlement fund to compensate other servicemembers who are identified pursuant to the notice procedure set forth in the agreement and determined by the DOJ to have been similarly harmed by SCRA violations.  Honolulu must also adopt SCRA-compliant policies and procedures for the disposition of towed vehicles and provide SCRA compliance training to employees involved in Honolulu’s abandoned vehicle program.

Such policies and procedures must include:

  • Steps to prevent the disposition of vehicles registered to active-duty servicemembers without a court order or executed SCRA waiver, such as amending the certificates for military Hawaii residents and non-residents used by Honolulu’s Division of Motor Vehicles, Licensing and Permits to include specified contact information for the servicemember and an emergency contact, and amending  Honolulu’s form for providing notice that an abandoned vehicle is in custody to inform servicemembers that they have 60 days to reclaim a vehicle, complete a power of attorney, and designate a representative to reclaim a vehicle, or complete an SCRA waiver.
  • Providing active-duty servicemembers adequate notice that a vehicle has been taken into custody by using the contact information provided in the certificates to notify the servicemember, or the servicemember’s emergency contact if the servicemember is unreachable, and providing at least 60 days for a servicemember to respond to such a notice before initiating court proceedings to auction, sell or otherwise dispose of the vehicle post-auction.
  • Providing active-duty servicemembers an opportunity to recover or relinquish a vehicle taken into custody by contractually requiring all towing companies providing services to Honolulu to accept a servicemember’s copied, scanned, or faxed power of attorney and release the vehicle to the servicemember’s designated representative upon payment of outstanding towing and storage fees and by accepting a signed SCRA waiver by a representative under a power of attorney if the power of attorney is submitted with the SCRA waiver.

 

A group of Democratic Senators and House members have sent a letter to Mick Mulvaney and Leandra English expressing concern about Mr. Mulvaney’s announcement that he plans to reorganize the CFPB’s Office of Fair Lending (OFLEO).

Earlier this month, Mr. Mulvaney announced that he plans to transfer the OFLEO from the Supervision, Enforcement, and Fair Lending Division (SEFL) to the Director’s Office, where it will become part of the Office of Equal Opportunity and Fairness (OEOF).  At that time, Mr. Mulvaney stated that OFLEO “will continue to focus on advocacy, coordination, and education, while its current supervision and enforcement functions will remain in SEFL.”  The OEOF oversees equal employment, diversity, and inclusion at the CFPB, and has no enforcement or supervisory role.

In their letter, the Democratic lawmakers expressed concern that the reorganization will frustrate the CFPB’s efforts to protect consumers from unfair, deceptive, or abusive acts and practices and from discrimination.  They cited OFLEO’s role in “help[ing] design specialized oversight and support[ing] bank examiners in assuring that CFPB’s regulated institutions were complying with anti-discrimination laws” and in “work[ing] with the CFPB’s enforcement lawyers and the Department of Justice to bring lawsuits” when problems identified in examinations could not be resolved. They noted that OFLEO has “also counseled banks in their efforts to build good compliance systems” and comment that of the OFLEO’s functions to date, “only the counseling will be supplied after the reorganization, though in the absence of dedicated anti-discrimination enforcement, it’s not clear whether there will be continuing demand.”

The Democratic lawmakers seek written responses to the questions asked in their letter by March 1, 2018 as well as “a copy of all documents and communications relating to the decision to [reorganize the OFLEO].”  Among the questions asked by the lawmakers are:

  • Whether the CFPB performed “a legal analysis to determine whether stripping the OFLEO of its enforcement authority would hinder the CFPB’s ability to carry out its statutory mandate to provide oversight and enforcement of federal fair lending laws
  • How transferring the OFLEO to the Director’s Office will “modify the Bureau’s decision-making process with regard to enforcement and other actions to protect consumers from unfair discrimination”
  • Whether Mr. Mulvaney or any other CFPB employee discussed the reorganization before it was announced “with any outside entities—including lobbyists or representatives of the banking or financial services industry”
  • Whether the CFPB is considering any substantive changes to its approach to the enforcement of fair lending laws, including changes to the CFPB’s interpretation of such laws

 

The Department of Education has published a request for information in today’s Federal Register seeking comment on the factors used to evaluate claims of undue hardship made by student loan borrowers attempting to discharge student loans through adversary proceedings in bankruptcy court.  Responses to the RFI must be received by May 22, 2018.

Under the federal Bankruptcy Code, a student loan can be discharged in bankruptcy only if necessary to avoid an “undue hardship” on the borrower.  Congress did not define “undue hardship” in the Bankruptcy Code nor did it authorize the ED to do so by regulation.  As a result, the legal standard for a student loan borrower to prove “undue hardship” has been developed through case law, with courts generally using one of two tests to determine if “undue hardship” has been established.  The three-factor Brunner test (named after the case in which the test was first articulated) evaluates the debtor’s standard of living, likely duration of his or her financial difficulties, and the efforts he or she made to continue making loan payments before filing for bankruptcy.  The “Totality of the Circumstances” test looks at the debtor’s financial resources (past, present, and future), his or her reasonably necessary living expenses, and any other relevant factors and circumstances surrounding the debtor’s individual circumstances.

ED regulations require guarantors and educational institutions participating in the Federal Family Education Loan Program (FFELP) and Federal Perkins Loan Program (Loan Holders) to evaluate undue hardship claims to determine if requiring repayment of a student loan would constitute undue hardship.  Guidance issued by the ED in 2015 provides that Loan Holders should use a two-step analysis when evaluating undue hardship claims.  First, using the tests established by the federal courts, a Loan Holder should determine whether requiring repayment would impose an undue hardship.  Second, if the Loan Holder determines that requiring repayment would not impose an undue hardship, it must evaluate the costs of undue hardship litigation.  If the costs to litigate the matter in bankruptcy court are estimated to exceed one-third of the loan balance, the Loan Holder is permitted to accept an undue hardship claim.

The 2015 guidance included a discussion of factors that are appropriate for a Loan Holder to consider when evaluating an undue hardship claim and how such factors fit within the tests established by the federal courts.  It also stated that the guidance mirrored the ED’s existing practice for the Direct Loan program and for ED-held FFELP and/or Perkins loans.

The RFI seeks comment on:

  • Factors to be used in evaluating undue hardship claims and the weight to be given to such factors
  • Whether the use of two tests results in inequities among borrowers
  • Circumstances under which a Loan Holder should concede an undue hardship claim
  • Whether and how the 2015 guidance should be amended

 

 

 

The Federal Financial Institutions Examination Council (FFIEC) has just issued an updated version of The Guide to HMDA Reporting: Getting It Right!

The Guide reflects the extensive changes to the Home Mortgage Disclosure Act rules that were adopted in October 2015 and became effective January 1, 2018.  Until now, the most recent version of the Guide was the April 2013 edition.

As previously reported, in December 2017 the CFPB announced that it intends to engage in a rulemaking to reconsider various aspects of the revised HMDA rules, such as the institutions that are subject to the rules, including the related transactional coverage tests, and the discretionary data points that were added to the statutory data points by the CFPB.  Any HMDA rule changes may require revisions to the Guide.

A bipartisan group of 16 state attorneys general has filed an amicus brief in support of a petition for certiorari asking the U.S. Supreme Court to review a Ninth Circuit decision upholding the district court’s approval of a class action cy pres settlement.  The petition was filed by objectors to the settlement.

Cy pres typically refers to the distribution of residual funds to one or more nonprofit organizations where the settlement proceeds are not completely distributed to class members.  However, the $8.5 million settlement reviewed by the Ninth Circuit (which resolved privacy claims against Google) was a “cy pres-only arrangement” in which no funds were paid to the 129 million class members.  Instead, in addition to the $3.2 million paid to attorneys, the named plaintiffs, and the settlement administrator, $5.3 million was paid to several universities, a law school, a foundation, and a public interest research group.  In their amicus brief, the AGs argue that Supreme Court guidance is necessary to resolve a circuit split on the allowable uses of cy pres settlement arrangements and the analysis courts should use in weighing when (if ever) such arrangements should be judicially approved.

The use of cy pres arrangements in DOJ settlements was the subject of recent remarks by Associate U.S. Attorney General Rachel Brand.  Ms. Brand noted that the DOJ has included cy pres clauses in some settlements under which Treasury funds were paid to third parties instead of being returned to taxpayers.  As “one of the worst examples,” she described a case in which the DOJ had settled claims against the government by creating a $680 million fund to pay individual claimants.  Under the settlement’s cy pres clause, about 90% of the $300 million that remained after all individual claims were paid was to be distributed to nonprofit groups identified by a trust controlled by the plaintiffs’ attorneys.  Ms. Brand indicated that this “means that hundreds of millions of dollars of the taxpayer’s money will be spent in ways never appropriated by Congress, with virtually no oversight.”

Ms. Brand suggested that cy pres arrangements are now barred by the memorandum issued in June 2017 by Attorney General Jeff Sessions that prohibits DOJ attorneys in cases involving the federal government from entering into settlement agreements on behalf of the United States that require payments or loans to any non-governmental person or entity that is not a party to the dispute.  The DOJ and CFPB have frequently included such provisions in consent orders settling fair lending claims.

In her remarks, Ms. Brand also indicated that the DOJ intends to take a more vigorous approach to the review of proposed class action settlements under the Class Action Fairness Act (CAFA).  CAFA provides that notice of such settlements must be served on the DOJ at least 90 days before a final approval hearing.  The DOJ can then weigh in with the court if it concludes that a proposed settlement is not fair or reasonable.

According to Ms. Brand, the DOJ’s failure to be more proactive in its review of proposed settlements “wasn’t for a lack of worthy cases” but was instead caused by “an almost comical story of government bureaucracy” that often resulted in CAFA notices not being reviewed by a DOJ lawyer “until after the fairness hearing or even after the settlement had been finalized.”  Ms. Brand told audience members that the DOJ has “begun to fix that process” and that they should “[b]e on the lookout in the coming days for the first example [of DOJ review].”

The District of Columbia Department of Insurance, Securities, and Banking (DISB) has released for comment a revised “Student Loan Borrower’s Bill of Rights.”  The District of Columbia Student Loan Ombudsman Establishment and Servicing Regulation Act of 2016 (Servicing Act), which became effective February 18, 2017, directed the DISB to draft the Bill of Rights.  (In September 2017, pursuant to the Servicing Act, the DISB began licensing student loan servicers operating in D.C.)

As originally released in October 2017, the Bill of Rights contained five articles.  We commented that instead of tracking the student loan servicing principles articulated by other regulators, the Bill of Rights seemed to borrow copiously from principles for the origination, servicing, and collection of small business loans adopted by the Responsible Business Lending Coalition, a network of for-profit and non-profit lenders, brokers and small business advocates.  In the revised Bill of Rights, which contains 17 articles, the DISB now appears to be proposing student loan servicing principles that more closely resemble those articulated by other regulators.

The revised Bill of Rights contains numerous requirements that were not in the original version.  For example, the revised version contains requirements concerning payment allocation and partial payments (Article IV), monthly billing statements (Articles V and VI), annual tax statements (Article VII), schedule of fees (Article IX), reporting to credit bureaus (Article XI), access to default diversion services (Article XII), and refinancing disclosures (Article XIII).  However, the DISB does not identify the source of those rights, which are not separately set forth in the Servicing Act.

The National Council of Higher Education Resources (NCHER), a national trade association representing higher education finance organizations, has sent a letter to the DISB commenting on the revised Bill of Rights.  As a general matter, NCHER expresses its view that the principles should not create enforceable obligations and highlights the enormous compliance burden that would be created for servicers if the DISB were to attempt to require federal and private student loan servicers to follow separate servicing routines for D.C. residents.  We agree, and find it particularly troubling that the DISB appears to be seeking to create obligations that may not only be inconsistent with the terms of the underlying loans but also preempted by federal law.  

With respect to specific provisions of the revised Bill of Rights, NCHER’s comments include the following:

  • Article IV provides that a borrower “has the right to have his or her payments applied to outstanding loan balance(s) timely, appropriately, and fairly” and that the servicer’s application process “shall result in partial payments being applied in the best interest” of the borrower.  NCHER questions what it means to apply payments “appropriately,” “fairly,” and “in the best interest” of the borrower and states that servicers currently post their payment allocation procedures but “should not be held to a vague standard that could be interpreted to create fiduciary responsibilities.”
  • Articles V and VI provide that a borrower has a right to “a monthly billing statement” and quarterly periodic statements containing certain information.  NCHER questions whether these articles establish separate servicing requirements for D.C. residents and comments that if so, they “would be overly burdensome to require that monthly payments be sent to borrowers in an in-school deferment.”
  • Article IX provides that a borrower has a right to have the servicer’s current schedule of fees that could be charged to the borrower.  NCHER comments that this article “seems to be based on an inaccurate understanding of roles of the various players in the student loan industry.”  It notes that as a general matter, “loan fees such as late fees and NSF fees are charged by lenders, not servicers, and are disclosed as part of the lender’s Truth-in-Lending Act requirements.”  NCHER also comments that if the article purports to cover expedited payment or convenience fees, “it should be understood that these optional payment services are selected by the borrower.”
  • Article XII provides that a borrower has the right to access “default diversion services” from the servicer that notifies the borrower when he or she is at risk of default and requires the servicer to assist the borrower with avoiding a default.  NCHER raises numerous questions about this article, including what timeframe the DISB contemplates using when measuring whether a servicer has appropriately notified a borrower that he or she is at risk of default and what “default diversion services” are contemplated by the DISB.
  • Article XIII provides that to the extent a servicer or an agent of a servicer provides any financing to a borrower, including a loan modification or refinancing, the borrower has a right  to receive financing that complies with certain principles.  Such principles include that the financing “is in the best interest” of the borrower.  NCHER comments that this article also “misconstrues the role of servicers since they do not make loans or extent credit” and that the reference to financing that “is in the best interest” of the borrower “sets up a fiduciary or suitability standard where compliance may be impossible.”

 

Earlier this week New York Attorney General Eric Schneiderman sent a letter to select state legislators adding his backing to the creation of a licensing regime in New York for student loan servicing, similar to what has been emerging in state legislatures across the country over the past two years.

The letter provides express support for Governor Cuomo’s 2019 Executive Budget Proposal, which calls for, among other things, establishment of a Student Loan Ombudsman at the Department of Financial Services. As described in an outline summarizing the proposal:

The Governor will advance a comprehensive plan to further reduce student debt that includes creating a Student Loan Ombudsman at the Department of Financial Services; requiring all colleges annually provide students with estimated amounts incurred for student loans; enacting sweeping protections for students including ensuring that no student loan servicers or debt consultants can mislead a borrower or engage in any predatory act or practice, misapply payments, provide credit reporting agencies with inaccurate information, or any other practices that may harm the borrower; and prohibiting the suspension of professional licenses of individuals behind or in default on their student loans.

Draft legislation in line with this proposal appears in Senate Bill S7508 and Assembly Bill A9508. Last year, Assembly Bill A8862 was introduced (establishing “the student loan borrower bill of rights to protect borrowers and ensure that student loan servicers act more as loan counselors than debt collectors”) and is currently in committee in the New York State Senate.

As we’ve previously noted, California, Connecticut, the District of Columbia, and Illinois have already enacted similar laws, and we have been closely tracking pending legislation in other states, including Ohio, Missouri, New Jersey, Virginia, and Washington. This is a trend that shows no signs of abating, and adoption in New York could serve as an additional catalyst as more states take up the issue.

On February 14, 2018, the United States House of Representatives passed the TRID Improvement Act of 2017, H.R. 3978, by a vote of 245 to 171.  The bill would amend the manner in which title insurance premiums are disclosed under the TILA/RESPA Integrated Disclosure (TRID) rule.

Under title insurance price structures in many states, when a consumer purchases both an owner’s title insurance policy and lender’s title insurance policy at the same time, a discount is offered on the price of the lender’s title insurance policy.  Nevertheless, when the consumer will purchase both an owner’s title insurance policy and lender’s title insurance policy, the TRID rule requires that the amounts disclosed for the owner’s title insurance policy premium and lender’s title insurance policy premium be determined as follows:

Lender’s Title Insurance Premium:  The premium for the lender’s policy based on the full premium rate (i.e., without regard to any discount offered by the title insurer).

Owner’s Title Insurance Premium:  The result of adding the full owner’s title insurance premium and discounted premium for the lender’s policy, and subtracting the premium for the lender’s policy based on the full premium rate.

Industry members have objected to the required disclosure approach because it deviates from the manner in which the actual premium amounts are charged.

The bill would amend language in the Real Estate Settlement Procedures Act (RESPA) to require the itemization of “all actual charges” and not just the itemization of “all charges.”  The bill also would amend RESPA to require that ‘‘Charges for any title insurance premium disclosed on [the TRID rule] forms shall be equal to the amount charged for each individual title insurance policy, subject to any discounts as required by State regulation or the title company rate filings.’’. Thus, the bill would not permit the current approach to the disclosure of title insurance premiums under the TRID rule, and would require that the amounts disclosed for title insurance reflect the actual premium charges, including any discounts.

Forty-three Democrats joined Republications in passing the bill.

By a vote of 245-171, the House passed H.R. 3299, the “Madden fix” bill (whose official title is the “Protecting Consumers’ Access to Credit Act of 2017.”)  In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.

The bill would add the following language to Section 85 of the National Bank Act: “A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.”

The bill would add the same language (with the word “section” changed to “subsection” when appropriate) to the provisions in the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal and state savings associations, federal credit unions, and state-chartered banks.  (A Senate bill with identical language was introduced in July 2017 by Democratic Senator Mark Warner.)

The House passed the bill despite strong Democratic opposition, with only 16 Democrats voting for the bill and 170 voting against.  As a result, the bill is expected to face an uphill battle in the Senate even though it can be passed with only 60 votes.

While adoption of a “Madden fix” would eliminate the uncertainties created by the Second Circuit’s Madden decision, it would not address a second source of uncertainty for some loans that are made by banks with substantial marketing and servicing assistance from nonbank third parties and then sold shortly after origination. These loans have been challenged by regulators and others on the theory that the nonbank marketing and servicing agent is the “true lender,” and therefore the loan is subject to state licensing and usury laws.  In November 2017, a bipartisan group of five House members introduced a bill (H.R. 4439) that is intended to address the “true lender” issue.