The White House announced that President Trump intends to nominate James Clinger to be a FDIC member for a six-year term and to be Chairperson for a five-year term, effective November 29, 2017 when the current FDIC chairperson’s term ends.  Mr. Clinger’s nomination must be confirmed by the Senate.

According to the White House announcement, Mr. Clinger was most recently the Chief Counsel for the House Financial Services Committee, having held this position since 2007.  He previously served as Deputy Assistant Attorney General from 2005 to 2007.  Prior to his DOJ service, Mr. Clinger served as Senior Banking Counsel for the House Financial Services Committee from 2001 to 2005, and as Assistant Staff Director from 1995 to 2001.  Before entering public service, he was a litigator in private practice.

 

 

Earlier this month, Attorney General Jeff Sessions issued a memorandum in which he prohibited DOJ attorneys from entering into settlement agreements on behalf of the United States that require a payment or loan to any non-governmental person or entity that is not a party to the dispute.  The AG’s press release explained that the directive was intended to end the use of settlement funds to “to bankroll third party special interest groups or the political friends of whoever is in power.”

Last week, Senator Charles E. Grassley, who chairs the Senate Judiciary Committee, sent a letter to the AG in which he asked Mr. Sessions to explain whether any payments made by settling defendants to non-governmental third parties during the Obama Administration at the DOJ’s direction “could lawfully be rescinded and re-directed back into the General Fund of the U.S. Treasury.”  Mr. Grassley also asked Mr. Sessions to explain when the DOJ will begin to seek the rescission or re-direction of settlement payments “[i]f such a procedure is consistent with law and the Department’s authority.”

Mr. Grassley’s letter includes a request for a “complete list of all settlement agreements reached during the Obama administration that involved payments to non-governmental third parties” and related information for each of the settlements, including a full accounting of what payments have been made to non-governmental third parties to date.

 

 

The CFPB will hold a public event on June 22, 2017 in Raleigh, N.C. about student loan servicing. The CFPB’s announcement provides no description other than that the event will feature remarks from Director Cordray and North Carolina Attorney General Josh Stein.

The CFPB may be labeling the event a “public event” rather than a “field hearing” because it is not inviting “witnesses” to provide “testimony” as it typically does for field hearings.  However, similar to its field hearings, it is likely the CFPB will use the event as a venue for announcing a new development involving student loan servicing.  Isaac Boltansky of Compass Point has suggested that that the CFPB may announce the release of either an update on the industry’s consumer complaint profile or an updated supervisory highlights report.  It is also possible that the CFPB will discuss the comments it has received in response to the notice it published in the Federal Register in February 2017 regarding its plan to require student loan servicers to report quarterly data on aggregated servicing metrics and borrower outcomes.

Mr. Stein, the North Carolina AG, was among the group of state AGs who sent a letter to U.S. Department of Education Secretary Betsy DeVos in April 2017 criticizing the ED’s withdrawal of various memoranda issued during the Obama Administration regarding federal student loan servicing reforms.  He also recently announced the settlement of a lawsuit involving an alleged student loan debt relief scam.  Mr. Stein might discuss these developments at the CFPB event.

In an unusual turn-about, the U.S. Justice Department has reconsidered its earlier position in a set of closely watched arbitration cases that the Supreme Court will decide next term and filed an amicus brief supporting the use of class action waivers in employment agreements.

Previously, under the Obama administration, the DOJ had sided with the National Labor Relations Board (NLRB) in arguing that federal labor statutes prohibit employers from including such waivers in their employees’ contracts.  Nevertheless, in its amicus brief filed on June 16, Acting Solicitor General Jeffery B. Wall advised the Court that the DOJ has “reconsidered the issue and has reached the opposite conclusion” that the NLRB’s ban on class action waivers failed to give “adequate weight to the congressional policy favoring enforcement of arbitration agreements that is reflected in the FAA [Federal Arbitration Act]” and also failed “to respect the FAA’s directive that arbitration agreements should be enforced unless they run afoul of arbitration-neutral rules of contract validity.”

In January, the Supreme Court granted certiorari in three circuit court cases that rendered conflicting results on the enforceability of class action waivers in employment agreements.  Opinions of the Seventh and Ninth Circuits agreed with the NLRB’s position that class action waivers in employment agreements violate Section 7 of the National Labor Relations Act, which protects an employee’s right to engage in “other protected activities.”  The Fifth Circuit, however, rejected the NLRB’s position and held that class action waivers in employment arbitration agreements are enforceable under the FAA because the use of class or collective action procedures does not constitute a substantive right protected by Section 7.

A key issue is whether the Court will apply the test set forth in its 2012 decision in CompuCredit Corp. v. Greenwood for determining the arbitrability of a federal claim.  That case held that if a federal statute does not expressly prohibit arbitration, it is trumped by the FAA and claims brought under the statute are arbitrable.  The DOJ’s amicus brief relies heavily on CompuCredit, arguing that:

CompuCredit demonstrates the formidable burden a party bears when seeking to show that “the FAA’s mandate has been ‘overridden by a contrary congressional command.’ ”  ….  One feature of CompuCredit and other decisions is especially notable for present purposes:  When examining text and legislative history, the Court has looked for evidence that Congress intended to address arbitration agreements in particular.  A statute’s general reference to litigation rights, even when combined with a provision forbidding the waiver of statutory protections, is insufficient to overcome the FAA’s presumption of enforceability.

The amicus brief, which liberally cites not only CompuCredit but also the Court’s landmark decisions in AT&T Mobility, LLC v. Concepcion and American Express Co. v. Italian Colors Restaurants upholding the use of class action waivers in consumer arbitration agreements, aligns the DOJ’s position with these recent pro-arbitration rulings and with the consumer financial services industry’s strong pro-arbitration positions.  The DOJ’s filing coincides with the CFPB’s efforts to prohibit consumer financial services companies from including class action waivers in their customer agreements.  In May 2016, the CFPB issued a proposed rule finding a ban on such waivers to be in the public interest and for the protection of consumers.  However, the rule has not yet been made final.  While the CFPB has publically attributed this to the time needed to review the thousands of comments it received on the proposed rule, many observers speculate that the change in administrations may also be delaying issuance of a final rule.  Indeed, the House of Representatives recently passed the Financial Choice Act which would repeal the Dodd-Frank Act section authorizing the CFPB to regulate consumer arbitration agreements in financial services contracts.

There have been rumors that the CFPB may attempt to finalize the arbitration rule by the end of this summer.  Importantly, however, under Dodd-Frank and the Administrative Procedures Act, even if the rule became final it would not become effective for 210 days.  During that grandfather period, one or more events could stop any final arbitration rule from taking effect.  For example, the Financial Choice Act could become law; Congress could disapprove the rule under the Congressional Review Act; and/or a ruling by the D.C. Circuit in PHH v. CFPB that the agency’s structure is unconstitutional could derail the rule.  The DOJ’s amicus brief is yet another event that should give the CFPB pause in considering whether and when to finalize the proposed rule as it demonstrates that the current administration strongly supports the use of class action waivers in arbitration agreements.

 

 

 

The report issued earlier this week by the U.S. Treasury Department to President Trump in response to his February 2017 Executive Order 13772, “A Financial System That Creates Economic Opportunities-Banks and Credit Unions,” recommends numerous CFPB changes.

Entitled “Core Principles for Regulating the United States Financial System,” the Executive Order was a high-level policy statement consisting of a series of Core Principles designed to inform the manner in which the Trump Administration regulates the financial system.  The Order directed the Treasury Secretary to identify, in a report to the President, any laws, regulations, guidance and other Government policies “that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.”

Treasury’s report, the first in a series of four reports to be issued in response to the Executive Order, covers the depository system, i.e. “banks, savings associations, and credit unions of all sizes, types and regulatory charters.”  In addition to the recommendations directed at the CFPB, the report makes recommendations for addressing a wide range of issues such as market liquidity, capital requirements, and the supervisory and regulatory roles of the federal banking agencies.

Treasury’s CFPB recommendations are discussed in the section of the report entitled “Providing Credit to Fund Consumer and Commercial Needs to Drive Economic Growth,” with the CFPB viewed as the source of many of the “numerous regulatory factors [identified by Treasury] that are unnecessarily limiting the flow of credit to consumers and businesses and thereby constraining economic growth and vitality.”  The CFPB recommendations are intended to address the CFPB’s “unaccountable structure and unduly broad regulatory powers [which] have led to predictable regulatory abuses and excesses” and its “approach to rulemaking and enforcement [which] has hindered consumer access to credit, limited innovation, and imposed unduly high compliance burdens, particularly on small institutions.”

Several of Treasury’s recommended CFPB changes are similar to the changes to the CFPB contained in the Financial CHOICE Act passed by the House last week.  It is unclear how Treasury’s recommendations will impact the CHOICE Act’s prospects in the Senate or the Senate’s approach to Dodd-Frank reform.

In addition to recommendations for changes to the CFPB’s residential mortgage regulations that we will discuss in a separate blog post, the Treasury’s CFPB recommendations include the following:

  • Structure and Funding.  Amend Dodd-Frank to:
    • Make the Director removable at-will by the President or restructure the CFPB as an independent multi-member commission or board; fund the CFPB through the annual Congressional appropriations process
    • Allow the CFPB to only retain and use funds in the Consumer Financial Civil Penalty Fund for payments to victims of the activities for which civil money penalties were imposed and require the CFPB to remit any excess fund to the Treasury
  • Regulatory Authority.  Issue UDAAP regulations “that more clearly delineate [the CFPB’s] interpretation of the UDAAP standard” and change CFPB policy to only seek monetary damages “in cases in which a regulated party had reasonable notice—by virtue of a CFPB regulation, judicial precedent, or FTC precedent—that its conduct was unlawful.”
  • Supervisory Authority. Repeal the CFPB’s supervisory authority, with bank supervisory authority limited to the prudential regulators and supervision of nonbanks limited to state regulators.
  • Enforcement Authority.
    • Issue a CFPB rule barring enforcement actions “in areas in which clear guidance is lacking or the CFPB’s position departs from the historical interpretation of the law” unless the CFPB has issued “rules or clear guidance subject to public notice and comment procedures” before bringing the action
    • Change the requirements for no-action letters to make them less onerous by aligning CFPB policy with “the more effective policies of the SEC, CFTC, and FTC,” with specific changes to CFPB requirements to include expanding the scope of the CFPB’s policy beyond new products
    • Adopt a CFPB policy to bring enforcement actions in federal district court rather than use administrative proceedings but to the extent administrative proceedings continue to be used, issue a rule specifying the criteria the CFPB will use when deciding which forum to use
    • Reform the CID process, including by adopting procedures for allowing a confidential appeal of a CFPB decision on modifying or setting aside a CID appeal if requested and enacting a Dodd-Frank amendment to allow motions to modify or set aside CID to be directly filed in federal district court.
  • Other.  Make data in the Consumer Complaint Database available only to federal and state agencies and not to the general public.

 

In a notice published in today’s Federal Register, the Dept. of Education announced that it is postponing  “until further notice” the July 1, 2017 effective date of various provisions of the “borrower defense” final rule issued by the ED last November, including the rule’s ban on arbitration agreements.  In a second notice also published in today’s Federal Register, the ED announced that it plans to establish two negotiated rulemaking committees, with one committee to develop proposed regulations to revise the “borrower defense” rule and the other to develop proposed revisions to the “gainful employment” rule that became effective in July 2015 and includes requirements for schools to make various disclosures such as graduation rates, earnings of graduates, and student debt amounts.

Effective Date Postponement.   Last week, the California Association of Private Postsecondary Schools (CAPPS) filed a complaint in D.C. federal district court against the ED and Education Secretary Betsy DeVos to overturn the “borrower defense” final rule.  In its notice delaying the rule’s July 1 effective date, the ED stated that the postponement “will preserve the regulatory status quo while the litigation is pending and the Court decides whether to uphold the final regulations.”

The Federal Register notice lists the specific provisions of the final rule for which the effective date is postponed.  The ED described the postponed provisions as those “pertaining to the standard and process for the Department to adjudicate borrower defense claims, requirements pertaining to financial responsibility standards, provisions requiring proprietary institutions to provide warnings about their students’ loans repayment rates, and prohibitions against institutions including arbitration or class action waivers in their agreements with students.”  The ED is retaining the July 1 effective date for several provisions of the final rule, such as those expanding the types of documentation that can be used for granting a discharge based on a borrower’s death.

Negotiated rulemaking.  The Federal Register notice indicates that the ED plans to hold public hearings on July 10, 2017 in Washington, D.C. and on July 12, 2017 in Dallas, Texas.  The ED stated that, after it reviews the public comments submitted at the hearing and in written submissions, it will publish one or more documents in the Federal Register announcing the specific topics for which it intends to establish the negotiated rulemaking committees and request nominations for individual negotiators.  The ED anticipates that the committees will begin negotiations in November or December 2017, with the committees meeting in Washington, D.C. area for up to three sessions of three to four days each at roughly five- to eight-week intervals.

Comments on the topics on which the Department intends to conduct negotiated rulemaking and additional topics to be considered for action by the negotiated rulemaking committees must be received by the ED on or before July 12, 2017.

State AGs Motion to Intervene.  Earlier this week, a group of 8 state attorneys general and the D.C. attorney general filed a motion for leave to intervene in the CAPPS lawsuit and to be heard at the hearing on the preliminary injunction sought by CAPPS. While the lawsuit challenges the overall final rule, CAPPS also filed a motion for a preliminary injunction in which it asked the court to preliminarily enjoin only the final rule’s arbitration ban and class action waiver provisions pending the resolution of the lawsuit.  To explain their interest in the case, the AGs highlight the arbitration ban in the “borrower defense” rule and assert that “by protecting borrowers’ ability to bring private lawsuits, the [ban] restore[s] an important component of the State Movants’ consumer protection enforcement frameworks, which were designed to include private lawsuits to supplement public enforcement efforts.”

 

On June 7, the CFPB submitted a Rule 28(j) letter to the D.C. Circuit in the PHH case.  In the letter, the CFPB embraced the fact that the Supreme Court’s recent Kokesh v. SEC decision makes the five-year statute of limitations in 28 USC § 2462 applicable to disgorgement remedies in CFPB administrative proceedings.  The CFPB asserted (incorrectly in our view) that Kokesh somehow obviated the applicability of RESPA’s three-year statute of limitations in the PHH case.

PHH forcefully responded to that argument in its reply letter.  It started with the point that § 2462’s limitation period applies “except as otherwise provided” by Congress. Because RESPA “otherwise provides” a three-year statute of limitations, § 2462 is inapplicable.  Next, it pointed out how unreasonable it is for the CFPB to assume that Congress would set one statute of limitations for judicial actions and another for administrative proceedings.  That “would destroy the certainty that Section 2614 was intended to provide,” it argued.  PHH also reminded the court of the CFPB Director’s holding in an earlier proceeding that no statute of limitations applies to administrative actions.  It chided the CFPB for trying to back away from that position at the “eleventh-hour.”

PHH also pointed out that “at the same time the CFPB argued in this Court that Section 2462 governs disgorgement, the Acting Solicitor General argued in Kokesh that it does not.  The CFPB’s freelancing merely underscores that the Director answers to no one but himself.”

The CFPB recently announced that it has entered into a consent order with Fay Servicing, LLC (“Fay”) to settle alleged mortgage servicing violations.  A copy of the consent order can be found here.  As is typical for CFPB enforcement activity in the mortgage servicing space, the focus of this consent order is alleged misconduct in connection with loss mitigation procedures and foreclosure protections.

According to the consent order, Fay did not send timely loss mitigation acknowledgement notices and loss mitigation evaluation notices.  The loss mitigation acknowledgement notice must generally be sent within five days after receipt of a loss mitigation application, and either confirm that the application is complete or detail the additional information or documents required.  The loss mitigation evaluation notice must generally be sent within 30 days of receiving a complete loss mitigation application and detail the determination of which options, if any, will be offered.

In some instances, the CFPB claims that Fay proceeded with certain foreclosure steps while the borrower was subject to foreclosure protections under Regulation X.  Those protections generally apply to a borrower who has submitted a complete loss mitigation application by certain points in the foreclosure process, and continue while the application is evaluated and resolved pursuant to Regulation X.

The consent order further states that there was a mistaken understanding that the loss mitigation requirements under Regulation X only applied to retention options (e.g., loan modification or repayment plan), and not to non-retention options (e.g., short sale or deed in lieu).  Finally, the CFPB asserted that Fay’s loss mitigation policies and procedures were lacking, and did not enable its personnel to engage in compliant practices.

Fay is required to pay restitution to consumers of up to $1.15 million, and to facilitate loss mitigation for those accounts that were the subject of the alleged misconduct.  Further, the consent order requires an extensive set of measures intended to ensure compliance going forward.

This enforcement action highlights again the importance of technical compliance with the loss mitigation procedures under Regulation X.  Since the servicing rules became effective in 2014, the CFPB has consistently signaled its prioritization of these requirements.

An Illinois federal judge ordered Dish Network to pay the federal government $168 million for violating the FTC’s Telephone Sales Rule (“TSR”).  The judgment is the largest civil penalty ever obtained for a violation of the TSR.  The remainder of the civil penalty was awarded to the states of California, Illinois, North Carolina, and Ohio for violations of the Telephone Consumer Protection Act (“TCPA”) and various state statutes.  In addition to permanently blocking Dish from making calls in violation of the do-not-call laws, the order requires Dish to undergo substantial long-term compliance monitoring.  Among the many costly provisions of the compliance monitoring component of the order, Dish is required to hire a telemarketing-compliance expert to prepare policies and procedures to ensure that Dish and its primary retailers continue to comply with the injunction and the telemarketing laws.

The decision follows a five week bench trial that commenced in January 2016.  A number of factors were central to the district judge’s 475-page opinion.  Significantly, the calls were placed to individuals whose numbers were listed on the National Do Not Call Registry and to individuals who informed Dish that they did not want to receive calls from them.  Notably, the court ruled in favor of the federal government on all of the TSR counts and found more than 66 million TSR violations.  It further chastised Dish for employing call centers without any vetting or meaningful oversight.  The court also admonished Dish for its refusal to take responsibility for the actions of its call centers and retailers.  Such remarks represent a growing trend of courts scrutinizing companies over their monitoring of third-party vendors and their practices.  Just last month, a North Carolina federal judge presiding over a TCPA class action, found Dish vicariously liable for its vendor’s willful and knowing violations of the TCPA and trebled the damages to $1,200 per call—more than $61 million in total.

A Dish spokesman said that Dish “respectfully disagrees” with the Illinois decision and plans to appeal.

We recently reported on a bill introduced in the House of Representatives by Congressman Dan Kildee (D-Michigan) that would amend the Military Lending Act (“MLA”) to require that creditors provide additional disclosures to covered members of the armed forces and their families. The text of H.R. 2697 is now available.

Titled the “Transparency in Military Lending Act of 2017,” the bill would add the following items to the list of mandatory disclosures required under the MLA:

  • A statement that the Department of Defense (“DoD”) and each service branch offers a variety of financial counseling services.
  • A statement that other, lower interest rate loans, including potentially 0 percent interest loans, may be available through other financial institutions and military relief societies.
  • Contact information for the nearest Department of Defense financial counseling office.
  • A statement of the actual cost of the extension of credit, prepared as an amortization table showing what the cost to the member or dependent will be if the extension of credit is paid off at different points over time.

H.R. 2697 would require the disclosures to be provided on a single sheet of paper and be in a bold, 14-point font.  In addition, the bill would require creditors to (1) obtain separate, signed acknowledgments for each of the four disclosures and (2) compile and make publicly available a list of Department of Defense financial counseling offices. As the bill is drafted, the additional disclosures appear to be required for any consumer credit covered by the MLA, as currently implemented by the DoD.  Nevertheless, in a subsection titled “TRANSPARENCY FOR PAYDAY LOANS AND VEHICLE LOANS,” the bill separately provides that “the term ‘consumer credit’ shall include ‘payday loans’ and ‘vehicle title loans’ as those terms were defined” by the MLA regulations in effect on July 1, 2015.  Perhaps Congressman Kildee expects the scope of the bill to be narrowed during the negotiation process to reach only payday and vehicle title loans.  Or perhaps he was uncertain whether the new regulations, which went into effect on October 1, 2015, still cover payday and vehicle title loans (they do).

If unedited, H.R. 2697 would represent a significant expansion of the MLA’s already onerous disclosure requirements.   While the bill does not expressly call for promulgation of new rules, the DoD would likely have to prescribe additional regulations if it becomes law.  For instance, the bill is bereft of details concerning the cost of credit disclosure other than to say it must be prepared as an amortization table showing the cost of credit if the credit is paid off “at different points over time.”

The bill has been referred to the House Armed Services Committee, and we will provide updates as developments occur.