Over the past week, members of Congress from both parties have sent several letters to the Department of Education (DOE or ED) regarding its ongoing rulemaking related to the ways higher education institutions request, maintain, disburse, and otherwise manage federal student aid disbursements. As part of that rulemaking, the DOE is considering changes that would, among other things, clarify permissible disbursement practices and agreements between education institutions and entities that assist in disbursing student aid, and increase consumer protections governing the use of prepaid cards and other financial instruments. In general, the letters from Congress express concern that the draft rule is too broad and will limit student access to financial services. For example, in a July 17 letter from Congressman Luetkemeyer (R-MO), Senator Hoeven (R-ND), and 40 other lawmakers, including six Democrats, the members expressed concern that the DOE proposal could cover any account held by a student or a parent of a student if the financial institution had any arrangement, however informal, with a school and regardless of when or why the account was opened. The members support efforts to protect students from abuses made in disbursing student aid, but ask the DOE to tailor the rule such that it could not be construed so broadly as to restrict students’ access to financial services. Earlier this year, another group of lawmakers called on the DOE to “mandate contract transparency, prohibit aggressive marketing, and ban high fees when colleges partner with banks to sponsor debit cards, prepaid cards, or other financial products used to disburse student aid.”
Bankruptcy Court Refuses To Dismiss Class Suit Claiming Bank’s Credit Reporting Practices Violated Bankruptcy Code
On July 22, the U.S. Bankruptcy Court for the Southern District of New York rejected a bank’s motion to dismiss a putative class action adversary proceeding alleging that certain of the bank’s credit reporting practices violated U.S. bankruptcy law. In re Haynes, No. 11-23212, 2014 WL 3608891 (S.D.N.Y. Jul. 22, 2014). The named plaintiff-debtor alleged that the bank charged off and sold his debt, which was subsequently discharged in bankruptcy, but failed to correct his credit report that listed the debt, post-discharge, as being only “charged off,” rather than being “discharged in bankruptcy.” The bank moved to dismiss for failure to state a claim, arguing that because it sold the debt pre-bankruptcy, it did not have an obligation under the FCRA or Sections 727 and 524(a) of the Bankruptcy Code to correct the debtor’s credit report. The court denied the bank’s motion on the grounds that (i) the bank continues to have an economic interest in the debt—notwithstanding its sale—because the bank continues to receive a percentage payment of the proceeds of each debt repaid to it and forwarded to the debt’s purchaser; and (ii) by failing to correct the credit reports, the bank is enhancing its purchasers’ ability to collect on the debt.
On July 8, Rhode Island Governor Lincoln Chafee signed HB 7997, which extends the state’s licensing requirements to include companies servicing a loan, directly or indirectly, as a third-party loan servicer. Under the existing state statute, the term “loan” means any advance of money or credit, including mortgage loans, educational loans, and other consumer loans. The new law adds new definitions for servicing and third-party loan servicer, establishes for such servicers a $1,100 annual licensing fee, and requires licensed servicers to: (i) maintain at least $100,000 capital; (ii) obtain a bond; (iii) maintain segregated borrower accounts; and (iv) maintain certain records. The law also establishes prohibited acts and practices for third-party servicers, including, among others: (i) knowingly misapplying loan payments to the outstanding balance of a loan or to escrow accounts; (ii) requiring unnecessary forced placement of insurance; (iii) failing to provide loan payoff information as required; (iv) collecting private mortgage insurance beyond the date required; (v) failing to timely respond to consumer complaints; and (vi) charging excessive or unreasonable fees to provide loan payoff information. The law exempts depository institutions and licensed lenders and other licensed entities. The new rules and requirements take effect July 1, 2015.
This week, the CFPB and 25 states filed amicus briefs in Jesinoski v. Countrywide Home Loans, Inc., No. 13-684, a case pending before the U.S. Supreme Court that may resolve a circuit split over whether a borrower seeking to rescind a loan transaction under TILA must file suit within three years of consummating the loan, or if written notice within the three-year rescission period is sufficient to preserve a borrower’s right of rescission. In short, the CFPB argues, as it has in the past, that no TILA provision requires a borrower to bring suit in order to exercise the TILA-granted right to rescind, and that TILA’s history and purpose confirm that a borrower who sends a notice of rescission in the three-year period has exercised the right of rescission. The state AGs similarly argue that TILA’s plain meaning allows borrowers to preserve their rescission right with written notice. In so arguing, the government briefs aim to support the borrower-petitioner seeking to reverse the Eighth Circuit’s holding to the contrary. The majority of the circuit courts that have addressed the issue, including the Eight Circuit, all have held that a borrower must file suit within the three-year rescission period.
On July 14, a national bank, numerous related companies, and several of their third-party collection vendors agreed to pay $75 million to resolve class claims that the bank and other parties violated the TCPA by using an automatic telephone dialing system and/or an artificial prerecorded voice to call mobile telephones without prior express consent. The bank maintains that its customer agreement provided it with prior express consent to make automated calls to customers on their mobile telephones, and that the TCPA permits prior express consent to be obtained after the transaction that resulted in the debt owed. Although they agreed to resolve the matter through settlement to avoid further costs of litigation, the bank and other defendants deny all material allegations.
CFPB Expands Complaint Collection To Include Prepaid Cards, Additional Nonbank Products And Services
On July 21, the CFPB announced that it is now accepting consumer complaints regarding (i) prepaid products, including gift cards, benefit cards, and general purpose reloadable cards; (ii) credit repair services and debt settlement services; and (iii) pawn and title loans. The CFPB’s decision to field prepaid card complaints comes as the agency prepares a proposed rule related to those products. The press release states that the CFPB is planning to initiate the prepaid card rulemaking “in the coming months.” Director Cordray recently stated the rule would be proposed at the “end of the summer.”
The CFPB provides the following options for consumers to identify the nature of their complaints:
- Prepaid Cards – (i) managing, opening, or closing your account; (ii) fees; (iii) unauthorized transactions or other transaction issues; (iv) advertising, marketing or disclosures; (v) adding money; (vi) overdraft, savings or rewards features; or (vii) fraud or scam.
- Credit Repair and Debt Settlement – (i) advertising and marketing; (ii) customer service/customer relations; (iii) disclosures; (iv) excessive fees; (v) unexpected/other fees; (vi) incorrect exchange rate; (vii) lost or stolen money order; (viii) lost or stolen check; or (ix) fraud or scam.
- Pawn and Title Loans – (i) charged fees or interest I didn’t expect; (ii) can’t stop lender from charging my bank account; (iii) received a loan I didn’t apply for; (iv) applied for a loan, but didn’t receive money; (v) lender charged my bank account on wrong day or for wrong amount; (vi) lender didn’t credit payment to my account; (vii) can’t contact lender; (viii) lender sold the property / repossessed or sold the vehicle; or (ix) lender damaged or destroyed property / vehicle.
As with all of the CFPB’s complaint categories, consumers also have an opportunity to describe their complaints regarding these new products and services in narrative form. Last week, the CFPB proposed a policy change under which it would publish those consumer complaint narratives, a move it hopes will increase the number of complaints the CFPB fields. At the same time the CFPB released its latest “snapshot” of consumer complaints, which provides an overview of the complaint process and summary analyses of complaints handled by the CFPB since July 21, 2011.
On July 14, the CFPB sued a Georgia-based law firm and its three principal partners for allegedly using high-volume litigation tactics to collect millions of dollars from consumers who may not actually have owed the debts or may not have owed the debts in the amounts claimed. The suit relates to the firm’s attempts to collect, directly or indirectly, consumer credit-card debts on behalf of both credit-card issuers and debt buyers that purchase portfolios of defaulted credit-card debts. The CFPB alleges the defendants violated the FDCPA and engaged in unfair and deceptive practices by: (i) serving consumers with deceptive court filings generated by automated processes and the work of non-attorney staff, without any meaningful involvement of attorneys; and (ii) introducing faulty or unsubstantiated evidence through sworn statements even though some signers could not have known the details they were attesting to. The CFPB is seeking to permanently enjoin the firm from engaging in the alleged activity, restitution to borrowers, disgorgement, civil money penalties, and damages and other monetary relief.
On July 16, the New York DFS re-proposed a rule to regulate third-party debt collection. The revised proposal: (i) describes disclosures debt collectors must provide to consumers when the debt collector initially communicates with a consumer, and additional disclosures that must be provided when the debt collector is communicating with a consumer regarding a charged-off debt; (ii) requires debt collectors to disclose to consumers when the statute of limitations on a debt has expired; (iii) outlines a process for consumers to request additional documentation proving the validity of the charged-off debt and the debt collector’s right to collect the charged-off debt; (iv) requires debt collectors to provide consumers written confirmation of debt settlement agreements and regular accounting of the debt while the consumer is paying off a debt pursuant to a settlement agreement; (v) requires debt collectors to provide consumers with disclosures of certain rights when settling a debt; and (vi) allows debt collectors to correspond with consumers by electronic mail in certain circumstances. The DFS states that although comments on its initial proposal were “generally supportive,” the revised proposal responds to comments on how the rules could better correspond to the structure of the collection industry, and seeks to clarify the meaning of certain provisions. Comments on the revised proposal are due by August 15, 2014.
On July 9, Pennsylvania Governor Tom Corbett signed SB 622, which directs the Department of Banking and Securities to establish licensing requirements, including fees, for providers of debt settlement services. Such a license will be a “covered license” under state law, and, as such, will require employees of entities seeking a license to submit to criminal history checks. In addition, licensed debt settlement firms would be required to provide written disclosures regarding, among other things: (i) the amount of time necessary to achieve the represented results; (ii) the extent to which debt settlement services may include settlement offers to creditors and debt collectors, including the time by which bona fide offers will be made; (iii) the cost to the individual for providing debt settlement services and the method by which any fee will be calculated; (iv) that the use of a debt settlement service will likely adversely impact the credit worthiness of the individual; and (v) the total estimated program costs if the individual completes the program. The bill does not apply to (i) judicial officers; (ii) depository licensees; (iii) title insurers, escrow companies, or other persons that provide bill paying services and offer debt settlement incidental to those services; or (iv) attorneys who act as intermediaries. The bill defines certain prohibited activities, and grants the regulator authority to supervise licensed firms, enforce the requirements, and impose civil penalties of up to $10,000 for each violation. Most provisions of the bill take effect November 1, 2014.
On July 15, the Department of Education’s Office of Inspector General (OIG) published a report on its audit of the Department’s Federal Student Aid (FSA) office, which revealed that the FSA has failed to effectively: (i) monitor borrower complaints against private collection agencies (PCAs) and ensure that corrective action is taken; (ii) ensure PCAs are abiding by federal debt collection laws and the related terms of their contracts; and (iii) consider borrower complaints in its evaluation and compensation of PCAs. The audit covered the period October 1, 2009, through September 30, 2012. The OIG recommended that FSA, among other things, (i) enforce the contract requirement that PCAs submit all complaints to FSA and establish procedures that include ensuring PCAs take corrective action; and (ii) require relevant staff to monitor, review, and evaluate the PCA deliverables and reconcile the management/fiscal reports with recorded complaints. The FSA concurred with the findings and most of the recommendations and stated that it has taken a number of steps over the past two years to strengthen its PCA oversight efforts. The FSA further stated that it has planned additional improvements that will further enhance its ability to effectively oversee PCA’s interactions with defaulted borrowers.
Yesterday, in advance of a field hearing being held today on consumer complaints, the CFPB released a proposal to expand the amount of information that will be included in the Consumer Complaint Database to include certain consumer complaint narratives, along with any response to the complaint submitted by the identified financial institution. The CFPB already collects the narrative information as part of the complaint intake process, but to date has not published narratives over privacy concerns it believes it now has addressed. The CFPB describes the proposed change as a natural extension of a policy designed to “provide consumers with timely and understandable information about consumer financial products and services, and improve the functioning, transparency, and efficiency of markets for such products and services.” The CFPB will accept comments on the proposal for 30 days following publication in the Federal Register. Read more…
On July 14, Illinois Attorney General (AG) Lisa Madigan announced that her office filed separate civil lawsuits (here and here) in state court against two student debt relief firms and their principals. The lawsuits allege that the defendants violated several state consumer protection statutes relating to their deceptive student debt relief practices and collection of improper fees. The AG claims that the unlicensed companies and their sole principals improperly accepted upfront fees from student borrowers while claiming to have enrolled them in sham loan forgiveness programs or other legitimate loan relief programs that were available to borrowers free of charge. The lawsuits also allege that the defendants engaged in extensive false and misleading advertisements that misrepresented their expertise, affiliation with the U.S. Department of Education, and the debt relief programs available to borrowers.
The AG maintains that these practices violate several state consumer protection statues, including:
- The Illinois Consumer Fraud and Deceptive Business Practices Act, prohibiting unfair and deceptive business practices, including making false representations and failing to disclose material facts to consumers;
- The Credit Services Organizations Act, prohibiting unlicensed parties from acting as “debt settlement providers” or accepting illegal fees; and
- The Debt Settlement Consumer Protection Act, prohibiting parties from accepting upfront payment for debt relief services.
The lawsuits seek injunctive and non-monetary relief in the form of permanent injunctions against each defendant and a rescission of all contracts with Illinois residents. The AG is also pursuing a variety of monetary damages and penalties, including restitution, costs of prosecution and investigation, and civil penalties of $50,000 for each statutory violation with additional penalties for those conducted with the intent to defraud or perpetrated against elderly victims.
On July 1, the Federal Reserve Board announced a joint enforcement action with the Illinois Department of Financial and Professional Regulation against a state bank that allegedly failed to properly oversee a nonbank third-party provider of financial aid refund disbursement services. The consent order states that from May 2012 to August 2013, the bank opened over 430,000 deposit accounts in connection with the vendor’s debit card product for disbursement of financial aid to students. The agencies claim that during that time, the vendor misled students about the product, including by (i) omitting material information about how students could get their financial aid refund without having to open an account; (ii) omitting material information about the fees, features, and limitations of the product; (iii) omitting material information about the locations of ATMs where students could access their account without cost and the hours of availability of those ATMs; and (iv) prominently displaying the school logo, which may have erroneously implied that the school endorsed the product. The regulators ordered the bank to pay a total of $4.1 million in civil money penalties. In addition, the Federal Reserve is seeking restitution from the vendor, and, pursuant to the order against the bank, may require the bank to pay any amounts the vendor cannot pay in restitution to eligible students up to the lesser of $30 million or the total amount of restitution based on fees the vendor collected from May 2012 through June 2014. The consent order also requires the bank to submit for Federal Reserve approval a compliance risk management program in advance of entering into an agreement with a third party to solicit, market, or service a consumer deposit product on behalf of the bank.
On July 8, the CFPB released guidance designed to ensure equal treatment for legally married same-sex couples in response to the Supreme Court’s decision in United States v. Windsor, 133 S. Ct. 2675 (2013). Windsor held unconstitutional section 3 of the Defense of Marriage Act, which defined the word “marriage” as “a legal union between one man and one woman as husband and wife” and the word “spouse” as referring “only to a person of the opposite sex who is a husband or a wife.”
The CFPB’s guidance, which took the form of a memorandum to CFPB staff, states that regardless of a person’s state of residency, the CFPB will consider a person who is married under the laws of any jurisdiction to be married nationwide for purposes of enforcing, administering, or interpreting the statutes, regulations, and policies under the Bureau’s jurisdiction. The Bureau adds that it “will not regard a person to be married by virtue of being in a domestic partnership, civil union, or other relationship not denominated by law as a marriage.”
The guidance adds that the Bureau will use and interpret the terms “spouse,” “marriage,” “married,” “husband,” “wife,” and any other similar terms related to family or marital status in all statutes, regulations, and policies administered, enforced or interpreted by the Bureau (including ECOA and Regulation B, FDCPA, TILA, RESPA) to include same-sex marriages and married same-sex spouses. The Bureau’s stated policy on same-sex marriage follows HUD’s Equal Access Rule, which became effective March 5, 2012, which ensures access to HUD-assisted or HUD-insured housing for LGBT persons.
This afternoon, the CFPB announced that a nonbank consumer lender will pay $10 million to resolve allegations that it engaged in certain unfair, deceptive, and abusive practices in the collection of payday loans. This action comes exactly one year after the CFPB issued guidance that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA. Read more…