In this issue:
• CLEC: CONFUSING CREDIT LAW HELPED BY WELL-DRAFTED DOCUMENTS
• CFPB OVERDRAFT PRACTICES CONSENT ORDER
• NEW NASDAQ RULE – DISCLOSURE OF THIRD-PARTY DIRECTOR COMPENSATION ARRANGEMENTS
• CFPB DEBT COLLECTOR PROPOSALS
Another court decision highlights that Maryland credit laws can be confusing and a trap for the unwary. However, this decision makes it clear that carefully drafted documents consistent with applicable statutes can make a difference in legal results. In an opinion issued July 8, 2016 (opinion available here), the U.S. Court of Appeals for the Fourth Circuit analyzed the late fee provision found in Maryland's Credit Grantor Closed End Credit Provisions (CLEC). CLEC applies to all types of closed end credit, but only if expressly elected in the loan documents governing the transaction. It is frequently elected in consumer credit transactions. According to the facts in this case, the creditor elected CLEC and included a contractual late fee provision in the promissory note that stated "for purposes of computing late charges, all payments … shall be applied to scheduled payments in the order they become due." The note also provided that payments would be applied first to late fees, then to interest, and then to principal. CLEC provides, among other terms, that "[n]o more than 1 late or delinquency charge may be imposed for any single payment or portion of payment, regardless of the period during which it remains in default." The borrower failed to pay numerous full monthly payments on time or within the late fee grace period provided in the note. These failures caused the creditor to appropriately charge late fees. However, the creditor also charged late fees in connection with two payments that were made in full and on time, because by applying those payments first to existing unpaid late fees (as provided in the note), the two on-time payments were treated as less than full monthly payments. The borrower claimed violations of CLEC on a variety of bases, all centered on the late fees charged by the creditor. The U.S. Court of Appeals for the Fourth Circuit approached the claims both by analyzing CLEC and by considering the terms in the promissory note. Indeed, the language in the note was instrumental to the outcome of this case. Ultimately, the Court determined the creditor did not violate CLEC or the note by applying payments first to late charges, then to interest, and then to principal or by posting late charges before midnight of the last day of the grace period. However, the Court found that the creditor violated CLEC by imposing late fees on the two otherwise full and timely payments. Specifically, the Court concluded that the creditor's "practice of charging late fees solely because payments were applied first to earlier late fees constitutes an improper collection of late fees, both because the note did not require monthly payments of amounts in excess of … [the stated monthly payment] and because the charging of late fees based on application of an otherwise conforming payment to prior late fees amounted to the collection of multiple late fees for a single installment …" in violation of CLEC. This practice likely also violated the federal regulatory prohibition on pyramiding late fees, but the borrower failed to raise this claim in a timely manner. Creditors electing CLEC as governing law should review this decision. For all creditors, we recommend revisiting contract language and operations and making changes, as necessary, to avoid borrower claims. Please contact Margie Corwin if you would like to discuss this subject.
The Consumer Financial Protection Bureau (CFPB) recently ordered a large bank to pay a $10 million fine in connection with the bank's overdraft practices (consent order available here). Regulation E (Reg. E) prohibits assessing a fee to a consumer for paying ATM or one-time debit card transactions that would overdraw the consumer's deposit account, unless the consumer affirmatively opts-in. Reg. E includes a model opt-in form for this purpose. The CFPB alleged that the bank (1) failed to obtain from customers the required Reg. E affirmative opt-in in many cases; and (2) for many customers who had opted-in, misled customers about the types of transactions covered by the opt-in, the fees associated with opting-in, and the related consequences of not opting-in. The CFPB also faulted the bank for using a third party vendor to market the bank's overdraft program. The vendor allegedly enrolled customers in the bank's payment of ATM and one-time debit card transactions without specifically obtaining consent and in other cases led customers to believe that the overdraft program was free (or that customers would be charged overdraft fees in connection with ATM and one-time debit card transactions even if they didn't sign up for the bank's overdraft program). In addition to the $10 million fine, the consent order requires the bank to: (1) go back and obtain affirmative opt-ins from certain customers; (2) not use a vendor to market its overdraft program; and (3) increase vendor oversight. Please contact Christopher Rahl for more information concerning this topic.
On July 1, 2016, the U.S. Securities and Exchange Commission approved an amendment to Rule 5250 of the NASDAQ Stock Market Rules that will require, on and after August 1, 2016 and subject to limited exceptions, NASDAQ-listed companies to publicly disclose the material terms of each agreement or other arrangement between a director or director-nominee and any third party that relates to compensation or other payments to be made in connection with that director or director-nominee's service or candidacy as a director of the company (amended rule available here). The disclosure must be made on an annual basis and no later than the date on which the company files its proxy statement for the meeting of stockholders at which directors will be elected (or at the time it files its Annual Report on Form 10-K, if the company does not file a proxy statement). A company may include the disclosure on its Internet website or in its proxy statement for that meeting of stockholders (or in its Annual Report on Form 10-K, if the company does not file a proxy statement). The disclosure obligation will continue until the earlier of the resignation of the director or one year following the termination of the agreement or arrangement. Please contact Andy Bulgin if you would like to discuss this rule change.
On July 28, 2016, the Consumer Financial Protection Bureau (CFPB) issued an outline of proposals that will guide its issuance for rulemaking concerning debt collection (outline of proposals available here). The CFPB's outline notes that it intends to limit the rule's coverage to "debt collectors" as they are defined in the Fair Debt Collection Practices Act (FDCPA) at 15 U.S.C. §1692. Thus, the anticipated rule will not apply either to first-party creditors collecting their own debts or to servicers that are collecting debts that were not in default when servicing began. According to the CFPB, the new rule would apply only to businesses in the following categories for debts acquired in default: "collection agencies, debt buyers, collection law firms, and loan servicers." This is generally consistent with the definition of "debt collectors" under the FDCPA as it is defined by statute and has been developed through case law. The anticipated rule will set some stringent caps related to the frequency of calls that debt collectors could make to debtors. The caps would vary based on whether there has been a "confirmed consumer contact" by a current or a prior collector or whether the contact was merely attempted. The caps would apply across all contact channels maintained by the consumer. A collector could attempt up to three contacts per week to each phone number or address the debt collector has for the consumer with an aggregate of six contacts per week for each consumer regardless of contact channel. A collector with a "confirmed consumer contact" could make only two contacts per week to each phone number or address it has for the consumer, for an aggregate of three contacts per week only one of which could be a live communication. In addition, the new rule would set specific requirements related to the collection of debts which are barred by statutes of limitations. A debt collector seeking to collect a debt barred by statute of limitations (i.e., a "time-barred debt") would be required to include a "time-barred debt disclosure" in the validation notice, in the first oral communication in which it requests payment, and possibly in each subsequent communication seeking payment. The CFPB is also considering whether it will actually prohibit a debt collector from accepting payment on any obsolete debt (such as a time-barred debt) until the debt collector has obtained the consumer's written acknowledgment of having received a disclosure. Also, the anticipated rule will set limitations on transferring debt to certain entities and include record keeping requirements. Please contact Robert Gaumont for more information related to this topic.