Maryland Legal Alert for Financial Services
Maryland Legal Alert November 2016
In this issue:
• SUPREME COURT TAKES FDCPA "PROOF OF CLAIM" CASE
• IT'S TIME TO REVIEW YOUR CREDIT COLLECTIONS PRACTICES
• SUPREME COURT TO DECIDE FATE OF STATE "NO SURCHARGE" LAWS
• D.C. CIRCUIT HOLDS CFPB STRUCTURE UNCONSTITUTIONAL
SUPREME COURT TAKES FDCPA "PROOF OF CLAIM" CASE
The United States Supreme Court recently granted review of a case from the 11th Circuit to determine if a debt buyer violates the Fair Debt Collection Practices Act (FDCPA) by filing a proof of claim in a bankruptcy proceeding concerning a debt where the underlying statute of limitations has expired. Courts have split concerning the issue, with many Circuits holding in favor of debt buyers (see our Legal Alerts in March 2015, April 2015, June 2015, and September 2016). The 11th Circuit has consistently held against debt buyers, starting with its 2014 decision in Crawford v. LVNV Funding, LLC. The 11th Circuit's most recent decision supporting and expanding its Crawford holding was issued in May of this year. The 11th Circuit held that: (1) filing a proof of claim related to a time-barred debt is an attempt to collect a debt that misrepresents the "legal status" of the debt in violation of the FDCPA; and (2) the Bankruptcy Code does not preempt the FDCPA (while the Bankruptcy Code may allow creditors to file proofs of claim even where the applicable statute of limitations has expired, creditors are "not free from all consequences of filling these claims" and are still subject to penalties under the FDCPA). The 3rd, 4th, and 7th Circuits have all reached contrary results and parties to a recent case from the 7th Circuit (holding in favor of debt buyers) also sought the Supreme Court's review, but the Supreme Court did not grant certiorari for the 7th Circuit decision. The Supreme Court's decision to review only the 11th Circuit's decision concerning this issue, coupled with the decisions in favor of debt buyers in most other Circuits, may signal that the Supreme Court will come down on the side of debt buyers. Please contact Christopher Rahl with questions concerning this topic.
IT'S TIME TO REVIEW YOUR CREDIT COLLECTIONS PRACTICES
The Consumer Financial Protection Bureau (CFPB) recently faulted a large credit union for allegedly using improper collection practices. The resulting consent order requires the credit union to change its collection practices and pay $28.5 million ($23 million in consumer refunds and a $5.5 million civil money penalty). The CFPB alleged that the credit union: (1) threatened legal action, including wage garnishment, when it seldom took such action; (2) misrepresented the credit consequences of not making loan payments; and (3) improperly froze member account access. Of particular interest is the CFPB's focus on the suspension/termination of online/electronic account access when a member's loan payments became delinquent. It is common for financial institutions to restrict or discontinue access to ancillary services (such as internet banking) for seriously delinquent consumers. In most cases, no funds will be in the related deposit accounts and once a loan reaches the point of charge-off, it makes little sense for a financial institution to continue to provide banking services/tools for a consumer who is likely not using the services and/or the related deposit accounts. The ability to discontinue access to such ancillary services is typically described in the related service terms/agreement and/or in the financial institution's deposit account agreement. In this case, the CFPB faulted the credit union for: (1) turning off online banking access too soon (almost immediately after a loan became delinquent in many cases); (2) not adequately disclosing the possibility of suspension/termination of services; (3) not providing advance notice that the services would be suspended/terminated; and (4) allowing the electronic deposit of federal benefits but preventing consumer access to the deposited funds. The consent order serves as a good reminder for all financial institutions to review their credit collection practices, including suspension/termination of ancillary services. Please contact Christopher Rahl or Marjorie Corwin if you need assistance reviewing your collection letters or your collection policies and procedures.
SUPREME COURT TO DECIDE FATE OF STATE "NO SURCHARGE" LAWS
The U.S. Supreme Court will decide whether state laws that ban credit card surcharges violate the First Amendment. The Court granted certiorari in Expressions Hair Design et al. v. Schneiderman, a case involving a challenge to a New York law that prohibits merchants from charging a surcharge when a customer pays with a credit card rather than cash. The U.S. District Court for the Southern District of New York held that the "no surcharge" law violates the First Amendment by prohibiting "surcharges" for consumers who pay with a credit card, but permitting merchants to give a "discount" to customers who pay with cash. The 2nd Circuit Court of Appeals disagreed, reasoning that the "no surcharge" law only regulates economic conduct and does not impact speech. The decision by the Supreme Court will resolve a split among the circuits. The 11th Circuit has determined that Florida's "no surcharge" law does target speech, because to comply with the law, merchants must describe dual pricing for payment with cash rather than a credit card as a "discount." The 2nd Circuit and the 5th Circuit have held that the "no surcharge" laws regulate pricing only. There are currently ten states with "no surcharge" laws – California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas. The decision by the Court will decide the future of these laws, with implications for merchants, consumers, and the credit card industry. Please contact Evelyn Cusson or Christopher Rahl with questions about credit card surcharges, credit card association rules, or similar issues.
D.C. CIRCUIT HOLDS CFPB STRUCTURE UNCONSTITUTIONAL
On October 11, 2016, the U.S. Court of Appeals for the District of Columbia issued an opinion that reversed a decision of the Consumer Financial Protection Bureau (CFPB) to impose a $109 million penalty on PHH Corporation (PHH). The facts involve a captive mortgage reinsurance company that PHH established to provide reinsurance for mortgage insurers that insured mortgage loans issued by PHH. PHH set up its captive reinsurance company prior to the CFPB's creation in 2010. In 2014, the CFPB initiated an administrative enforcement action against PHH, arguing that PHH's captive reinsurance company arrangement violated the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA). PHH had relied on prior U.S. Department of Housing and Urban Development (HUD) opinions that provided a safe harbor under RESPA for captive mortgage reinsurance arrangements (based on payments for reinsurance that are made at fair market value rates). The CFPB discarded the prior HUD safe harbor and found that PHH had violated RESPA's anti-referral prohibitions. The CFPB retroactively sanctioned PHH, despite its reliance on the prior HUD safe harbor, and ordered PHH to pay $109 million in disgorgement and enjoined PHH from entering into future captive reinsurance arrangements. PHH petitioned the D.C. Circuit for review and the D.C. Circuit held the CFPB's single director structure unconstitutional because it lacked the presidential control or "substitute check" required by Article II of the U.S. Constitution (to protect against abuses of power and arbitrary decision making). The D.C. Circuit also: (i) rejected the CFPB's argument that statutes of limitation do not apply to CFPB administrative enforcement actions; (ii) held that the plain language of RESPA permitted captive reinsurance arrangements like the PHH arrangement, as long as payments for reinsurance are made at fair market value rates; and (iii) held that the CFPB violated PHH's due process rights by retroactively applying its new RESPA interpretation to PHH's prior conduct. The D.C. Circuit remanded the matter to the CFPB for further consideration of whether PHH's conduct violated RESPA as interpreted by HUD. If the D.C. Circuit's decision stands, there are several notable points to take away from the case: (1) the CFPB director will now serve at the will of and under the supervision of the President; (2) CFPB administrative enforcement actions are subject to the appropriate statute of limitations period for the associated statutory violation (three years under RESPA); and (3) the CFPB will be subject to regulatory review procedures that apply to Executive branch agencies (including review of proposed and final regulations by the Office of Information and Regulatory Affairs -- for evaluation of the anticipated regulatory burdens). We will be closely monitoring this case. In the interim, please contact John Morton with any questions concerning this topic.