Mortgage Lenders & Servicers

2017 was a transformative year for the consumer financial services world. As we navigate an unprecedented volume of industry regulation and forthcoming changes from the Trump Administration, Troutman Sanders is uniquely positioned to help its clients find successful resolutions and stay ahead of the compliance curve.

In this report, we share developments on consumer class actions, background screening, bankruptcy, credit reporting and consumer reporting, debt collection, payment processing and cards, mortgage, auto finance, the consumer finance regulatory landscape, cybersecurity and privacy, and the Telephone Consumer Protection Act (“TCPA”).

We hope you find this helpful as you navigate the evolving consumer financial services landscape.

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On December 14, the Supreme Court of Virginia reaffirmed in MCR Federal, LLC v. JB&A, Inc. that tort claims for actual and constructive fraud cannot stand where the source of the duty breached arises from the parties’ contractual relationship.  The Court’s holding is consistent with established precedent and is beneficial to the mortgage servicing industry in Virginia where relationships with borrowers arise from loan contracts such as a promissory note and a deed of trust.

Bringing suit in tort for misrepresentations has the obvious advantage of greater damage awards and the possibly of punitive damages.  However, in Virginia, the source of duty rule prevents “turning every breach of contract into an actionable claim for fraud.”  (It is important to note that the source of duty rule does not bar a tort claim to the extent the breach is a statutory or common law duty.)

In MCR Federal, the Court analyzed the breach of warranties in a bring down certificate in an acquisition between two government contractors.  The bring down certificate was a condition precedent to the sale, and the breach occurred at closing where the buyer falsely stated that a representation in the bring down certificate remained true.  The trial court found the buyer liable for breach of contract and constructive fraud, and awarded damages and attorneys’ fees as equitable relief.

On appeal, the Supreme Court agreed with the buyer that any duty between the parties arose solely by virtue of the purchase agreement, barring the seller’s actual and constructive fraud claims.  The Court noted that “[t]he fact that the delivery of the bring down certificate was a condition precedent to closing rather than a contractual duty, ‘does not take the fraud outside of the contractual relationship.’”  But for the purchase agreement, the buyer had no duty to provide the seller with the certificate.

While the Court’s opinion also addressed causation and damages, its holding on the source of duty rule is particularly beneficial to the mortgage industry in Virginia where breach of contract claims are sometimes paired with claims of fraud.

On December 12, a federal judge dismissed a challenge to the Office of the Comptroller of the Currency’s proposal to issue special purpose national bank charters to financial technology firms, finding that the plaintiff – the New York State Department of Financial Services – lacks standing and that the claims asserted are not ripe because the OCC’s proposal is not yet final.

The OCC’s proposal emerged from an initiative to promote innovation in the financial services industry. In August 2015, the OCC announced its intent to develop a “framework to evaluate new and innovative financial products and services.”[1] According to the OCC, that effort was necessary because of the perception, shared by many fintech firms, that it is “too difficult to get new ideas through the regulatory approval process.”[2]

In September 2016, the OCC announced that, as part of its innovation initiative, it was “considering how best to implement a regulatory framework that is receptive to responsible innovation, such as advances in financial technology,” and “whether a special purpose charter could be an appropriate entity for the delivery of banking services in new ways.”[3] And in December 2016, the OCC requested public comments on “whether it would be appropriate for the OCC to consider granting a special purpose national bank charter to a fintech company.”[4]

The OCC’s announcement and request for public comment kicked off a vigorous debate. State regulators, including the New York State Department of Financial Services, submitted comments to the OCC opposing its proposal. But many fintech firms welcomed the proposal and submitted comments to the OCC supporting it.

Then, in response to signals that the OCC was moving forward with its proposal, the New York State Department of Financial Services filed a lawsuit challenging the OCC’s authority to do so.

The Department alleged that the OCC’s proposal exceeds its statutory authority and violates the Tenth Amendment of the U.S. Constitution. Those causes of action were grounded in perceived harms. Specifically, the Department alleged that the OCC’s proposal would be “destructive” and would cause “concrete harm to New York’s financial market stability and consumer protection controls.”[5]

Without addressing the merits of those allegations, however, U.S. District Court Judge Naomi Reice Buchwald found that the Department lacks standing and that its claims are not ripe because, according to the Court, the OCC “has not reached a final ‘Fintech Charter Decision.’”[6]

According to Judge Buchwald, the Department’s “alleged injuries will only become sufficiently imminent to confer standing once the OCC makes a final determination that it will issue [special purpose national bank] charters to fintech companies.”[7]

Because Judge Buchwald dismissed the Department’s complaint without prejudice, we expect the Department to promptly refile its complaint if the OCC finalizes its proposal to issue national bank charters to fintech firms.

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[1] See Remarks of Thomas J. Curry, Comptroller of the Currency, Before the Federal Home Loan Bank of Chicago. August 7, 2015 (https://www.occ.gov/news-issuances/speeches/2015/pub-speech-2015-111.pdf) (hereinafter, “Remarks”).

[2] Id.

[3] See Proposed Rulemaking, Receiverships for Uninsured National Banks, 81 Fed. Reg. 62,835 (Sept. 13, 2016).

[4] Office of the Comptroller of the Currency, “Exploring Special Purpose National Bank Charters for Fintech Companies,” December 2016 (https://www.occ.gov/topics/responsible-innovation/comments/special-purpose-national-bank-charters-for-fintech.pdf).

[5] Complaint, Vullo v. Office of the Comptroller of the Currency, No. 1:17-cv-03574 (S.D.N.Y. filed May 12, 2017), ECF No. 1.

[6] Order, Vullo v. Office of the Comptroller of the Currency, No. 1:17-cv-03574 (S.D.N.Y. entered Dec. 12, 2017), ECF No. 30.

[7] Id.

On December 8, the United States Supreme Court agreed to decide whether the tolling rule adopted in American Pipe & Construction Co. v. Utah i.e., that the filing of a class action tolls the limitations period for a purported class member’s individual claims – permits a previously absent class member to bring a subsequent and otherwise untimely class action.

The federal appellate courts have split on that question.  The First, Second, Third, Fifth, Eighth, and Eleventh circuits have held that American Pipe tolling only permits subsequent individual actions.  However, the Sixth, Seventh, and Ninth circuits have held that American Pipe tolling also permits subsequent class actions.

In the case before the Supreme Court, China Agritech Inc. v. Resh, shareholders of China Agritech filed a putative class action alleging that the company committed securities fraud.  China Agritech moved to dismiss, arguing that the putative class action was filed after the applicable two-year limitations period had lapsed and was thus untimely.  In response, the plaintiffs argued that, under American Pipe, the action was timely because the limitations period was tolled during the pendency of two earlier-filed but defective class actions against the same defendants based on the same underlying events.

The district court granted China Agritech’s motion to dismiss, finding that the putative class action was untimely, but the Ninth Circuit reversed the district court’s decision.

The Ninth Circuit noted that the American Pipe tolling rule was adopted to “promote economy in litigation” and that, absent tolling, “[p]otential class members would be induced to file protective motions to intervene or to join in the event that a class was later found unsuitable.”  Relying in large part on that rationale, the Ninth Circuit then held that “once the statute of limitations has been tolled, it remains tolled for all members of the putative class until class certification is denied,” and that, at that point, members of the putative class are entitled to bring individual suits “either separately or jointly.”

In urging the Court to grant certiorari, China Agritech argued that the Ninth Circuit’s decision would lead to forum shopping.  The U.S. Chamber of Commerce agreed, arguing that the Ninth Circuit’s decision “erroneously extends a judicially created tolling doctrine to effectively eliminate Congressionally mandated statutes of limitations.”

The Court is expected to issue a decision in the case before the end of its term in June 2018.

The Board of Governors of the Federal Reserve System recently issued a Consent Order against Peoples Bank, based in Lawrence, Kansas, to settle claims of deceptive residential mortgage origination practices that arose from the bank’s charging of fees in mortgage originations.  The Federal Reserve alleged that Peoples told mortgage borrowers that certain additional fees that the borrowers paid as discount points would lower the borrowers’ interest rates.  The Federal Reserve’s investigation determined that many borrowers did not, in fact, receive a reduced interest rate.  The Federal Reserve alleged this practice violated Section 5 of the Federal Trade Commission Act (“FTC Act”).

The Consent Order requires Peoples to pay approximately $2.8 million into an account to be used to provide restitution to the borrowers.  Additionally, Peoples must develop a plan that provides for restitution to each borrower who, in the course of obtaining a mortgage loan from Peoples, paid discount points that did not reduce the borrowers’ interest rate.  The Consent Order also requires Peoples to avoid any future violation of Section 5 of the FTC Act.

A Texas-based payment processor agreed on November 1 to pay $9 million to settle a putative class action brought under the Telephone Consumer Protection Act in the United States District Court for the Northern District of California.  According to the plaintiffs, Pivotal Payments, Inc. failed to ensure that a third party it hired to make marketing calls on its behalf complied with the TCPA, which prohibits telemarketing calls to cellular telephone numbers without call recipients’ prior express written consent.

Pivotal Payments allegedly included a provision in its contract with the marketing firm that mandated TCPA compliance.  However, the marketing firm allegedly violated the contract by calling cell phone numbers without first obtaining the recipients’ prior express consent.  Although Pivotal Payments initially filed a third-party complaint against the marketing firm seeking indemnification, it voluntarily dismissed such claims less than a month later.

After more than a year of discovery, Pivotal Payments and the putative class agreed to settlement terms for a class of over 1.9 million members.  Pivotal Payments agreed to pay $9 million to settle the TCPA claims.  Class members are each expected to receive between $20 and $60.  The settlement fund will also pay for an incentive award to the named plaintiff ($25,000), settlement administration costs (approximately $50,000), and class-action attorneys’ fees and costs (approximately $2.25 million).

It is also important to note that the District of Columbia Circuit Court of Appeals has the potential in the near future to upend litigation under the TCPA, one of the nation’s most frequently litigated statutes, as it considers the legality of the FCC’s 2015 Declaratory Ruling and Order that greatly expanded the statute’s purview. With oral argument completed in October 2016, a decision is likely imminent.

Troutman Sanders LLP has unique industry-leading expertise with TCPA compliance, with experience gained trying TCPA cases to verdict and advising Fortune 50 companies regarding their compliance strategies.  We will continue to monitor regulatory and judicial interpretation of the TCPA to identify and advise on potential risks.

In the past several years, Dish Network, LLC has found itself a target of several class actions for violations of the Telephone Consumer Protection Act.   Earlier this year, a jury found Dish Network liable for TCPA violations arising from telemarketing calls.  The North Carolina District Court trebled the jury verdict, resulting in a $61 million damages award.  Also, earlier this year, Dish Network was found liable for TCPA violations after a jury trial in an Illinois federal court that rendered a $280 million damages award against the direct-broadcast satellite service provider.

In its post-trial motions filed in the North Carolina District Court, Dish Network argued that the $61 million award should be set aside because the Illinois class action had a preclusive effect on North Carolina TCPA claims.  The Court rejected this argument, finding that Dish Network waived its right to assert the defense of res judicata because of its “prolonged silence, its representations to the Court and the plaintiffs [that two actions had no preclusive effect on each other], and failure to object to the dual prosecution of this case and the Illinois Action.”

Dish Network also argued that, if not set aside, the $61 million verdict should at least be reduced.  The Court disagreed, concluding that the treble damages did not improperly punish Dish Network based on its “past compliance issues” with telemarketing laws.  Rather, the Court gave weight to the specific violations at issue while also considering the evidence of “Dish’s historic and general non-compliance with telemarketing laws.”  The Court also rejected as “inaccurate and nonsensical” Dish Network’s argument that no deterrence was necessary because the evidence in support of deterrence went back more than a decade.  The Court emphasized that the need for deterrence was greater precisely because non-compliance with the TCPA continued over the course of many years.

Simultaneous prosecution in several states of class actions based on the same facts is not a rare occurrence.  A global strategy for handling such actions is vital to reducing the risk of excessive and duplicative damages awards.

The Court’s opinion can be found here.

On September 18, in an en banc review, the Court of Appeals for the Eleventh Circuit overruled, in part, seminal cases Barger v. City of Cartersville, 348 F.3d 1289 (11th Cir. 2003) and Burnes v. Pemco Aeroplex, Inc., 291 F.3d 1282 (11th Cir. 2002), adopting a totality-of-the-circumstances analysis when facing questions of judicial estoppel.  In Barger and Burnes, the Court endorsed an inference that a plaintiff’s claims are barred by judicial estoppel, without the defendant having to prove the plaintiff’s intent to mislead the court, when the plaintiff fails to disclose a lawsuit in a chapter 7 bankruptcy.

In Slater v. U.S. Steel Corp., Case No. 12-15548, plaintiff Sandra Slater filed suit against her employer, U.S. Steel, with allegations of discrimination and retaliation (the “discrimination suit”).  During the pendency of her discrimination suit, Slater filed for chapter 7 bankruptcy but failed to list the discrimination suit as an asset in her bankruptcy schedule.  Slater’s bankruptcy trustee eventually issued a Report of No Distribution, and Slater’s bankruptcy estate was fully administered.

After Slater’s bankruptcy, U.S. Steel sought summary judgment in the discrimination suit, arguing that Slater was judicially estopped from asserting her claims because she failed to list her suit as an asset in her bankruptcy.  The District Court granted U.S. Steel’s motion, even though the bankruptcy court reopened Slater’s bankruptcy case, converted it to a chapter 13, and allowed Slater to continue her suit, without penalty.

The district court, relying on Burnes and Barger, rejected Slater’s arguments that her omission of her civil claims was inadvertent and not intended to “thwart judicial process.”  The district court reasoned that Slater had motive to conceal her claims to prevent creditors from receiving a payout if a money judgment was entered in her favor.  The district court also reasoned that nondisclosure is “inadvertent only when . . . the debtor either lacks knowledge of the undisclosed claims or has no motive for their concealment.”

The Eleventh Circuit, in an en banc review, overruled its prior precedent outlined in Barger and Burnes.  The Court stated that Barger and Burnes “endorsed an inference that a plaintiff who failed to disclose a lawsuit in a chapter 7 bankruptcy intended to manipulate that judicial system because the omission was not inadvertent.”  In those cases, the Court determined that nondisclosure of a known civil suit or cause of action during bankruptcy precluded the party from filing that civil suit at a later date whether or not the party corrected his bankruptcy disclosures without penalty.

The Circuit Court first discussed the main differences between chapter 7 and chapter 13 bankruptcy proceedings.  Particularly, in chapter 7 the debtor’s estate is controlled by the trustee, and the creditors are paid with pre-petition assets.  In a chapter 13 bankruptcy, the debtor controls their estate, and their creditors are paid with post-petition earnings.  In chapter 13, the debtor retains standing to continue to pursue the civil claim.  This distinction is important and may limit the applicability of the Court’s ruling to chapter 13 cases.

The Circuit Court then discussed the principle of judicial estoppel.  The Court reaffirmed that a district court may apply judicial estoppel when two elements are satisfied: (1) the plaintiff took a position under oath in the bankruptcy proceeding that was inconsistent with the plaintiff’s pursuit of the civil lawsuit, and (2) the plaintiff intended to make a mockery of the judicial system.  The Circuit Court, however, focused on the second element, finding, for example, that a party could fail to list a civil suit because the party misunderstood the instructions on the schedule without any intent to mock the judicial system.

The Circuit Court found that a broader inquiry is required for judicial estoppel, allowing courts to consider the party’s actions to determine whether the debtor intended to mislead the court and creditors.  The Court reasoned that the bankruptcy courts do not view omissions on a bankruptcy schedule as sufficient intent to mislead the Court, finding there is “no good reason why. . . a district court should not consider the bankruptcy court’s treatment of the nondisclosure.”  The Court noted that the Bankruptcy Code allows debtors to amend their schedules at any time and contains rules for dealing with intentional non-disclosures, preventing manipulation of the court.  The Circuit Court further suggested that courts look at plaintiffs’ “level of sophistication,” any explanation for the omission, whether the bankruptcy disclosures were corrected, and whether the bankruptcy court took issue with the plaintiff’s nondisclosure, before determining that the party had ill intentions and granting a motion for judicial estoppel.

The Circuit Court noted that its present ruling was consistent with the principals of judicial estoppel by allowing courts to ensure the debtor had the requisite culpability when the debtor failed to list an asset in bankruptcy without awarding a defendant “an unjust windfall.”

The Court remanded the case to the panel to determine whether the district court abused its discretion in applying judicial estoppel to Slater’s civil lawsuit.

On September 20, the Consumer Financial Protection Bureau issued proposed policy guidance that would modify a mortgage disclosure law in an effort to protect applicants’ and borrowers’ privacy.

In 2015, the CFPB finalized changes to the Home Mortgage Disclosure Act (“HMDA”), which requires lenders to report and disclose to the public certain information about their mortgage lending activities.  The HMDA’s purpose is to help determine whether financial institutions are serving the housing needs of their communities; to assist public officials in distributing public-sector investment and attracting private investment in areas where it is needed; and to identify possible discriminatory lending patterns and enforce anti-discrimination statutes.  To achieve these goals, the CFPB plans to disclose most of the collected data to the public in 2019.

The CFPB proposes to exclude the following data from public disclosure to protect the privacy of applicants and borrowers:

  • the universal loan identification number;
  • the application date;
  • the date of action taken by the financial institution on a covered loan or application;
  • the address of the property securing the loan or, in the case of an application, proposed to secure the loan;
  • the applicant’s credit score relied on in making the credit decision;
  • the unique identification number assigned by the Nationwide Mortgage Licensing System and Registry for the mortgage loan originator;
  • the result generated by the automated underwriting system used by the financial institution to evaluate the application; and
  • free-form text fields used to report the following: applicant or borrower race and ethnicity; the name and version of the credit scoring model used to generate each credit score or credit scores relied on in making the credit decision; the principal reason or reasons the financial institution denied the application, if applicable; and the automated underwriting system name.

The CFPB also proposes to reduce the specificity of some information disclosed to the public.  For instance, the applicant’s or borrower’s age will be published as a range rather than as a specific number, and property values or loan amounts will be reported in $10,000 increments.

The CFPB has said that these proposed changes seek to maintain a balance of privacy risks and benefits of disclosure, and it has invited public comment on the proposals.

Also on September 20, in a related action, the CFPB issued a final rule modifying Equal Credit Opportunity Act regulations to provide flexibility and clarity to mortgage lenders in the collection of consumer ethnicity and race information.  ECOA is aimed at protecting against discrimination in the financial marketplace and restricts lenders’ ability to ask consumers about their race, color, religion, national origin, or gender, except in certain circumstances.  The finalized rule now allows lenders to ask mortgage applicants more detailed questions about their race and ethnicity and provides lenders the ability to use a broader range of uniform documents, including the Uniform Residential Loan Application.

In a September 19 speech at the Federal Communications Bar Association in Washington, FTC Acting Chairman Maureen K. Ohlhausen stated that the Commission should focus on addressing instances of “substantial consumer injury” in deciding which cases to pursue.  Echoing (intentionally or not) the language of the Supreme Court’s foundational decision in Spokeo, Inc. v. Robins, Ohlhausen outlined the types of concrete injury—as opposed to “hypothetical” injury—potentially sufficient to warrant FTC involvement.

Ohlhausen began her speech by laying out, in broad strokes, the FTC’s enforcement powers and its track record of bringing enforcement actions on a case-by-case basis.  She stressed that the FTC is the “primary U.S. enforcer of commercial privacy and data security obligations” and stated the agency takes that charge “very seriously.”

Discussing the types of incidents that warrant FTC action, Ohlhausen focused her discussion on consumer injury, noting it is part of the FTC’s Section 5 unfairness standard.  She also touted a focus on consumer injury “plain good policy,” with the government doing the most good when it can address “substantial consumer injury” instead of expending resources to prevent “hypothetical injuries.”

With that focus in mind, Ohlhausen described in general terms five types of inaccuracies she sees as paradigmatic of warranting FTC focus, though she cautioned that the list was neither exhaustive nor intended to provide legal guidance on what the FTC considers substantial injury.  She noted the FTC had focused on the following types of harms:

(1)     deception injury or subverting consumer choice, relevant in instances where a company has misled consumers through material claims about a product or service’s privacy or security features, inducing consumers to make a choice that they otherwise wouldn’t have made;

(2)     financial injury, relevant across various fact patterns of consumers suffering pecuniary loss;

(3)     health or safety injury, relevant when, for example, personal information is misused by stalkers or abusive former spouses for nefarious purposes;

(4)     unwarranted intrusion injury, relevant in, for example, claims for violation of the Telephone Consumer Protection Act through unsolicited spam phone calls; and

(5)     reputational injury, which she acknowledged overlaps with the other categories, and is sometimes the reason why another type of harm is material to the consumer.

Ohlhausen also noted that, in addition to the type of injury, the FTC also considers its magnitude, both individually and in aggregate.  She also stated, without further elaboration, that the FTC considers “both realized injuries as well as those that are likely.”

Together, Ohlhausen’s comments provide an informative look at the types of issues sufficient to catch the attention of regulators at the FTC, and a framework by which injuries can be assessed to determine whether they might warrant enforcement action.

Troutman Sanders LLP will continue to monitor FTC policy statements and any related enforcement actions.