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Articles in Category: Financial Services

CFPB’s Proposed Arbitration Limitations Aim to Restore Consumer Class-Action Relief

By: James R. Bryan

100267765-debt_collection_gettyp.1910x1000In the Dodd-Frank Act, Congress directed the Consumer Financial Protection Bureau (CFPB) to study pre-dispute arbitration agreements and to issue regulations restricting or prohibiting the use of arbitration agreements if the CFPB found that such rules would be in the public interest and for the protection of consumers. Pursuant to that authority, and following an extensive yet controversial study on the issue, the CFPB is now proposing limitations on arbitration agreements for covered providers of consumer financial products and services.

The proposal is based on the CFPB’s preliminary finding that pre-dispute arbitration agreements are being used to prevent consumers from seeking relief from legal violations on a class basis and that consumers generally do not file individual lawsuits or arbitration cases to obtain relief, especially in low-dollar-value cases. In the following, I address a few basic questions about the proposed rule.

1. If this new rule takes effect, what will be the immediate impact on financial services companies?

If the new rule takes effect, the immediate impact will likely be an increase in the number of class action complaints filed against financial services companies. The proposal being considered would not ban arbitration clauses in their entirety but would ban arbitration clauses that prevent consumers from participating in a class action.

Moreover, the current proposal would require financial services companies to include language in arbitration clauses explicitly stating that “[w]e agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.”

 

2. Which financial products will incur the greatest risk of being targeted in consumer class actions? 

 The CFPB is proposing to cover a wide variety of consumer financial products and services that it believes are in or tied to the core consumer financial markets of lending money, storing money, and moving or exchanging money.

For example, these products and services include: (1) most types of consumer lending (such as making secured loans or unsecured loans or issuing credit cards); activities related to that consumer lending (such as providing referrals, servicing, credit monitoring, debt relief, and debt collection services, among others, as well as the purchasing or acquiring of such consumer loans); and extending and brokering those automobile leases that are consumer financial products or services; (2) storing funds or other monetary value for consumers (such as providing deposit accounts); and (3) providing consumer services related to the movement or conversion of money (such as certain types of payment processing activities, transmitting and exchanging funds, and cashing checks).

It should be noted, however, that the Dodd-Frank Act already prohibited arbitration clauses in residential mortgages.

 

3. What will be the longer-term impact of removing mandatory arbitration clauses?

Industry groups claim the longer-term impact of removing mandatory arbitration clauses is that the increased costs of class action litigation will be passed on to consumers. On the other hand, consumer groups claim that the potential for class action litigation will ensure that businesses are held accountable and will comply with the law.

Considering its implications, the new CFPB rule will likely face immediate legal challenges based on recent U.S. Supreme Court precedent, such as AT&T Mobility v. Concepcion, as well as challenges to the CFPB’s authority to establish such a rule.

 

4. What should financial services companies do right now?   

Financial services companies should start preparing now and be aware that the proposed rule would require providers to insert language into their arbitration agreements to explain the effect of the rule. Companies should determine whether any of their activities are covered by the proposed regulation and review the arbitration provisions in their existing contracts. Financial services providers should also consider whether to participate in the public comment process on the proposed rule.

As currently worded, however, the CFPB’s proposed rule will only apply to agreements entered into after the rule takes effect, which will be 30 days after final publication in the Federal Register. Thus, the rule is not expressly grandfathered into prior contracts, and companies should be afforded sufficient time to adjust their standard agreements.

 

JimBryan_BW_webJim Bryan is a partner at León Cosgrove who represents plaintiffs and defendants in complex commercial litigation matters– including class actions– across the country.

TILA-RESPA Integration and Lender Obligations

By: James R. Bryan

mortgage-home-keys-thinkstock-750xx2040-1148-0-162On October 3, 2015, the TILA-RESPA Integrated Disclosure Rule (TRID) went into effect. Its provisions are aimed at improving consumer understanding of the mortgage process by increasing transparency, enabling a comparison between loan opportunities and avoiding any last minute surprises at the closing table. While this increased consumer protection is well-intentioned, lenders are faced with a series of challenges as they rework their current processes to ensure compliance with these regulations.

Specifically, the TRID regulations require lenders to provide potential borrowers with a good faith estimate of their loan configuration within three business days of receiving an application. See 12 C.F.R. 1026.19 (e)(ii)(A) & (iii)(A). This places a substantial burden on the lender to expedite a preliminary review of the loan, without sacrificing the accuracy of that review. Indeed, even where a mortgage broker (oppose to a lender) provides this preliminary estimate, the lender remains obligated to ensure substantive compliance and timely delivery to the potential borrower.   See 12 C.F.R. 1026.19 (e)(ii)(A) & (iii)(A).

It is important to note that a consumer receiving this good faith estimate will not be under any obligation to pursue the loan, but will be empowered to compare a variety of lender offerings and assess which is best suited for its needs. While the benefits to the consumer are apparent, a significant burden is placed on the lender, along with corresponding exposure for its potential failure to comply without any guaranteed return on those efforts.

Under the TRID provisions, a lender is also obligated to provide potential borrowers with certain disclosures at least three days prior to a closing. This three-day waiting period is mandatory and lenders must undertake processes to ensure their adherence to same. Inevitably, there will be instances where lenders provide these closing disclosures in compliance with the three-day waiting period, but are subsequently required to reissue them based on inaccuracies they contain. In that instance, depending on the deficiency at hand, the lender may be obligated to wait an additional three days after issuing the corrected disclosure before consummating the loan. 12 C.F.R. 1026.19(f)(2)(ii).

While this might seem minimally disruptive on a case-by-case basis, in the aggregate, lenders can expect an increase in the time and costs associated with a closing as they ensure their compliance with this three-day waiting period. That being said, it is worth underscoring that not every deficiency requires a new three-day waiting period, and further an exception to the three-day waiting period exists where the consumer modifies or waives its right due to a bona fide personal financial emergency. 12 C.F.R. 1026.19(f)(1)(iv) & 12 C.F.R. 1026.19(f)(2)(i).

 

A lender’s “Good Faith” Effort to Comply

While TRID imposes several obligations on a lender to revise its mortgage origination and closing processes, one of the most difficult requirements is ensuring a lender undertakes “good faith” efforts to comply. That is, while the standard for assessing a lender’s compliance with TRID is expressly provided for in the statute, what is required to ensure “good faith” efforts have been expended is rather ambiguous. It is clear, however, that “good faith” efforts imposes different obligations at each stage of the lending process and compliance should be determined with the assistance of counsel.

With that in mind, a preliminary interpretation by the CFPB indicates that at a minimum, any good faith estimate, disclosure or other documentation provided to a potential borrower must be based on the best information reasonably available to the lender at the time it is made. See 12 C.F.R. 1026.19 (e)(1)(ii) & 12 C.F.R. 1026.17 (c)(2)(i). This “reasonably available” requirement means that a lender must exercise due diligence in obtaining information necessary to comply with the disclosure requirements of TRID. Further, the legislature has provided certain TRID approved disclosure forms, the use of which bolsters a lender’s the position that good faith efforts to comply have been made.

 

Potential Litigation Resulting from TRID

 As with any consumer protection statute, lenders can expect litigation will inevitably ensue in relation to their compliance (or non-compliance) with TRID. While valid claims should not be discredited, we can certainly expect a series of other claims that are simply attempting to test the boundaries of the statute. Thus, in the short term, it is likely that litigation will increase as a result of the implementation of TRID. In the long term, however, we may see a reduction in the number of valid claims from consumers who previously made assertions of duress and undue influence when entering into their mortgage loan, or assertions that they were unclear on what they were agreeing to at the time of closing.

Specifically, since TRID now provides consumers with the opportunity to review their loan documents well in advance of closing, it will be much harder for consumers to justifiably contend that they didn’t have a chance to inspect the closing documents or were pressured by the lender to agree to the contents despite alleged deficiencies therein. There may also be a reduction in the number of mortgage loan defaults over time, since potential borrowers will have an additional opportunity to analyze the exact terms of the loan and assess whether they are financially comfortable with those terms prior to consummating the loan.

While we won’t know for certain until the TRID regulations are put to the test in a judicial setting, if the statute is effective in accomplishing its purpose, there should be a reduction in certain types of claims against lenders in the long-term.

 

Potential Causes of Actions for TRID Enforcement

One issue that is sure to be the subject of litigation in the near future is the extent to which TRID provides a private cause of action for a lender’s failure to comply. TRID, which by definition integrates both TILA and RESPA, blurs the lines between those two regulations. While TILA traditionally offers a private right of action, RESPA generally does not. With respect to TRID, the CFPB’s implementation of that provision is under Regulation Z, the same regulation that implements TILA.

Thus, lenders can expect an argument to be made that the statutory remedies proffered under TILA–which includes enforcement through a private cause of action–are now available for violations of TRID. To the extent this position is endorsed by the courts, TRID would effectively create a private cause of action for certain disclosure violations (which encompass RESPA) where none previously exists.

Until litigation over TRID occurs and courts rule on what constitutes acceptable lender compliance and means of enforcement, lenders, along with their counsel, will be left to assess how best to proceed. Once courts have begun to rule on the legislative intent and adequacy of compliance, along with potential means of enforcement, lenders will assume the steep task and corresponding cost of ensuring their conduct is consistent with TRID in hopes that its potential long-term benefits accrue to both the consumer and lender.

 

 

CarlyKligler_BW_webCarly A. Kligler is an associate at León Cosgrove LLC who focuses on complex commercial litigation and consumer finance law. Formerly as in-house counsel for a software company, she specialized in data privacy, cyber security and regulatory compliance.

Mortgage Industry Awaits Florida Supreme Court Bartram Decision on Foreclosure Statute of Limitations

By: James R. Bryan

Currently pending before the Florida Supreme Court, in U.S. Bank National Association v. Bartram, is a question critical to the residential mortgage industry, certified by Florida’s Fifth District Court of Appeal as a “matter of great public importance.” The certified question is:

Does acceleration of payments due under a note and mortgage in a foreclosure action that was dismissed pursuant to rule 1.420(b), Florida Rules of Civil Procedure, trigger application of the statute of limitations to prevent a subsequent foreclosure action by the mortgagee based on all payment defaults occurring subsequent to dismissal of the first foreclosure suit?

In essenHome-for-sale-The-Registry-real-estatece, the Supreme Court is called upon to decide whether an action to foreclose a mortgage containing an optional acceleration clause is barred by Florida’s five-year statute of limitations, when an unsuccessful prior action to accelerate and foreclose the mortgage was filed in excess of five years earlier. The limitations period for an action to foreclose a mortgage begins to run, where the mortgage contains an optional acceleration clause, when the right to accelerate is exercised, typically by a demand in a foreclosure co
mplaint for the entire amount secured by the mortgage.

The Fifth District in Bartram, relying on Florida Supreme Court precedent in Singleton v. Greymar Associates, answered the certified question in the negative. The Fifth District concluded that an action to foreclose a mortgage is not barred by the statute of limitations simply because an unsuccessful action was filed in excess of five years earlier. The Court of Appeal held:

Based on Singleton, a default occurring after a failed foreclosure attempt creates a new cause of action for statute of limitations purposes, even where acceleration had been triggered and the first case was dismissed on its merits. Therefore, we conclude that a foreclosure action for default in payments occurring after the order of dismissal in the first foreclosure action is not barred by the statute of limitations. . . .

In Singleton, the Supreme Court expressly recognized “the unique nature of the mortgage obligation and the continuing obligations of the parties in that relationship.” It held that “successive foreclosure suits” are not barred by the doctrine of res judicata, “regardless of whether or not the mortgagee sought to accelerate payments on the note in the first suit,” because a “subsequent and separate alleged default create[s] a new and independent right of the mortgagee to accelerate payment on the note in a subsequent foreclosure action.” In other words, under Singleton, an action to accelerate and foreclose a mortgage, based on a different act or date of default not alleged in a dismissed prior action, creates a new and independent cause of action. The Fifth District therefore concluded, as to that new and independent cause of action, that a new and independent limitations period applies.

Following the Fifth District’s Opinion in Bartram, the Fourth and First Districts followed suit. Likewise relying on Singleton, the Fourth District, in Evergrene Partners, Inc. v. Citibank, N.A., affirmed a trial court’s dismissal with prejudice of a claim to cancel two mortgages, based on allegations that the statute of limitations applicable to an action to foreclose the mortgages had expired. The Fourth District held:

While a foreclosure action with an acceleration of the debt may bar a subsequent foreclosure action based on the same event of default, it does not bar subsequent actions and acceleration based upon different events of default. . . .Therefore, the statute of limitations has not run on all of the payments due pursuant to the note, and the mortgage is still enforceable based upon subsequent acts of default.

More recently, also relying on Singleton, the First District in Nationstar Mortg., LLC v. Brown reversed a trial court’s decision that an action to accelerate and foreclose a mortgage was barred by the statute of limitations, holding:

We find that appellant’s assertion of the right to accelerate was not irrevocably “exercised” within the meaning of cases defining accrual for foreclosure actions, when the right was merely asserted and then dismissed without prejudice.

 The sole appellate outlier on this issue is Deutsche Bank Trust Co. Americas v. Beauvais, an Opinion from the Third District Court of Appeal. The Third District, in Beauvais, held that the action to accelerate and foreclose at issue in that case was barred by the statute of limitations, because a prioraction was filed more than five years earlier. Cognizant that its Opinion was otherwise irreconcilable with Singleton, the Beauvais court concluded that the critical principle articulated in Singleton—that the mortgage obligations are continuing and a new default, based on a different act or date of default not alleged in a dismissed action, creates a new cause of action—applies only where the prior action was dismissed with prejudice. The Third District explained:

In Singleton, the dismissal with prejudice disposed not only of every issue actually adjudicated, but every justiciable issue as well. . . . This operated as an adjudication on the merits . . . Thus, in Singleton . . . the order of dismissal with prejudice served to adjudicate, in favor of the borrower, the merits of the lender’s claim and the borrower’s defenses, thus determining there was no valid default (and, by extension, no valid or effective acceleration of the debt). It is this merits determination that the Supreme Court addressed in Singleton, and is the issue which renders the Singleton analysis inapplicable to the instant case. . . .

The Third District’s reasoning in this regard is flawed in a number of respects. Most fundamentally, a dismissal with prejudice, such as the dismissal of the first action in Singleton (for failure to attend a case management conference) is not, as a matter of law, a finding of fact, much less a finding of fact (inverting the burden of proof) that all allegations/elements of a claim were disproven, i.e., “determining there was no valid default (and, by extension, no valid or effective acceleration of the debt).” The failure to prove a default (as a result of a dismissal for failure to attend a case management conference, or any other reason) is simply not an implicit counter-factual finding that the borrower made his or her monthly mortgage loan payments, as Beauvais would have it. A dismissal with prejudice is an “adjudication on the merits” solely for purposes of res judicata, its effect being no more than a bar to the same cause of action again. Indeed, the case cited by the Third District in support of its holding that “every justiciable issue” was disposed of, i.e., that there was an “implicit” finding of fact that there was no default and therefore no valid acceleration, makes clear “[t]his pronouncement is considered by us as controlling only when res adjudicata is the proper test.”  Hinchee v. Fisher, 93 So. 2d 351, 353 (Fla. 1957).

A Motion for Rehearing En Banc is pending in Beauvais. Oral arguments were heard on November 12, 2015.

Notably, federal courts across Florida, in considering the issue, have routinely and consistently agreed with the reasoning in Bartram, Evergrene and Nationstar. And in a number of cases, the federal courts have expressly rejected the opinion in Beauvais.

Florida’s Supreme Court heard oral arguments in Bartram on November 4, 2015. Their ruling is expected in April 2016.

The author gratefully acknowledges the contributions to this article of León Cosgrove paralegal Sam Vincent.

 

BenWeinberg_BW_webBenjamin Weinberg is a partner at León Cosgrove LLC who focuses his practice on financial services litigation and government enforcement actions involving a wide array of claims, including consumer protection statutes, deceptive and unfair trade practices, fraud, breach of fiduciary duty and foreclosure class actions. bweinberg@leoncosgrove.com

New HMDA Rule Doubles Data Collection for Mortgage Lenders

By: James R. Bryan

Real-Estate-Today

The Home Mortgage Disclosure Act (HMDA) was passed into law in 1975. The Federal Reserve Board implements the Act through Regulation C, 12 CFR 203, requiring lending institutions to report public loan data to government authorities.

The HMDA requires financial institutions to maintain, report, and publicly disclose information about mortgage lending. The Consumer Financial Protection Bureau (CFPB) – to which the Dodd-Frank Act transferred Reg. C rule-writing authority – regards this data as a tool for gauging whether lenders are serving the housing needs of their neighborhoods and communities. The data is also intended to equip public officials with information that assists in public-sector investment distribution in an effort to attract new private sector investment, and to both shed light on and prevent discriminatory lending patterns.

On October 15, 2015, the CFPB issued a new rule that vastly expands mortgage data collection and reporting under the HMDA and Regulation C. These changes are intended to improve the quality of information about today’s housing market: to help the CFPB identify emerging risk and potential discriminatory lending practices in the marketplace, and to improve monitoring of fair lending compliance and access to credit. It is hoped than an improved ability to screen for possible fair lending issues would assist both institutions and regulators in focusing their attention on the riskiest areas of the market where fair lending problems are most likely to exist.

By the time the new rule goes into effect fully on January 1, 2018, lenders must have updated their information and compliance systems to capture the new data points and report all required information for calendar year 2018 by March 1, 2019. Reporting requirements will be expanded to include loan underwriting and pricing information such as property value, term of the loan, interest rate, duration of any teaser or introductory interest rate, discount points, and the borrower’s age, credit score, and debt-to-income ratio.

The CFPB claims that this underwriting and pricing information will help it and other stakeholders monitor developments in specific markets, such as multifamily housing, affordable housing, and manufactured housing. The new rule also requires that covered lenders report, with some exceptions, information about all applications and loans collateralized by dwellings, including reverse mortgages and open-end lines of credit.

The practical effect of the new rule is that it doubles the amount of HMDA data collection and heightens fair lending scrutiny for mortgage lenders, with associated regulatory risk. Each institution’s reported data will be made publicly available, raising privacy and reputational concerns for lending institutions.

Lenders should take a proactive approach by immediately launching efforts to assess their existing information systems and staffing, if they have not already. A self-assessment should be performed prior to the rule’s effective date to identify any deficiencies that may cause the institution to be out of compliance.

If you are a lender and would like assistance working through the implications of the HMDA rule changes, our team of experienced financial services litigators at León Cosgrove LLC would be happy to discuss your needs.

 

Brendan HerbertBrendan I. Herbert is an associate at León Cosgrove LLC who focuses his practice on commercial litigation with an emphasis on representing financial institutions in all manner of complex disputes.
bherbert@leoncosgrove.com