Maintaining Consumer Protections

The 2013 Escrows Final Rule amends an existing rule that provides protections regarding assessments of consumers’ ability to repay and prepayment penalties on certain “higher-priced” mortgage loans. These protections include, for example, lengthening the time for which a mandatory escrow account established for a higher-priced mortgage loan must be maintained. The 2013 Escrows Final Rule, however, can be interpreted to cut off the old protections pertaining to “higher-priced” mortgage loans before the new expanded protections take effect. This would create a six-month period when those consumer protections would not apply. The clarifying and technical amendments to the 2013 Escrows Final Rule establish a temporary provision to ensure existing protections remain in place for higher-priced mortgage loans until the expanded provisions take effect in January 2014.

“Rural” and “Underserved” Definitions

The 2013 Escrows Final Rule also established an exemption from the escrow requirement for certain creditors that operate predominantly in “rural” or “underserved” areas. The CFPB’s amendments to the 2013 Escrows Final Rule clarify how to determine whether or not a county is considered “rural” or “underserved” for purposes of applying an exemption in the 2013 Escrows Final Rule and special provisions adopted in three other Dodd-Frank Act mortgage rules issued in January 2013. The CFBP used the amendments to the 2013 Escrows Final Rule to compile its final 2013 rural or underserved counties list.

Mais sued under the Telephone Consumer Protection Act which prohibits autodialed calls made to cell phones without the called party’s express consent. The court granted Mais summary judgment finding that Gulf Coast lacked prior express consent to call Mais using an autodialer. It stated that the FCC’s 2008 ruling that the provision of a cell phone number to a creditor, e.g., as part of a credit application, reasonably evidences prior express consent by the cell phone subscriber to be contacted at that number regarding the debt” was inconsistent with the TCPA’s plain language. The court applied the dictionary definitions of “express“ and “implied“ to reach its conclusion. It stated:

The FCC was not in fact talking about “express consent,” but is instead engraphing into the statute an additional exception for “implied consent” – - one that Congress did not include. Although it may be reasonable to presume that an individual, in providing his cell phone number on a credit application, consents to be called at that number by the creditor, such consent is “implied” through the individual’s conduct – - that is, his act of writing down his number on the application. He has not directly, clearly, and unmistakably stated that the creditor may call him, and so he has not given “express consent.” The FCC’s construction is inconsistent with the statute’s plain language because it impermissibly amends the TCPA to provide an exception for ‘prior express or implied consent.’ Congress could have written the statute that way but it didn’t. And because it didn’t, the FCC’s contrary construction is not entitled to deference.”

The court further explained that the cases where mere provision of a telephone number was found to be express consent arose in the debtor creditor context. It made a distinction for the situation before it where the number was provided in a hospital emergency room. However, that distinction was not critical to the ruling.

This case not only questions the 2008 TCPA Ruling but also the FCC’s original 1992 Report and Order, which provided, “telephone subscribers who knowingly release their phone numbers to a business will be deemed to have given their invitation or consent to the called at the number which they have given, absent instructions to the contrary.” It, along with Thrasher-Lyon v. CCS Commercial, LLC which is currently pending in the Seventh Circuit Court of Appeals, questions not just the FCC orders but twenty years of jurisprudence around this important issue.

The CFPB recognized that demand exists for small dollar credit products, and that they can be helpful for consumers if they are structured to facilitate successful repayment without the need to repeatedly borrow, as they come with a high cost. However, the CFPB was concerned that if the cost and structure of a loan made it difficult to repay, these products may further impair a consumer’s finances. Thus, the CFPB focused on the problem of “sustained use” – the long-term use of a short-term, high-cost product that is repeatedly rolled over, or re-borrowed, resulting in a high level of accumulated fees.

The CFPB report concluded that two-thirds of consumers who use payday loans had seven or more such loans in a year, and that most of these consumers took new loans almost immediately after paying off their existing loans. The CFPB concluded that many consumers are unable to repay their loans in full and still meet their other expenses.

The CFPB fears that consumers may not understand the costs, benefits and risks of using these products. Although they appear to be simple instruments, there are complex features to them, and they seem to result in many consumers being indebted for longer than anticipated, and at a higher cost than they expected.

As for the lenders, the CFPB found that they were not attempting to determine if a consumer had an immediate need to take a loan for an unusual expense that the consumer could repay with the next paycheck, but rather that the lenders were simply relying on being repaid quickly, without regard to whether the consumer could afford the loan.

The CFPB stated that it will look into the effectiveness of limitations on these loans, such as cooling-off periods, in curbing sustained use and other harms. The CFPB concluded that “further attention is warranted to protect consumers….[T]he CFPB expects to use its authorities to provide such protections.” Thus, we can expect to see some additional regulation of payday and deposit advance loans in the future.

A new case trying to establish a class action under the FCRA was filed in the Central District of California (Moreland v. CoreLogic, Inc. (Case No. 8:13-cv-00470)). The attorneys for Moreland include Caddell and Champman, the Consumer Litigation Associates, P.C., and Francis & Mailman, P.C.  Counsel for defendant, CoreLogic, is Morrison and Foerster LLP (our fellow lender lover). Please note, commentary in this article is based upon the opinion of the author and the author alone, and should not be attributed to her firm, colleagues, clients, parents, spouse, friends, or dog. (Although, my dogs are pretty smart, so they likely agree with me.)

Moreland, the consumer, submitted a rental application and was informed that due to the information contained in a “Lease Decision” report the landlord had received from credit reporting agency (“CRA”) CoreLogic, the consumer would not be able to rent an apartment on her own. The landlord allegedly stated that it could not determine whether Moreland was being truthful about her identity due to the number of addresses and identities listed in the CoreLogic report. 

The main claims raised in the Complaint are generally summarized as:

• Impermissible Purpose:  Moreland claims that CoreLogic has a practice of  not obtaining from landlords a permissible purpose certification for the limited permissible use of Lease Decision reports, as required by the FCRA. Moreland argues that CoreLogic knows that landlords are using its reports for impermissible purposes, because CoreLogic’s report instructs landlords not to use the report directly for the purposes of making any housing decisions. (Does this sound like circular logic
• Inaccurate Reports: Moreland claims that the CoreLogic report inaccurately identified her as having several different aliases, including male names, and CoreLogic should have known that Moreland was clearly a woman. (Moreland’s first name is Susan.  Apparently, Moreland has never heard of “A Boy Named Sue.”) Thus, the Complaint contains the type of  mixed file claims that are typical against CRAs under the FCRA. 
• Lack of Access: Moreland claims that it was too difficult for her to obtain access to a copy of her credit report from CoreLogic. She claims that CoreLogic’s procedures for obtaining a free copy of her credit report was too burdensome.  She was required to complete a paper request form, sign the form under the penalty of law, mail the form to CoreLogic (gasp!  someone was required to use the US Postal system!!), and provide a photocopy of her picture identification. Moreland also claimed that the Consumer Disclosure Request Form CoreLogic provided was too long (12 pages) and complicated. (The Complaint glosses over the facts that Moreland was required to prove her identity so that individuals were not improperly obtaining a credit report about her, and the form was 12 pages long because it included the FCRA Summary of Rights that CoreLogic is legally required to provide under the FCRA. The “complicated” language she refers to was most likely the language that CoreLogic was legally required to provide.) 

Based on these facts, Moreland attempts to bring a class action lawsuit on behalf of all persons residing in the United States during the two years prior to the filing of the Complaint and continuing through the date of the resolution of the case: (a) who made a request to CoreLogic for his or her consumer file, but did not receive it; or (b) about whom CoreLogic sold a Lease Decision report. The Complaint also attempts to name separate classes for California residents.  (This separation of California members is undoubtedly an attempt by Moreland’s counsel to hedge their bets. The separation of the California members may allow the attorneys to argue that the claims under the California Consumer Credit Reporting Agencies Act (CCRAA) should be allowed to go forward, even if the federal claims under the FCRA are dismissed or the court refuses to certify a national class.) 

The Moreland case highlights the bigger issue for the consumer financial industry of whether a class action is possible under the FCRA. Due to the types of damages that are available under the FCRA, it would be extremely difficult, if not impossible, to bring a class action under the current form of the FCRA. For willful violations the FCRA authorizes: (a) actual damages sustained by a consumer of not less than $100, and not more than $1,000; (b) punitive damages; and (c) attorneys’ fees and costs. For negligent, but not willful violations, the FCRA authorizes: (a) any actual damages sustained by the consumer as a result of the failure; and (2) attorneys’ fees and costs.   

To meet the requirements for class certification, Moreland will have to demonstrate, among other requirements, that the questions of law and fact are the same for all of the class members, and that Moreland’s claims are typical of the claims of the other class members. The United States Supreme Court has made it clear that class certification is not appropriate where the court would be required to conduct a mini-trial within a trial for each class member to ascertain each class member’s damages. Thus, it would be extremely difficult, if not impossible, to prove that every single eligible class member had the exact same type and amount of actual damages as did Moreland. 

Due to the fact-specific nature of damages under the FCRA, courts are reluctant to certify class actions under the FCRA. One of the recent debates in the industry is whether class certification is even possible, and whether the FCRA should be amended to ban class actions under the FCRA. Of course, consumer advocates argue that the legislature should create a statutory exception under the FCRA that would allow for class actions. We have been watching this issue and will keep you informed on any key court decisions. We will also keep you informed of important developments in the Moreland case (such as whether consumers should be forced to use the US Postal system).

For years there has been litigation about whether banks can be held accountable for a dealer’s discriminatory markups. Some courts say yes. Some say no. The CFPB has now weighed in and as a result we can expect many more of these types of cases. The CFPB has found that giving discretion to dealers to markup loans creates a significant risk of price disparity based on race, national origin and potentially other prohibited bases.

The CFPB is encouraging institutions subject to CFPB jurisdiction to take steps to make sure they are in compliance with the Equal Credit Opportunity Act and Regulation B. The CFPB proposes that banks impose controls on dealer markup and compensation policies, monitor and address unexplained price disparities on or eliminate altogether dealer discretion to markup rates. 

The CFPB also suggests financial institutions develop a fair lending program which includes:

1. Up to date fair lending policies statements;
2. Training;
3. Monitoring for compliance with fair lending policies and procedure;
4. Review of lending policies for potential violations;
5. Analysis of loan data for potential disparities;
6. Regular assessments of the marketing of loans and;
7. Meaningful oversight of fair lending compliance. 

This program should also include the bank making sure to educate the dealers about the Equal Credit Opportunity Act, gathering dealer specific portfolio wide loan pricing data and taking corrective action against dealers who misuse the markup procedure and promptly refunding money to consumers who have unexplained disparities on their transactions. 

The bulletin is not a regulation. Its contents are not mandates.  But as we have heard before, the CFPB is the cop on the beat. This bulletin identified a new avenue for investigation. Banks have taken notice. Recent earnings calls already have revealed bank plans to cut back on dealer discretion.

The CFPB had previously included consumer complaints relating to credit cards in the database; now, the database also covers mortgage loans, other consumer loans and leases, student loans, and bank accounts and services. In expanding and releasing the publicly-accessible database, the CFPB is underscoring its commitment to soliciting and revealing consumers’ complaints about financial products and services and their providers.

The CFPB also issued a report to Congress on its findings from consumer complaints received in 2012, as required by Section 1013(b)(3)(c) of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010.

The CFPB’s Rules Relating to Investigations (Rules) describe the CFPB’s investigative processes, including the CID. While the Rules provide an important framework — and it is critical to be mindful of CFPB deadlines and procedural requirements — there are also important practical considerations beyond the Rules themselves.

Addressing a Problematic CID

Consideration should be given to assessing compliance concerns and engaging in active negotiations with the CFPB right away. A CID can be expansive, requesting “all documents” on a broadly worded subject. Compliance can be burdensome, particularly regarding ESI. If you are facing a problematic CID, you have two basic options: negotiate the terms of compliance with the Bureau or petition the Director to set aside or modify the CID. This can be a difficult decision, but must be made quickly.  The Bureau will not consider a petition to set aside or modify a CID unless you have engaged in the meet and confer process — set forth in the Rules and described below — and then will only consider issues raised in the meet and confer. Yet a CID recipient generally has only 20 calendar days in which to challenge a CID by petition. The Bureau disfavors extensions of this deadline, which it specifically intends to prompt recipients to make a quick decision on whether they intend to comply with the CID. 

The Meet and Confer Process

The Rules provides for a meet and confer between the parties within 10 calendar days of serving a CID (or before the petition deadline, whichever is earlier) to discuss and attempt to resolve all compliance issues. 

The Director and Assistant Director of the Office of Enforcement have the authority to negotiate and approve the terms of compliance with CIDs and grant extensions for good cause. They are not required to (and typically will not) attend the meet and confer itself, but must approve any request for modification or extension.

Be prepared to be specific about your concerns. The more detail you can provide to substantiate the burden you have identified, the better. The Bureau staff may not take you at face value about the burden of accessing records or generating reports but instead expect a full and coherent description of the relevant business units, organization structure, electronic systems, etc., to assess your concerns.  In some circumstances, it may be appropriate for personnel with the relevant knowledge, such as someone who is familiar with your ESI systems, to participate in the meet and confer. Consider offering specific alternatives rather than simply identifying overbroad requests. Likewise, be prepared to identify areas of the CID where you can and will comply.

Some investigators will dialogue with you about their specific concerns, whereas others will hold their cards much closer to the vest.

There are numerous possible areas to explore in the meet and confer, and no one size fits all. Consideration should be given to the scope, burden, and timing of compliance. Dodd-Frank does not provide the right to recover the costs of defending against an investigation, but you may be able to do at least some damage control through the negotiation process. Possible issues to raise at the meet and confer include:  rewording CID definitions or requests to focus more effectively on relevant information; whether the CID requires the production of ESI and, if so, for which requests or custodians; a “rolling” document production schedule; and a reasonable extension of time for compliance.

At the conclusion of the meet and confer, the CFPB staff must seek approval for your requests from the Director or Assistant Director of the Office of Enforcement. Typically, the staff will have you put your requests in writing. You will receive a written decision. Review it carefully — even if you are granted some relief, it is not unusual for the details to deviate somewhat from what was discussed at the meet and confer. The Director may even substitute an old request for a new element entirely.

Reassess your ability to comply with the CID. In some circumstances, it may be appropriate to re-engage the CFPB in the meet and confer process. This is more likely to be successful if you have already collected and produced at least some information and documents, preferably a strong showing, to the CFPB. 

Petitioning the Director

The other option is to petition the Director to modify or set aside the CID. There is tension in this regard. The CFPB unquestionably weighs its investigative process toward resolution by negotiation and agreement, and the Director has proven unlikely to grant a petition. On the other hand, there is no other mechanism for objecting to a CID if the meet and confer process is unfruitful; the CID instructions provide that the only basis for withholding information responsive to the CID is that of privilege. Thus, there is some risk that failing to file a petition may result in the waiver of any objections to the CID.

A petition to modify or set aside a CID must include all factual and legal objections to the CID, including all appropriate arguments, affidavits, and other supporting documentation. An attorney objecting to a demand must sign any objections. You must also provide a signed statement providing detail regarding your good-faith efforts to resolve the issues raised by the petition and identifying the unresolved issues. The timely filing of a petition will stay the time permitted for compliance with the portion challenged.

In response, the Director may affirm the CID, modify it, or set it aside. If the petition is denied in whole or in part, the ruling will specify a new return date.

There is no provision for additional independent review of a Director’s decision on a petition. If the CFPB wants to enforce the CID, it must move for a court order. Typically, there will be an opportunity to negotiate further with the CFPB before it moves in this direction. If a resolution is still not possible, the controversy will be decided by a more neutral party — a federal district court judge — but most judges will be expecting a defending CID recipient to have a persuasive and well-documented reason for non-compliance. Indeed, the Bureau is authorized to seek civil contempt or other relief in cases where a court order enforcing a CID has been violated.

Conclusion

If you receive a CID, get on top of it right away and evaluate the feasibility, burdens, and risks of compliance. Develop a strategy and timetable for trying to resolve the concern that led the Bureau to issue the CID in the first place. While a CID can be frustrating and a lot of work, it also may present an opportunity to iron out a compliance wrinkle, and even allow you to begin to establish a good long-term relationship with this regulatory body.

Foley & Lardner’s Consumer Financial Services Litigation Practice

Foley & Lardner LLP has a full-service litigation practice that includes a dedicated group of trial and regulatory lawyers with in-depth experience negotiating and defending enforcement actions in the consumer financial services arena.

The Court reasoned that a zip code, “when combined with the consumer’s name, provides the merchant with enough information to identify through publicly available databases the consumer’s address or telephone number, the very information Section 105(a) expressly identifies as personal identification information….”

Because G.L.c. 93, Section 105(d) provides that a violation of Section 105(a) also violates G.L.c. 93A, Sections 2 and 9 (which prohibit unfair or deceptive acts or practices in the conduct of a trade or business), the procuring of a zip code creates exposure to the severe penalties that can be imposed under Chapter 93A. The Court found that the procuring of a zip code can lead to “the actual receipt by a consumer of unwanted marketing materials …; and the merchant’s sale of a customer’s personal identification information or the data obtained from that information to a third party.” The Court held that either of these results constituted “an injury that is distinct from the statutory violation itself and cognizable under G.L.c. 93A, Section 9….” Chapter 93A provides not only that the consumer can recover damages for injuries caused by a violation of that statute, but also that the consumer can recover up to three times the actual damages suffered, and reasonable attorneys fees, in certain situations.

This decision establishes that in Massachusetts a consumer need not be the victim of identity theft or suffer a loss of money in order to sue a merchant who requests and receives the consumer’s zip code during a credit card transaction. As a result, Massachusetts merchants who continue to request a customer’s zip code as a part of a credit card transaction should expect to be targeted by class actions on behalf of consumers, and will need to be prepared to prove that no marketing materials were sent to the consumer and that no data regarding the consumer was provided to any third party.

Therefore, Massachusetts merchants must now weigh the cost of dealing with such potential claims against the benefit of obtaining zip codes from their customers.

My second thought, and much more on point for this Blog, was that too often attorneys and courts lose sight of the common sense answer. We get so wrapped up in the legal analyses that it can be easy to miss the forest for the trees. This often periscope view is why you — the clients — often add a lot of value to the legal strategy for a case. 

I must admit that I have not read the briefs from the Massachusetts case to know if these arguments were raised, but there are a few common sense arguments that I think should have been considered in the case. First, according to About.com, the Zoning Improvement Plan or “ZIP Code” originally began on July 1, 1963 to assist the U.S. Postal Service in handling the increase in the number of items mailed, primarily due to business mail. The first digit designated a broad geographical area of the United States, ranging from zero for the Northeast to nine for the far west.  This was followed by two digits that more closely pinpointed population concentrations and those sectional centers accessible to common transportation networks. The final two digits designated small post offices or postal zones in larger zoned cities (http://inventors.about.com/od/xyzstartinventions/a/zipcode.htm). Then in 1983, a hyphen and four digits were added to the existing five digit ZIP Code. The first five digits continued to identify an area of the country and delivery office to which mail is directed. The sixth and seventh numbers were added to denote a delivery sector, which may be several blocks, a group of streets, a group of post office boxes, several office buildings, or a small geographic area. The last two numbers denote a delivery segment, which might be one floor of an office building, or one side of a street. 

Thus, the ZIP Code was developed to be public information to assist the US Postal Service in finding the correct address. Knowing someone’s ZIP Code doesn’t mean you know how to get to the person’s home. In fact, the ZIP Code could be to a Post Office Box that is located in an entirely different city or state from the person’s physical residence.   

Compare a ZIP Code to the property records that you can access on your computer from most local property appraisers’ Web sites or tax collectors’ Web sites. An actual picture of your home, the size of your home, what you paid for your home, and whether you have paid the taxes on your home, are all public records.  Included in that information is your ZIP Code. Thus, how can the use of a ZIP Code for credit card purchases be any more threatening to a consumer than having a picture of your home on the web? The logic escapes me. 

The next time that you need to consult legal counsel, don’t be afraid to share your thoughts about the case with your attorney. Often there are practicalities about your business that you know best, and which may be of tremendous help to your attorney in forming his or her trial strategy.

Although the Bureau has not yet published the official list of rural or underserved counties, it issued a preliminary list. The following California Counties are on the list:

• Alpine County;
• Amador County;
• Calaveras County;
• Colusa County;
• Del Norte County;
• Glenn County;
• Humboldt County;
• Inyo County;
• Lassen County;
• Mariposa County;
• Modoc County;
• Mono County;
• Plumas County;
• Sierra County;
• Siskiyou County; and
• Trinity County

The Bureau has indicated that it will publish an official list of rural or underserved counties prior to June 1, 2013.