Tuesday, October 3, 2017

Arbitration Rule - Preserving Consumer Access to Courts

Chairman & Managing Director
Lenders Compliance Group

The US Chamber of Commerce and prominent financial industry groups (collectively, “Chamber”) have now gotten into the act of trying to deprive consumers of their day in court.[i] The Chamber’s view is that the Consumer Financial Protection Bureau (“Bureau”) has promulgated an “unconstitutional and illegal” arbitration rule (“Arbitration Rule”) that supposedly blocks companies from forcing consumers to go to arbitration instead of filing class action cases.

There are eighteen plaintiffs in the Chamber’s suit, filed on September 29, 2017. They want to set aside the Arbitration Rule as invalid, alleging the measure was based on a “fundamentally flawed” study and is the “tainted” product of an agency structure that is itself unconstitutional.

So, now comes this lawsuit, filed in the Northern District of Texas, seeking to enjoin the Bureau from enforcing the new Arbitration Rule that prohibits most financial service providers from requiring consumers to sign mandatory arbitration agreements that bar class action lawsuits. This lawsuit is brought both by the Chamber and a coalition of corporate business lobbying groups. In the complaint for declaratory and injunctive relief, these plaintiffs argue the Arbitration Rule is invalid and must be set aside.

The claims are lined up in a section of the lawsuit, which I outline as follows:
...
First, the Rule is the product of, and is fatally infected by, the unconstitutional structure that Congress gave the CFPB when it created the Bureau in the Dodd-Frank Wall Street Reform and Consumer Protection Act ("the Dodd-Frank Act").
Second, the Rule violates the Administrative Procedure Act ("APA") because the CFPB failed to observe procedures required by law when it adopted the conclusions of a deeply flawed study that improperly limited public participation, applied defective methodologies, misapprehended the relevant data, and failed to address key considerations.
Third, the Rule also violates the APA for the related reason that it runs counter to the record before the Bureau and fails to take account of important aspects of the problem it purports to address, making it the very model of arbitrary and capricious agency action.
And
Fourth, the Rule violates the Dodd-Frank Act because it fails to advance either the public interest or consumer welfare: it precludes the use of a dispute resolution mechanism that generally benefits consumers (i.e., arbitration) in favor of one that typically does not (i.e., class-action litigation).” (My emphases and change of format.)

Unless the federal court provides the plaintiffs' requested relief or federal lawmakers choose to act on the issue, the Bureau’s new Arbitration Rule is set to become effective on October 18, 2017.

As you may know, for the most part, I have taken the opposite point of view than the plaintiffs. For a detailed understanding of my position, please read my article Take-It-or-Leave-It Arbitration, Banning Consumers from the Court.[ii] You can download it HERE from the Articles section of our Lenders Compliance Group website.

In particular, I object to this construal in the plaintiffs’ claim:

“Such a regulation, which eliminates a demonstrably effective method of dispute resolution while making it impossible for businesses to pass on the cost savings achieved through use of arbitration, neither advances the public interest in general nor protects consumers in particular.”

Wednesday, July 26, 2017

Take-It-or-Leave-It Arbitration: Banning Consumers from the Court

Jonathan Foxx
Managing Director
Lenders Compliance Group

SLAYING THE DRAGON

Recently, there has been quite a lot of weeping and gnashing of teeth against the big, bad Bureau, the dragon with the scary name, Consumer Financial Protection Bureau (Bureau). The dragon slayers, such as banks and nonbanks, are fighting the dragon on its most recent fiery huffing and conflagrant puffing on a new rule involving arbitration clauses.

The ire of the dragon slayers is limitless due to the fact that the dragon has issued a “disgraceful,” “egregious,” “outrageous,” and “shameful,” final rule that bans companies from using arbitration clauses to bar consumers from filing class action lawsuits. The dragon slayers have formed a conclave consisting of banks, nonbanks, credit card companies, and sundry other companies to fight the good fight. They are even threatening to storm the dragon’s redoubt by pitching at it the magical incantations of the Trump administration, mustering up in their cause a bevy of like-minded acolytes, disciples, groupies, hangers-on, oodles of assorted politicians and other baby-kissers.

On July 10, 2017, the Bureau announced the release of its anticipated Arbitration Rule, which opens the door for more consumer class actions against financial institutions concerning financial products and services.[i] Many consumer contracts, such as credit card and bank agreements, contain mandatory arbitration clauses. These clauses typically require consumer disputes to be arbitrated rather than litigated in court, with the goal to prevent class action lawsuits from being filed. But consumer advocacy groups have long complained about such clauses, pointing out that individuals are unlikely to be able to handle the costs of arbitration to resolve what are typically low dollar value cases. Their position is that if consumers were able to band together and file class action lawsuits, consumers would be more apt to challenge allegedly unlawful conduct against financial institutions, and companies would be held accountable.

The Bureau’s position is really rather simple: it notes the incontrovertible fact that mandatory arbitration clauses that ban class action litigation happen to stop consumers from seeking judicial remedies in disputes over small fines and other charges. Let’s call this kind of arbitration clause the “Take-It-or-Leave-It” clause.

Put another way, many consumers are unable to pursue small dollar settlements disputes, given the not erroneous belief that the payout would not be worth the trouble. So, the Bureau contends, not incorrectly, that allowing companies to use the Take-It-or-Leave-It clause enables them to wrong consumers, but face no consequences for doing so.

Under the final rule, the companies would no longer be allowed to put the Take-It-or-Leave-It clause in their arbitration provisions. The result of this rule, then, would be to put consumers into the position of banding together in group lawsuits, consisting of fellow sufferers with similar legal concerns.

To quote the Bureau’s Director Richard Cordray, the fire-breathing top dragon mounty himself:

“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong. These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up.”[ii]

Notice I did not indicate that arbitration clauses are themselves banned. That is because the rule does not ban arbitration clauses! Companies can still work out binding legal settlements with consumers by means of arbitrators paid for by the company.

Wednesday, June 21, 2017

When is a terrorist not a terrorist?

Managing Director
Lenders Compliance Group

Question: When is a terrorist not a terrorist?

Answer: When a Credit Reporting Agency (CRA) conflates a class of consumers with similarly named terrorists and criminals from a government watch list.

A California federal jury found Tuesday, June 20th, that TransUnion violated the Fair Credit Reporting Act (FCRA), awarding the plaintiffs whopping statutory and punitive damages topping $60 million.[*] I’m not sure if a larger award has ever been achieved in an FCRA verdict, but my guess is this size damages would likely be near or at the top!

I guess there are some people who have names that sound like the names of terrorists. So what else is new?

The credit reports issued by TransUnion, the CRA, checked consumers against the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) database. This database lists terrorists, drug traffickers, and other criminals. But, as the suit alleged, the credit reports about law-abiding consumers were sometimes linked to similarly named criminals on the OFAC watch list.

Lawsuits thrive where ambiguity afflicts the host!

The 8,185 class members profiled by TransUnion will each get $984 in statutory damages and $6,353 in punitive damages, bringing the total award to $8 million in statutory damages and $52 million in punitive damages. 

This scenario is not a mere thought-distracting speculation. In fact, financial institutions face dilemmas like this every day in their mission to originate loans that do not get flagged as requiring the filing of Suspicious Activity Reports (SARs). They depend on such services as CRAs to give them the information needed to determine if a loan applicant is just a Joe or Jane consumer who, perhaps with some of the usual venial exceptions caused by life’s poisoned petty mortifications, just want to get a loan versus the representationally complex behavior control system of a rabid, deranged terrorist whose moribund artificialities lead to morose glee at the loss of life and limb of innocent people.

After a week-long trial, the jury found that TransUnion willfully failed to assure the maximum accuracy for its results, to notify class members of their OFAC results in written disclosures, and to provide them with notice of their FCRA rights. That notion of “willfully failed” is the operative phrase! It hinges on the claim, which the jury accepted, that technology is available to deliver accurate results in credit reporting and that the failures of TransUnion to ensure accuracy showed willful noncompliance with the FCRA.

There is the usual casting of calumnies on plaintiff’s counsel. Transunion has stated that “the plaintiffs’ firm ... has a history of bringing questionable claims against credit reporting companies, to enrich itself rather than enforcing consumer protections.” But the facts, as alleged, seem kind of daunting.

This lawsuit, filed all the way back in February 2012, alleges that the lead plaintiff, Sergio L. Ramirez, was prevented from buying a car in 2011 because TransUnion told lenders he potentially matched two entries on the OFAC list.

Unfortunately, when Ramirez tried to get off TransUnion’s list, the CRA’s customer service agents gave him a “runaround" and didn’t explain how the error could be corrected. Then, as stated at trial, TransUnion argued that Ramirez’s experience occurred because a credit report produced by TransUnion was “garbled” after it was transferred between multiple financial entities before ending up at the auto dealer.

Just be glad something like this hasn’t happened to you!

As a defense, Transunion claimed that the consumers weren’t financially harmed by the mix up, because they were “able to purchase the car they wanted on the same financial terms and during the same time frame as would have been the case if the plaintiff’s name was not a potential match to a name on the OFAC list.”

Personally, I don’t particularly like this defense in this case. It is like saying that ‘somebody shot a bullet into a crowd of people, but that’s alright since nobody was killed!’ Of course, the goal of such a defense is to show that there was no damage and, mutatis mutandis, the legal viability of the suit is vitiated.

But I’m going with plaintiff’s view that TransUnion allegedly didn’t ensure accuracy, as required by the FCRA, by cross-checking OFAC name hits with other results, such as the date of birth. Plaintiffs also alleged TransUnion kept the OFAC results from the consumers themselves and only disclosed potential matches to the companies requesting the credit checks.

If you think this failure to comply with the FCRA is something new for Transunion, just consider the fact that TransUnion had lost a similar suit in Pennsylvania federal court in 2005. 

What I don’t get is why one lost lawsuit was not enough to learn from such a glaring defect in a technological solution! But then I do tend to descant critically against such ingenious conceits as not learning from muddled lapses and avoidable blunders.


[*] Sergio L. Ramirez v. TransUnion LLC, Case 3:12-cv-00632, U.S. District Court for the Northern District of California

Wednesday, April 26, 2017

Bi-Weekly Baloney

Managing Director
Lenders Compliance Group

Almost two years ago, the Consumer Financial Protection Bureau (CFPB) filed a lawsuit in federal district court against Nationwide Biweekly Administration, Inc., Loan Payment Administration LLC (collectively, “Nationwide”), and the companies’ owner, Daniel Lipsky, alleging that Nationwide misrepresented the interest savings consumers would achieve through a bi-weekly mortgage payment program and also misled consumers about the cost of the program. The CFPB was seeking compensation for harmed consumers, a civil penalty, and an injunction against the companies and their owner.

An interesting feature of this lawsuit is the role that teaser ads, in general, and telemarketing sales scripts, in particular, have on exposure to regulatory violations.

This past Monday, after some haggling back and forth in the usual mix and bantering of legal procedures, the two entities found themselves in court at a bench trial.[*] The CFPB told a California federal judge at the beginning of the trial that Nationwide violated consumer protection laws by suggesting it was affiliated with the homeowners’ mortgage providers and hiding its fee structure in deceptive mailers and sales calls.

The CFPB argued during opening arguments that Nationwide sent deceptive mailers to potential customers that included the name of the bank holding their mortgage and stated the loan amount. These mailers allegedly told the customers that if they declined the bi-weekly program, they were “waiving” loan savings. When potential customers called in, sales representatives supposedly would say that Nationwide “has a working relationship with your bank.” According to the CFPB, these were misrepresentations that violated the Consumer Financial Protection Act and the Telemarketing Sales Rule.

The violations can be grouped into the following four categories, each of which I will explicate briefly.

1)      Falsely promising consumers they could achieve savings without paying more:
In direct mail, online, and other marketing materials, Nationwide claimed that consumers who enrolled in its “Interest Minimizer” program would save money without increasing their mortgage payments. In a video on Nationwide’s website, Lipsky stated, “you’re not increasing your payment. You’re just switching to a smaller bi-weekly or weekly amount.” The CFPB alleged that, in fact, consumers in the program paid processing fees for each bi-weekly payment on top of the initial set-up fee to Nationwide, plus the equivalent of one additional monthly payment each year.

2)      Falsely promising immediate savings that take years to achieve:
Despite promises of immediate savings, the CFPB alleged that a consumer would have had to stay enrolled for many years to recoup the fees that Nationwide charged. Nationwide used a metric for its calculations, claiming that the median consumer in its Interest Minimizer program in 2013 had a 30-year mortgage for approximately $160,000 with an interest rate of 4.125 percent. But the CFPB calculated that a consumer with those loan terms would have to stay in the program for nine years to recoup the fees – at which point the consumer would have paid more than $1,200 in fees to Nationwide. Moreover, only 25 percent of the consumers enrolled at the end of 2014 had been enrolled for longer than four years.

3)      Misleading consumers about the cost of the program:
It was the CFPB’s contention that Nationwide’s direct mail and marketing materials falsely claimed that consumers’ extra payments “are directed 100% to the principal of the loan.” However, Nationwide kept the first extra bi-weekly payment (up to $995) as the set-up fee. When consumers asked Nationwide sales representatives how much the program costs, some of the company’s sales scripts allegedly instructed the representative to redirect the consumer, and other scripts said representatives should only mention the fee if consumers “persist to ask about fees.” According to the CFPB, none of the scripts stated the dollar amount of the setup fee.

4)      Falsely claiming to be affiliated with mortgage lenders or servicers:
Nationwide’s marketing materials allegedly misrepresented that it was affiliated with consumers’ mortgage lenders or servicers. For example, in one telemarketing sales script, when consumers ask, “Do you work with/affiliated with my lender?” sales representatives were supposedly instructed, “Do NOT say ‘No’” – when the accurate answer is actually “No.”

I’m not particularly impressed with Nationwide’s case, especially when its counsel tries to give the impression that Nationwide meant well! Counsel praised Nationwide’s founder Lipsky’s “entrepreneurial spirit,” and said he and the company had grown more vigilant after a regulatory “learning curve” during which he obtained state-by-state licensing – and a 2008 lawsuit brought by the Ohio Attorney General’s Office over similar claims, which, by the way, ended two years later with a settlement for consumer refunds, injunctive relief and $30,000 in penalties. I call this the “errant fool” defense, where we seek mercy from the court by claiming mistakes were made, but at least they were well-meaning mistakes. Or, to give Nationwide’s counsel a chance to speak, “This is just a company trying to sell a wonderful financial concept, trying to do so in a way that complies with regulations, and a hyper-vigilant agency looking at things in a way a reasonable consumer would not.” Yeah! That’s the ticket! Blame the CFPB!

Thursday, February 2, 2017

Smorgasbord of RESPA Section 8 Violations

Managing Director
Lenders Compliance Group

Yet another cautionary tale out of the Consumer Financial Protection Bureau (Bureau) about referrals. Yet again, the Bureau took action against a mortgage lender, this time Prospect Mortgage LLC,[i] which happens to be a major mortgage lender, for paying illegal kickbacks for mortgage business referrals.

Not stopping there, the Bureau also took action against two real estate brokers (RGC Services, Inc., (doing business as ReMax Gold Coast) and Willamette Legacy, LLC, (doing business as Keller Williams Mid-Willamette) as well as a mortgage servicer (Planet Home Lending, LLC) that allegedly took illegal kickbacks from Prospect.

So, here we go again! Now there is yet another Consent Order (“Order”) on a subject that has been vetted many times already in litigation. How many such Consent Orders need to be had before there is a strong wake-up call?

Although Prospect has consented to the issuance of this Order by the Bureau, without admitting or denying any of the findings of fact or conclusions of law, why does it have to come to such a sorry state where a punitive action arises in the first place? Does anybody really believe that the alleged RESPA violations are not foreseeable?

Under the terms of the Order, Prospect is now stuck paying a $3.5 million civil penalty for its illegal conduct, and the real estate brokers and mortgage servicer will pay a combined $495,000 in consumer relief, repayment of ill-gotten gains, and penalties.

Take a look at these allegations and let’s put a check where there is a violation of Section 8(a) of the Real Estate Settlement Procedures Act’s (RESPA) prohibition on the payment of kickbacks in exchange for referrals of federally related mortgage loans, 12 U.S.C. § 2607(a), and its implementing regulation, Regulation X, 12 C.F.R. part 1024, as well as by violating RESPA, mutatis mutandis, also then violating Section 1036 of the Consumer Financial Protection Act (CFPA), 12 U.S.C. § 5536.

Here goes! Allegedly steering consumers to Prospect, often with Prospect’s encouragement, by:
  • requiring all consumers to apply for and obtain preapprovals with Prospect before allowing them to submit an offer on a property;
  • paying their agents cash or a cash equivalent bonus each time the agent steers a consumer to Prospect;
  • selectively imposing economic measures to coerce consumers into using Prospect, such as fees that would be waived if the consumer used Prospect, or credits that would be given only if the consumer used Prospect; and
  • directly referring consumers to Prospect. 

Prospect is not some rinky-dink mortgage lender. It is one of the largest independent retail mortgage lenders in the United States, with nearly 100 branches nationwide. And these referral relationships lay out as the real estate brokers being but two of more than 100 real estate brokers with which Prospect allegedly had improper arrangements, and Planet Home Lending, LLC is a mortgage servicer that allegedly referred consumers to Prospect Mortgage and accepted fees in return.

Now let’s take a deeper dive into how these referrals were structured. See if you can catch the violations! I will break down each categorical area that can trigger RESPA violations.

Violating RESPA by Using Lead Agreements to Pay Brokers for Referrals

Lead agreements simply are blatant attempts to circumvent RESPA either in fact or in spirit. Actually, the violations stemming from these types of agreements are easily identified by Examiners. Take a look at this scenario. It is laid out here in a fact pattern.
  • Lender enters into lead agreements with more than 200 different counterparties. Most of these counterparties are real estate brokers.
  • Under these agreements, lender pays the counterparty for each lead it receives. A lead generally consists of a prospective buyer’s name, address, email address, and phone number. Lender then reaches out to the prospective buyer to market its loan products.
  • But the counterparties who receive lender’s lead fees go well beyond simply transferring information about prospective buyers. They also actively refer prospective buyers to lender’s loan officers.