Industry Settlement Filed: The Likely Impact on Litigation

The multistate settlement agreement was finally publicly filed on March 12, 2012, in the U.S. District Court for the District of Columbia, and we’re busy examining it to assess its impact on the world of mortgage servicing. The complaint is 49 pages long, and each of the five consent judgments is approximately 300 pages long, with numerous schedules covering financial terms, servicing standards, and the like. We’ll be writing about these aspects of the settlement in future editions of the Mortgage Banking Update. For now, though, we wanted to comment on the likely impact of the settlement on litigation—both private and governmental.

On the government side, the settlement has several important implications. First, it is obvious from the public statements surrounding the settlement that the state attorneys general are not finished with mortgage-related enforcement actions. Rather, this settlement has been characterized as the beginning of other enforcement activity to come, and so we should all anticipate that more cases will be brought against other servicers. When that occurs, it is likely that the state AGs will view the multistate settlement as a template for agreements with other servicers. Whether other servicers would go along with a similar settlement (with or without similar monetary payments) remains to be seen.

Also notable, from a governmental litigation standpoint, is how the settlement illustrates the use of litigation to effect essentially legislative or regulatory measures that affect the parties involved. The terms of the multistate settlement bear little resemblance to the kind of relief a court could enter under a state UDAP statute, and instead reflect the use of an enforcement proceeding to obtain relief in a settlement that never could have been achieved in a court. This settlement sets a precedent for “regulation by enforcement” on a massive and visible scale, and more examples of that phenomenon seem sure to follow.

With regard to private litigation, we might anticipate a short-term uptick in litigation against the parties to the settlement, as borrowers view past or pending foreclosure efforts through the lens of the provisions of the settlement. It is possible that, in the longer term, the parties’ implementation of the measures in the settlement will decrease their litigation caseload, because the settlement’s terms address many of the commonly raised issues by borrowers. On the other hand, the publicity of the settlement may create more litigation, so these factors may balance each other out.

For the rest of the industry, it is likely that borrowers will attempt to use the settlement as “authority” for litigation claims against servicers. Certainly the settlement is not “authority” in any proper sense, but the visibility of the settlement may carry practical impacts for other servicers, as their conduct is measured against the provisions of the settlement. Other servicers need to be prepared to respond to these efforts because they are sure to occur. Moreover, the existence of the settlement and the large degree of publicity surrounding it will likely increase borrowers’ motivations to seek out counsel and make claims, and in turn increase the volume of servicing-related litigation.

- Christopher J. Willis

  


 

Massachusetts Changes Debt Collection Regulations for Creditors and Debt Buyers

Debt collection regulations issued by the Massachusetts Attorney General (MAG) have been revised to expand their coverage to include collection of debts owned by passive debt buyers and to impose significant new obligations on persons subject to those regulations. The revisions, announced in an MAG press release, became effective on March 2, 2012.

The debt collection industry, and creditors attempting to collect their own debts, are currently experiencing the spread of documentation-related challenges used in mortgage foreclosures to collection actions involving credit card, student loan, and other types of non-mortgage consumer debts. To assist clients in making a proactive response to such challenges, Ballard Spahr has created a Collection Documentation Task Force that brings together litigators with experience defending mortgage lenders and other consumer lenders in documentation-related lawsuits nationwide and regulatory lawyers with deep knowledge of the Office of the Comptroller of the Currency’s national bank foreclosure review process and federal and state debt collection laws.

As revised, the MAG regulations define “creditor” to mean “any person and his agents, servants, employees, or attorneys engaged in collecting a debt owed or alleged to be owed to him by a debtor and shall also include a buyer of delinquent debt who hires a third party or an attorney to collect such debt.” There is an exception for persons whose only collection-related activities are solely for the purpose of serving legal process.

It is unclear whether the MAG’s new “creditor” definition is intended to reach the conduct of third-party debt collectors who are subject to regulations issued by the Massachusetts Division of Banks (DOB). The DOB regulations apply to a “debt collector,” defined as a person whose principal business is debt collection and “who regularly collects or attempts to collect, directly or indirectly, a debt owed or due or asserted to be owed or due another.”

According to the MAG’s website, the MAG debt collection regulations prohibit “many unfair debt collection practices by creditors, and regulations of the [DOB] prohibit unfair debt collection practices by debt collection agencies.” Thus, it would appear that the MAG regulations are not intended to directly regulate third-party debt collectors. However, by treating passive debt buyers as “creditors,” the MAG regulations threaten to make passive debt buyers liable for conduct of third-party debt collectors who do  not comply with the MAG regulations.

There are a number of other significant changes to the MAG regulations. First mortgage loans or debts greater than $25,000 are now covered by the regulations. Restrictions that previously applied only to “oral” communications now also apply to text messages and other non-oral communications.

There are new limits on the frequency of telephone calls made either in person or through text messaging or a recording. Creditors cannot use contact methods that result in a charge to the debtor or a person residing in the debtor’s household. Creditors must make new disclosures regarding time-barred debts and provide a state validation notice.

In addition to having to comply with various restrictions in the Fair Debt Collection Practices Act, creditors are prohibited from engaging in other conduct such as (1) failing to disclose the creditor’s telephone number and office hours or that of its agents on all written communications to the debtor, and (2) requesting any information about the debtor or the debtor’s assets or accounts other than information the creditor in good faith believes will assist in the collection of the debt.

- Barbara S. Mishkin

 


 

preparing your company for sale: Due Diligence from a seller's perspective

Business owners seeking to sell their companies are well advised to first consider undertaking a due diligence investigation of the company. A thoughtful evaluation of the business before the sale process starts will make the process more manageable, efficient, and cost effective for a seller.

What is Due Diligence?

Due diligence is the process by which business owners conduct a business, legal, and financial investigation of a company in preparation for a possible sale transaction. While company owners and management can adequately perform business due diligence, a company should consider engaging outside financial and legal advisers to conduct its financial and legal due diligence. Such investigations are time consuming, may be overwhelming, and vary greatly depending upon the nature and form of a potential transaction. Legal advisers can make available a variety of services to assist a client with selling its business.

For example, Ballard Spahr’s transaction teams routinely: (1) work with investment bankers to coordinate due diligence investigations with the mutual client, (2) assist clients with organizing due diligence information for prospective buyers through the use of data room services, shared drives, or FTP sites, (3) conduct formal litigation and Uniform Commercial Code and state and federal tax lien searches, (4) review contracts, licenses, approvals, and other corporate documents to assess how provisions affecting transfer may prolong the transaction process, and (5) render legal opinions.

Why is Due Diligence Important?

Legal due diligence is a critical part of the transaction process for several reasons. First, a selling company, along with its legal advisers, will identify potential and hidden liabilities during the due diligence process. Second, pre-transaction due diligence provides a company with the opportunity to prevent a buyer from discounting the value of a business due to the lack of proper respect for good corporate housekeeping. For example, a company may find that its key contracts are not fully executed, its corporate records are missing minutes or consent resolutions authorizing critical actions, or the company’s assets are encumbered by liens that have not been removed. In this case, the company with the aid of its legal advisers can remedy these matters before a buyer conducts its own due diligence and uses these deficiencies as a basis to discount the value of the business. Lastly, the information collected during due diligence will assist legal advisers in negotiating and drafting transaction documents and the company in preparing its disclosure schedules (exceptions to a seller’s representations and warranties in a purchase and sale agreement). Based on the liabilities and potential liabilities identified during the due diligence process, legal advisers can draft representations and warranties, covenants and indemnification provisions in the transaction documents, and disclosures to allocate risk at the seller’s direction. In some instances, a prospective buyer will request a legal opinion of seller’s counsel to be delivered at the closing, and such legal opinion requires that seller’s legal advisers conduct a detailed review of the selling company’s due diligence as a basis for the legal opinion. Therefore, the legal due diligence process is as important for legal advisers as it is for the selling party.

The Essentials of Due Diligence

A selling company will be asked to provide a prospective buyer with the information the buyer needs to satisfy its own due diligence inquiries and to evaluate the target business. There are a number of categories for which a seller should collect information early in the transaction process. As noted previously, the nature and form of the due diligence process will vary depending upon the transaction structure deployed by the parties, and, in some cases, the due diligence process may result in a revised transaction structure with greater benefits to the seller. Accordingly, the categories of legal due diligence will vary depending on whether the transaction involves an asset or stock sale. In general, the common categories of due diligence include the following:

  • Organizational information – formation or incorporation documents; bylaws or operating agreements; agreements between owners of the equity interests; up-to-date board minutes; notices for equity owner and board meetings; ledgers; equity certificates
  • Financial records – balance sheets; income statements; annual reports; audit reports; attorneys’ letters to auditors
  • Material contracts – customer contracts; supply agreements; loan and other financing agreements; insurance policies; employment contracts and consulting agreements; marketing and advertising agreements
  • Regulatory matters and litigation – permits and orders; copies of pleadings in pending litigation; copies of threatened litigation or notices of violation of any laws
  •  Employment and labor matters – information regarding employees, wages, benefit plans, bonus compensation, vacation, sick time, and any benefits and policies
  • Intellectual property – documentation supporting any copyrights, trademarks, trade names, or patents owned by the selling company or any of its key employees related to the business

Investment bankers engaged to market a company’s business will likely have a supplemental due diligence checklist that will assist a seller in assembling relevant information. Further, prospective buyers will likely request numerous categories of operational due diligence.

The Benefits of Due Diligence

Because the due diligence process may be overwhelming and time consuming, engaging legal advisers to assist the seller in its pre-transaction organization of due diligence information and remedy any deficiencies or liabilities to the greatest extent possible will make a sale transaction process more manageable for a seller, minimize the likelihood that a buyer will devalue the business, aid in the negotiating and drafting of the transaction documents and disclosure schedules, and reduce transaction costs to both the seller and the prospective buyer in the long run.

For further information, please contact Karen C. McConnell at 602.798.5403 or mcconnellk@ballardspahr.com.

 


 

White House Privacy Plan Includes Strong FTC Enforcement

The Obama administration’s recently released white paper outlines a consumer data privacy framework that would supplement existing laws and, as one of its four key elements, give the Federal Trade Commission a strengthened enforcement role.

The framework represents the administration’s proposal for providing additional consumer data privacy protections that it believes are necessary to preserve consumer trust "in the technologies and companies that drive the digital economy." According to the white paper, the administration intends to implement the framework "without delay."

The framework has four key elements:

A Consumer Privacy Bill of Rights

The administration has developed a "Consumer Privacy Bill of Rights" (CPBR) that, in the administration’s view, "provides a baseline of clear protection for consumers and greater certainty for companies." The CPBR, which is similar to the privacy principles recognized by the European Union, would give consumers a right to: (1) individual control over personal data collected and its use, (2) transparency as to a company’s privacy and security practices, (3) respect for the context in which the consumer provides personal data (meaning that such data is collected, used and disclosed in ways that are consistent with such context), (4) security in the handling of personal data, (5) consumer access to data maintained on them and the ability to ensure the accuracy of such data, (6) focused collection (meaning reasonable limits on the data collected), and (7) accountability of a company and its employees for how personal data is handled.

The administration has developed a "Consumer Privacy Bill of Rights" (CPBR) that, in the administration’s view, "provides a baseline of clear protection for consumers and greater certainty for companies." The CPBR, which is similar to the privacy principles recognized by the European Union, would give consumers a right to: (1) individual control over personal data collected and its use, (2) transparency as to a company’s privacy and security practices, (3) respect for the context in which the consumer provides personal data (meaning that such data is collected, used and disclosed in ways that are consistent with such context), (4) security in the handling of personal data, (5) consumer access to data maintained on them and the ability to ensure the accuracy of such data, (6) focused collection (meaning reasonable limits on the data collected), and (7) accountability of a company and its employees for how personal data is handled.

Market and Industry Codes of Conduct

The administration seeks a "multistakeholder process" to develop codes of conduct that implement the general principles contained in the CPBR. The stakeholders would include individual companies, industry groups, privacy advocates, consumer groups, state attorneys general, and federal civil and state law enforcement officers. The stakeholders would be charged with identifying markets and industry sectors that involve significant consumer data privacy issues and may be appropriate for an enforceable code of conduct. If a company chooses to adopt a code of conduct for its market or industry (and possibly multiple codes for different business lines), the administration expects it could enforce the company’s public commitment to adhere to the code of conduct under Section 5 of the FTC Act.

The administration seeks a "multistakeholder process" to develop codes of conduct that implement the general principles contained in the CPBR. The stakeholders would include individual companies, industry groups, privacy advocates, consumer groups, state attorneys general, and federal civil and state law enforcement officers. The stakeholders would be charged with identifying markets and industry sectors that involve significant consumer data privacy issues and may be appropriate for an enforceable code of conduct. If a company chooses to adopt a code of conduct for its market or industry (and possibly multiple codes for different business lines), the administration expects it could enforce the company’s public commitment to adhere to the code of conduct under Section 5 of the FTC Act.

FTC Enforcement

The FTC would be charged with enforcing the commitments of companies under the FTC’s jurisdiction to adhere to one or more codes of conduct. According to the administration, "in any investigation or enforcement related to the subject matter of one or more codes, the FTC should consider the company’s adherence to the codes favorably."

The FTC would be charged with enforcing the commitments of companies under the FTC’s jurisdiction to adhere to one or more codes of conduct. According to the administration, "in any investigation or enforcement related to the subject matter of one or more codes, the FTC should consider the company’s adherence to the codes favorably."

International Cooperation

To address the challenge created by differences in national privacy laws for companies that transfer personal data across national borders, the United States would engage with other countries "to increase interoperability in privacy laws" through mutual recognition and enforcement cooperation.To address the challenge created by differences in national privacy laws for companies that transfer personal data across national borders, the United States would engage with other countries "to increase interoperability in privacy laws" through mutual recognition and enforcement cooperation.

In the white paper, the administration also outlines its desired approach to new privacy legislation. That approach includes the passage of legislation codifying the CPBR and granting enforcement authority to the FTC and state attorneys general. The administration believes such legislation should also (1) give the FTC authority to review and approve codes of conduct adopted by companies and determine if the codes sufficiently implement the CPBR, (2) grant companies who follow an FTC-approved code of conduct a safeharbor from enforcement of the statutory CPBR, and (3) preempt state laws that are inconsistent with the statutory CPBR.

The administration’s intent is to avoid creating duplicative regulatory burdens, so that financial institutions subject to the Gramm-Leach-Bliley Act and its implementing regulations and guidelines would largely be exempt from the new regime. In addition, the administration’s plan does not expressly envision a role for the Consumer Financial Protection Bureau (which has authority to enforce provisions of the GLBA.) Nevertheless, the administration’s actions in the privacy arena are likely to influence the CFPB’s approach to data privacy and security. In addition, the administration states its support for a national standard for security breach notifications that would preempt state notification laws and that purportedly would apply to all financial institutions.

- Barbara S. Mishkin 


Copyright © 2012 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

 

 

 

 

 

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.