Federal Regulators Propose Standards for Assessing Diversity Policies of Regulated Entities

Six federal agencies have proposed joint standards for assessing the diversity policies and practices of regulated entities relating to employment and contracting with third parties. The proposal was developed by the agencies' Offices of Minority and Women Inclusion (OMWI).

The Dodd-Frank Act directed the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, Federal Reserve Board of Governors, Federal Deposit Insurance Corporation, National Credit Union Administration, and Securities and Exchange Commission (Agencies) to establish an OMWI. The Act also required each Agency's OMWI to develop assessment standards for the entities the Agency regulates.

As discussed below, the proposal contemplates that regulated entities will use the standards to conduct self-assessments. Such self-assessments could involve a substantial amount of work for regulated entities. In addition, because the self-assessments could be potentially discoverable by private plaintiffs in fair lending and fair employment litigation, it will be prudent for regulated entities to conduct them with the assistance of legal counsel.

The standards, which may be tailored to take into account a regulated entity's size and other particular characteristics, deal with four areas: 

  • Organizational commitment to diversity and inclusion, such as whether a regulated entity makes diversity and inclusion considerations in employment and contracting an important component of its strategic plan, has a diversity and inclusion policy that is approved and supported by senior management and the board of directors and overseen by a senior level official, and conducts equal employment and diversity education and training on a regular and periodic basis
  • Workforce profile and employment practices, such as whether a regulated entity is using metrics (such as required filings with the Equal Employment Opportunity Commission) to evaluate and assess workforce diversity and inclusion efforts, holds management accountable for such efforts, and has policies and practices, such as outreach to minority and women organizations, that create diverse applicant pools for internal and external opportunities
  • Procurement and business practices and supplier diversity, such as whether a regulated entity has a supplier diversity policy that provides opportunities for minority- and women-owned businesses to compete in procurements, methods to evaluate and assess supplier diversity, and practices to promote a diverse supplier pool such as outreach to minority- and women-owned contractors
  • Practices to promote transparency of organizational diversity and inclusion, which consider whether a regulated entity makes information about its diversity and inclusion activities publicly available on an annual basis through its website or another method

A surprising aspect of the proposal is the Agencies' plans for conducting assessments. According to the Agencies, "the assessment [they envision] is not one of  traditional examination or other supervisory assessment. Thus, the Agencies will not use the examination or supervision process in connection with these proposed standards." The proposal contemplates an assessment that includes:

  • A self-assessment in which a regulated entity uses the Agencies' standards to conduct a quantitative and qualitative evaluation of its diversity and inclusion policies and practices
  • The entity's voluntary disclosure of the self-assessment results to the appropriate Agency
  • The entity's disclosure of information about its efforts to comply with the standards on its website and in annual reports and other materials

The proposal does not address what actions the Agencies plan to take if an entity's diversity and inclusion policies and practices are found to be unsatisfactory. Since the Dodd-Frank Act is silent regarding the Agencies' authority in such circumstances, the Agencies could take the position that they have discretion to take whatever action they deem appropriate, including conducting a more rigorous fair lending examination of an entity that engages in lending.

In addition to seeking comments on the proposal generally, the Agencies are seeking comments on specific questions set forth in the proposal. Comments are due by December 24, 2013.

Barbara S. Mishkin 

New York City Brings Enforcement Action against National Debt Collector

The New York City Department of Consumer Affairs (DCA) recently filed an enforcement action to enjoin National Credit Adjusters, LLC, a national debt collector, from collecting debts in the City. The DCA had rejected the company's application to renew its debt-collection license earlier in the year after it allegedly admitted to collecting on illegal payday loans. In the enforcement action, the DCA charged that, after losing its license, the company filed collection lawsuits against 23 New York City residents.

The lawsuit is another example of efforts by New York regulators to crack down on payday lending, not only through actions directed at the lenders themselves but also by targeting their providers and vendors. In February 2013, New York's Department of Financial Services (DFS) published a notice warning debt collectors "that they should not seek to collect on … payday loans made in New York over the Internet and via phone and mail."

The warning was followed by the DFS's announcement in August 2013 of aggressive enforcement-related activities directed at allegedly unlawful online payday lending. Notably, the DFS not only sent cease-and-desist letters to 35 payday lenders but also took actions directed at banks that process electronic payments on behalf of payday lenders and debt collectors. (These actions were detailed in our prior legal alert.)

In early October, New York Attorney General Eric Schneiderman and five New York-based debt collectors that collect payday loans entered into a settlement that resulted in $279,606 in restitution of amounts collected on payday loans made to New York consumers and $29,606 in civil penalties. (For more on the settlement, see our legal alert.)

As the above actions make clear, both State and City regulators are aggressively targeting providers that work with online payday lenders, and that trend is expected to accelerate in the coming months. A provider that ignores this trend could soon find itself in the crosshairs of an enforcement action.

- Justin Angelo

New York DFS Seeks Stronger Court Rules for Default Judgments in Collection Actions

A proposal by the New York Department of Financial Services (DFS) would substantially drive up the costs of bringing consumer debt collection actions in the state. The DFS is seeking stronger court rules for obtaining default judgments in debt collection actions than those recently proposed by the state's Advisory Committee on Civil Practice. The proposal, which would amend the Uniform Rules applicable to New York City Civil Court and courts outside the City, would establish five forms of standard affidavits for use by plaintiffs requesting entry of default judgments in such actions. Comments are due by December 4, 2013.

While applauding the proposed rules as "a positive first step" in its comment letter on the proposal, the DFS stated that "the proposed rules could go much further to address the significant debt collection litigation abuses that have a profound impact on New Yorkers and the state court system." Among other things, the DFS urged the Advisory Committee to adopt the following measures to protect consumers in collection lawsuits:

  • Mandatory pre-suit notice that advises the consumer of impending collection litigation and discloses basic information on the debt and the consumer's rights
  • Stronger affidavits to prevent robo-signing, including requiring the affiant not only to attest to "personal knowledge" of the plaintiff's books and records, but to personal knowledge of the debtor's records, including the date of charge-off and date of last payment
  • "Demonstrable proof of service" by the plaintiff before the entry of a default judgment, such as a global positioning system (GPS) report or time-stamped pictures
  • The provision of an "adequate opportunity" to consumers to vacate a default judgment upon a violation of the court's rules

The DFS claimed that stronger measures are needed because debt buyers allegedly consistently fail to obtain records verifying ownership and the balance owed before obtaining a default judgment. In fact, the DFS claimed that "the collection industry's litigation strategy … relies on consumers failing to appear in court, or if they do appear, being unrepresented by counsel." Lastly, the DFS noted that stronger rules governing debt collection litigation would complement the pre-litigation debt collection rules proposed by the DFS in July 2013. (The DFS proposal would impose significant disclosure and other requirements on persons engaged in the collection of consumer debts. For a summary of the proposal, see our prior legal alert.)

The DFS' proposed measures would significantly increase the costs of bringing collection actions in New York. For example, requiring an affiant to have personal knowledge of the individual debtor's loan records is unprecedented and marks a departure from the traditional business records exception to the hearsay rule.

If New York were to adopt the proposal, creditors and debt collectors could be forced to hire additional staff, since a debtor's attorney would likely challenge an affidavit executed by an employee who repeatedly signs affidavits in collection cases. Further, the DFS or Attorney General could bring an enforcement proceeding against a debt collector or creditor that repeatedly used the same affiant in collection cases. Additionally, a requirement of "demonstrative proof of service" in collection cases is particularly burdensome. If the rule were to explicitly set forth what constitutes "demonstrative proof of service," then creditors and debt collectors would have to incur the additional cost to obtain such proof. Alternatively, if the statute did not define "demonstrative proof of service," then the issue could be litigated on a case-by-case basis.

- Barbara S. Mishkin

Firing Alcoholic Employee for Relapse Is Not ADA Violation, Third Circuit Holds

The U.S. Court of Appeals for the Third Circuit has ruled that a freight transportation company did not violate the Americans with Disabilities Act (ADA) and other antidiscrimination laws when it fired an alcoholic employee who violated a Return to Work (RWA) agreement. In Ostrowski v. Con-way Freight, the RWA violation occurred when the employee suffered a relapse after returning from a leave of absence to undergo rehabilitation for alcoholism.

The plaintiff appealed a district court ruling favoring the employer in his lawsuit, which alleged that his firing violated the ADA, the Pennsylvania Human Relations Act (PHRA), and the Family and Medical Leave Act (FMLA). The Third Circuit holding is in line with numerous other courts that have recognized that terminating an employee who violates an RWA does not run afoul of the ADA or other applicable law.

The plaintiff had been employed with Con-way Freight, Inc., as a Driver Sales Representative (DSR). U.S. Department of Transportation (DOT) regulations require Con-way to maintain strict drug and alcohol screening policies for its DSR employees. In 2009, the plaintiff requested a leave of absence under the FMLA to enter an alcohol rehabilitation program. Con-way approved his request and did not discipline him as a result of his leave. Upon his return to work, however, Con-way required the plaintiff to sign an RWA in which he agreed to remain "free of drugs and alcohol (on company time as well as off company time) for the duration of his employment."

Within a month of signing the RWA, the plaintiff entered an alcohol abuse treatment center after he resumed drinking alcohol. Approximately two weeks later, Con-way terminated his employment.

In affirming summary judgment, the Third Circuit held that the plaintiff was unable to establish that his discharge violated the ADA, PHRA, or FMLA. Notably, the court held that the plaintiff could not prove that Con-way's reliance on the RWA was a pretext for unlawful discrimination.

In addition, the court held that the plaintiff could not prove that the RWA violated the ADA's prohibition of "qualification standards, employment tests or other selection criteria that screen out an individual with a disability." Relying on precedent from the Sixth and Eighth Circuits, the court held that employers do not violate the ADA merely by entering into RWAs that impose employment conditions different from those of other employees. The court acknowledged the plaintiff was subject to different standards than other employees who did not sign a RWA, but explained that this stemmed from the terms of his RWA rather than from disability discrimination.

Importantly, the court noted that the RWA did not restrict the ability of individuals who suffer from alcoholism to work at Con-way. Instead, the RWA merely prohibited any employee who is subject to it from consuming alcohol.

The court also affirmed summary judgment on the plaintiff's FMLA claim, holding that he submitted no evidence suggesting that Con-way would not have discharged him had he not requested FMLA protected leave. The court further held that the RWA did not interfere with the plaintiff exercising his rights under the FMLA because Con-way requested the RWA in accordance with its obligations under the DOT regulations to maintain strict alcohol policies for covered employees.

The court's holding should give employers confidence when it becomes necessary to terminate an employee with a substance abuse problem who has entered into a properly constructed and applied RWA.

- Brian D. Pedrow and Mark Kowal

Employer Voice-Recording Ban Is Lawful, NLRB Administrative Law Judge Finds

A National Labor Relations Board (NLRB) Administrative Law Judge (ALJ) recently found that a policy of Whole Foods Markets, Inc., prohibiting employees from recording conversations in the workplace did not violate the National Labor Relations Act (the Act). Because cell phones, tablets, and other devices with recording capabilities are now ubiquitous, even in the workplace, employers should take note of this decision as they draft and apply their own anti-recording rules.

In Whole Foods Market, Inc., the ALJ found that, because the text of the employer's rule explained its purpose, and because that purpose was "clear, logical, and legitimate," no employee could reasonably construe the rule as a prohibition on rights protected by the Act.

According to the Whole Foods policy, employees could not "record conversations with a tape recorder or other recording device (including a cell phone or any electronic device) unless prior approval is received from [their] store or facility leadership." It further stated: "The purpose of this policy is to eliminate a chilling effect to the expression of views that may exist when one person is concerned that his or her conversation with another is being secretly recorded. This concern can inhibit spontaneous and honest dialogue especially when sensitive or confidential matters are being discussed."

Analyzing the Whole Foods recording ban under the test articulated by the NLRB in its 2004 Lutheran Heritage Village-Livonia decision, the ALJ determined that the rule did not explicitly restrict any activities protected by the Act because making recordings in the workplace is not a protected right. Further, the rule did not prohibit employees from engaging in any other protected, concerted activities, or speaking about them. Indeed, "[t]he only activity the rule forbids is recording conversations or activities with a recording device. Thus, an employee is free to speak to other employees and engage in protected, concerted activities in those conversations."

The ALJ also found no evidence to suggest that Whole Foods established the policy in response to union activity or that it had applied the rule to restrict the exercise of rights protected by the Act. The ALJ likewise concluded that employees would not reasonably construe the policy as prohibiting activities protected by the Act.

The NLRB General Counsel argued that the rule precluded collection of recorded evidence that could be presented in administrative and judicial forums. The ALJ noted, however, that an employee could present a contemporaneous written record of the conversation, as well as his or her own testimony.

Employers should review any existing policies prohibiting the use of recording devices to ensure that the stated reasons for their policies are clear. Employers should also review other policies that limit the use of technology in the workplace to ensure that they too meet the NLRB's evolving standards.

Employers should take note, however, that the ALJ's decision is subject to review by the NLRB, if either party files exceptions to the decision. As it did in recent decisions involving the use of social media, it is likely that the NLRB would scrutinize the impact of any no-recording rule on employees' rights. We will continue to monitor and report on these developments.

- William K. Kennedy II and Christopher T. Cognato

Welcome to Theodore Flo

We are pleased to welcome Theodore Flo, a consumer financial services and mortgage banking litigator, as the newest member of our Mortgage Banking Group. Theodore is an associate in the firm's Washington, D.C., office and represents financial services industry clients in traditional litigation, class actions, arbitrations, and government enforcement matters.

Theodore has represented five major financial institutions in targeted examinations by the CFPB; conducted internal investigations for banks and Fortune 100 companies of alleged bribery, embezzlement, and FCPA violations; and assisted in negotiating the settlement of a $200 million CFPB enforcement action against a large financial institution.

Theodore previously was counsel at the Federal Home Loan Mortgage Corporation, where he worked on mortgage insurance and other litigation matters. During law school, he clerked for the Federal Trade Commission. He holds a J.D. from George Washington University Law School and a B.A. and B.S. from the University of Maryland.

NMLS Expansion Update

As noted in prior editions of the Mortgage Banking Update, states are transitioning non-mortgage licenses to the NMLS. Most recently, the Utah Department of Financial Institutions began receiving new applications for Deferred Deposit Lender Registrations through the NMLS on November 1. Any company or individual that extends a deferred deposit loan to a Utah citizen, either at a physical location or through the Internet, is required to register.

The Indiana Department of Financial Institutions also added a Money Transmitter License to the NMLS on November 1. Any entity engaged in the business of sending or receiving payment instruments primarily for personal, family, or household purposes must obtain the license. In addition, effective January 1, 2014, a physical presence, such as an in-state office, is no longer a licensing requirement for out-of-state organizations that engage in money transmission with Indiana residents.

- Marc D. Patterson

Copyright © 2013 by Ballard Spahr LLP.
(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.

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