CFPB: Industry Should 'Start Now' To Comply with Workplace Diversity and Inclusion Standards

I recently participated in a panel presentation at the MBA Strategic Markets and Diversity Summit in Washington, D.C. Stuart Ishimaru, Director of the Consumer Financial Protection Bureau's Office of Minority and Women Inclusion, also sat on the panel.

I recently participated in a panel presentation at the MBA Strategic Markets and Diversity Summit, in Washington, D.C. Stuart Ishimaru, Director of the Consumer Financial Protection Bureau's Office of Minority and Women Inclusion, also sat on the panel.

The presentation focused on Section 342 of the Dodd-Frank Act and the proposed Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices (the Proposed Standards). The Proposed Standards were issued by six agencies mandated to assess the diversity and inclusion policies and practices of regulated entities in the financial services industry. We are awaiting issuance of the final standards.

Some of the most common questions being asked about the Proposed Standards are:

When are entities expected to comply?

I asked Mr. Ishimaru if he could let us know when the final standards are expected to be issued and whether regulated entities will have lead-in time to take necessary compliance measures. While Mr. Ishimaru could not say with certainty when this would occur, he recommended that entities "start now" to take compliance steps. We understand that final standards are expected before the end of this year.

To whom do the standards apply?

Section 342 applies to "entities regulated by [an] agency." This means that all entities regulated by the CFPB or by any one of the following eight agencies are covered: Department of the Treasury, Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency (FHFA), all Federal Reserve Banks, Board of Governors of the Federal Reserve System, National Credit Union Administration (NCUA), Office of the Comptroller of Currency (OCC), and Securities and Exchange Commission (SEC). In addition to the CFPB, the agencies that issued the Proposed Standards are OCC, Federal Reserve Board, FDIC, NCUA, and SEC.

The Proposed Standards recognize that some regulated entities also are required to file EEO-1 reports with the Equal Employment Opportunity Commission (EEOC) and/or are federal contractors covered by affirmative action laws. These requirements are triggered by the size of the employer and whether the employer has a federal contract or subcontract above the dollar threshold. However, the proposed standards are broader and not limited in their application to only entities covered by these legal requirements.

What compliance steps are required?

The Proposed Standards contain specific standards across four key areas: organizational commitment to diversity and inclusion; workforce profile and employment practices; procurement and business practices – supplier diversity; and practices to promote transparency of organizational diversity and inclusion.

Recognizing that one size does not fit all, the Proposed Standards note that an entity may tailor its approach to compliance, taking into consideration the entity's size, total assets, number of employees, governance structure, revenues, number of members and/or customers, contract volume, geographic location, and community characteristics.

Given Mr. Ishimaru's recommendation to begin moving toward compliance now, I suggest regulated entities start by assessing what diversity and inclusion measures already are in place and can be continued or expanded in the future. In addition, certain of the Proposed Standards are highly likely to be part of the final standards, including the development of a strategic plan, diversity policies, metrics and progress reporting, and outreach. These areas would be good starting points for an entity's diversity and inclusion program.

- Brian D. Pedrow


Maryland High Court Limits Liability of Assignee Lenders under State's Secondary Mortgage Loan Law

In a recent ruling, the Maryland Court of Appeals substantially limited claims of second mortgage loan borrowers under the state's Secondary Mortgage Loan Law (SMLL), holding that an assignee of a second mortgage is not liable for violations of the SMLL committed by the originating lender.

The SMLL was enacted as a consumer protection statute applicable to residential second mortgage loans. Among other things, the law sets a maximum rate of interest, limits origination and finder's fees, mandates certain form disclosures, prohibits false advertising, and requires the originating lender to consider the borrower's ability to repay the loan. A lender that violates the SMLL may collect only the principal amount of the loan and is not entitled to collect any interest or other charges. If the violation is "knowing," the borrower can also recover treble damages.

In Thompkins v. Mountaineer Investments, LLC, Maryland's highest court held that the SMLL violations committed by the original lender cannot be imputed to a lender that later acquires the loan. Because there is no direct assignee liability under the SMLL, common law, or the UCC, the borrower's sole remedy against an assignee is a claim in recoupment to reduce the amount still owed on the loan. Regarding the plaintiffs in Thompkins, their second mortgage loan had already been repaid in full. Therefore, they had no viable claims under the SMLL against the assignee, because "there is no amount against which their claim in recoupment can be made."

The decision is significant because, in recent years, Maryland's appellate courts have expanded liability for SMLL violations by holding that claims under the law are a statutory specialty subject to a 12-year statute of limitations instead of the state's typical three-year limitations period. The new limit on assignee liability in Thompkins constitutes a reprieve for assignees of second mortgage loans. The holding that assignees are only subject to claims in recoupment is also particularly important because many loans subject to the 12-year statute of limitations have already been repaid in full. This means that there is not even a right of recoupment for those borrowers.

- Robert A. Scott


FTC Announces Settlement with Debt Collector over Alleged FDCPA Violations

The Federal Trade Commission (FTC) recently announced a settlement with a Houston debt collection company and its individual owner related to alleged violations of the Fair Debt Collection Practices Act (FDCPA). This action is the FTC's latest demonstration to the debt collection industry that it does not intend to take a backseat to the Consumer Financial Protection Bureau (CFPB) when it comes to FDCPA enforcement.

According to the FTC's complaint, which named both the debt collection company and its president and sole shareholder as defendants, the defendants violated the FDCPA and Section 5 of the FTC Act by conduct that included:

  • Falsely claiming that collection calls were made on behalf of an attorney or, when calling Spanish-speaking consumers, that the caller was an attorney
  • Making false threats to begin litigation or false claims that litigation has already begun
  • Using a deceptive scheme labeled a "Hard-Ship Program," in which consumers were told they had to provide personal information to qualify for an assistance program when the defendants' true purpose was to obtain such information to assist in future collection efforts
  • Deceiving consumers into paying transaction or convenience fees for telephone-authorized credit card, debit card, or check payments by leading them to believe such fees were required or could not be avoided, including by falsely telling consumers payments sent by mail were not accepted

The stipulated order imposes a $4 million penalty, but based on the defendants' inability to pay, the FTC has agreed to suspend the remainder of the penalty upon payment of $100,000. The individual defendant is also required to transfer a motor home to a third party in an arms-length transaction or surrender it to the lienholder. The order bars the defendants from engaging in any practices that violate the FDCPA, including continuing to engage in the unfair and deceptive conduct alleged in the complaint.

The order also establishes a 10-year period during which the defendants must create and retain for five years certain records and, if certain specified changes occur, submit compliance reports. Such changes include a change in the corporate defendant's structure or any entity in which it has an ownership interest and a change in the individual defendant's role in any business activity.

The debt collection industry continues to be a major CFPB focus, with the CFPB nearing the issuance of proposed debt collection regulations.

- John L. Culhane, Jr., Glen P. Trudel, Stefanie H. Jackman, and Heather S. Klein


U.S. Supreme Court Cell Phone Privacy Decision Deserves Employer Attention

In a unanimous decision, the U.S. Supreme Court ruled on June 25, 2014 in Riley v. California that police generally may not conduct a warrantless search of digital data stored on the cell phone of someone who has been arrested. The ruling likely will have implications beyond the context of arrest-related searches, and it should serve as a reminder to employers that unfettered access to data on mobile devices used by their employees will likely infringe upon employees' reasonable privacy expectations, regardless of whether such devices are company-provided.

The question before the Court was whether police searches of digital data stored on the cell phones of individuals who had been arrested were reasonable searches "incident to a lawful arrest" and therefore excepted from the Fourth Amendment's warrant requirement. The Court heard oral argument in April of this year in two cases on the issue, but issued a single opinion.

In the first case, Riley v. California, Petitioner David Riley was arrested on weapons charges; a police officer searched Mr. Riley and seized a smartphone from his pocket.

The smartphone contained photographs and videos, which officers used to connect and charge Mr. Riley with an earlier shooting. In the second case, United States v. Wurie, Respondent Brima Wurie was arrested after he was observed making an apparent drug sale; during a search of his person, officers seized two cell phones, including a flip phone containing substantial call log data. Officers used this data to locate Mr. Wurie's home, where, after executing a search warrant, they found evidence sufficient to charge him with drug and weapons offenses.

A substantial portion of the Court's opinion is devoted to discussing how modern cell phones—typically, smartphones—differ from physical objects. The Court discussed modern cell phones' capacity to store large amounts of private data over long time periods, in the form of text, pictures, videos, metadata, mobile application data, and other data. Such data, Chief Justice John G. Roberts, Jr., wrote, may be used to reconstruct "[t]he sum of an individual's private life."

A cell phone search, the Court reasoned, therefore "implicates substantially greater individual privacy interests than a brief physical search." The Court found that in the context of modern cell phones, individual privacy interests generally outweigh the government's interest in safety and preservation of evidence.

The Riley decision represents a victory for advocates of individual privacy rights, and signals the need to carefully consider the bounds for accessing private data in a digital age. In light of the decision, employers that permit the use of employee-owned devices for work purposes—including cell phones, tablets, and laptops—should make sure they have a Bring Your Own Device (BYOD) or mobile device policy in place that is understandable and carefully calibrated to strike a balance between individual privacy interests and the employer's interests.

- David S. Fryman


Supreme Court Sets Framework for Determining Software Patent Eligibility

The U.S. Supreme Court recently issued an important opinion in Alice Corp. v. CLS Bank International regarding the patent eligibility of basic business methods covered in computer software patents. Writing for the unanimous Court, Justice Clarence Thomas used prior precedent to set out a clear, two-part test for patent eligibility under 35 U.S.C. §101 and found the claims at issue to be patent-ineligible because they were "drawn to the abstract idea" of intermediated settlement. The ruling deals a blow to patent trolls and those who seek to enforce overbroad software patents drawn to abstract concepts.

Alice Corp.'s patents were directed to a computerized scheme for mitigating the risk that only one party to a transaction will perform. The computerized intermediary would act as a kind of escrow, creating and adjusting on a real-time basis "shadow" credit and debt records that mirrored the parties' real-world accounts, and instructing financial institutions to carry out "permitted" transactions in accordance with the shadow records.

The Supreme Court took review of the case to resolve a fractured Federal Circuit en banc decision in which several judges provided differing approaches for determining patentability of computer software. The Court ruled that using a generic computer or generic computer components to perform conventional tasks does not make an abstract idea patentable.

Incorporating the two-step test espoused in its recent decision in Mayo v. Prometheus, the Court describes a first inquiry into whether the patent claims at issue are directed to a patent-ineligible concept. If so, the Court requires a second inquiry regarding whether the elements of the claims, either individually or as an ordered combination, "transform" the nature of the claims into a patent-eligible invention.

Applying this test to the software patent at issue in Alice Corp., the high court held that the company's patent claims were drawn to an abstract idea of intermediated settlement—which, like the method for hedging risk at issue in Bilski v. Kappos, the Court described as "a fundamental economic practice long prevalent in our system of commerce." The Court further called the use of a third-party intermediary "a building block of the modern economy," language that should prove helpful to financial institutions defending against patent claims drawn to basic economic practices.

In applying the second step, the Court held that the abstract idea was not transformed into a patent-eligible invention because all of the claims, including the method, system, and computer program claims, merely added a generic computer or generic computer components to implement the abstract notion of intermediated settlement.

This decision will inform the federal courts and the Patent Office alike in deciding the patent eligibility of basic business methods that constitute "abstract concepts"; such concepts may not be patentable even if computer software or systems are employed to implement them.

- Brian W. LaCorte, Charley F. Brown, and Sean J. Holder


Congratulations to New Partners Mark Furletti and Dan McKenna

The Mortgage Banking Group congratulates Mark J. Furletti and Daniel JT McKenna on their election as partners at Ballard Spahr, effective July 1. Based in the firm's Philadelphia office, they have handled significant matters for the Group, putting in countless hours of hard work to achieve this professional milestone.

Mark, a business and finance attorney, focuses on federal and state consumer lending and payments laws, particularly those that apply to payment cards, vehicle-secured loans, unsecured loans, and deposit products. He counsels providers of consumer financial services, including banks, on regulatory compliance matters and has successfully represented such providers in class action litigation. Mark provides guidance on various consumer protection laws, such as the Truth in Lending Act (TILA), Fair Credit Reporting Act (FCRA), Equal Credit Opportunity Act (ECOA), and UDAAP statutes prohibiting unfair, deceptive, and abusive acts and practices. He also defends class actions alleging violations of these laws. Before joining Ballard Spahr, he worked for several years at the Federal Reserve Bank of Philadelphia.

Dan is a litigator in our Mortgage Banking Group who advises mortgage lenders, servicers and other financial services institutions on lending, collection, arbitration, and litigation compliance issues and defends them in individual and class actions brought by consumers, businesses, and government agencies. His consumer and commercial finance/banking litigation and arbitration experience includes representing lenders, servicers, and vendors in actions brought across the country under various federal and state statutes and regulations. He handles a wide range of cases throughout Ballard's 14 offices, including ability to repay claims, loan modification actions and mass actions, allegations of FCRA, FDCPA, TILA, HOEPA, RESPA, and UDAP violations and foreclosure defense claims. In addition, Dan leads the nationwide implementation of the Wills for Heroes program, which provides free estate planning services to veterans, police, firefighters, and first responders.

Please join us in welcoming Mark and Dan to the partnership.

- Richard J. Andreano, Jr. and John D. Socknat

Louisiana Amends Consumer Loan Licensing Requirements

Louisiana Governor Bobby Jindal recently signed HB 766 into law, which amends numerous provisions regulating creditors engaging in any consumer credit or deferred presentment transaction. Under the law, a creditor may not take assignments, undertake direct collection of payments, or enforce rights against consumers arising from consumer loans without first obtaining a license. However, a creditor may collect and enforce consumer loan obligations of which he has taken assignment for three months without a license if:

  • He notifies the Commissioner in writing of his intention to take assignments at least 10 days before the assignment is made
  • The Commissioner does not object
  • The creditor promptly applies for a license afterward that is not denied

Notably, in a change from current law, the amendment eliminates the exemption for creditors that do not have in-state offices. Under the new law, such creditors will be required to obtain a license regardless of whether they maintain an in-state office.

The bill makes a number of other changes to the laws governing licensees, among them, changes to record-keeping requirements; requirements regarding registration with the Louisiana Secretary of State; finance charge and fee restrictions; requirements pertaining to payment plans for consumers who are unable to repay their consumer loans; and public notice requirements mandating that licensees post certain information at their lending locations and websites.

The changes take effect January 15, 2015.

- Marc D. Patterson


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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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