CFPB Announces eClosing Pilot Program Participants

The CFPB has announced the participants for its mortgage eClosing pilot program, a three-month pilot set to begin later this year. The CFPB’s plans to conduct the pilot were unveiled at a forum on the mortgage closing process held in April 2014, together with the CFPB’s release of a report on the “major pain points associated with the closing process” and guidelines for the pilot program.

The pilot program is intended to explore how the increased use of technology during the mortgage closing process can address those “pain points,” affect consumer understanding and engagement, and save time and money for participants. It is part of the CFPB’s “Know Before You Owe” mortgage initiative.

The CFPB has described the 12 participants it has selected for the pilot as “a mix of technology vendors providing eClosing solutions, and creditors that have contracted to close loans using those solutions.”

The eClosing features that the CFPB plans to study in the pilot include (1) how pre-closing educational materials such as document summaries, term definitions, or process explanations can help improve the closing process for consumers, including whether the order of the documents changes the consumer experience, (2) various technologies that would let consumers see the entire package of closing documents ahead of time, and (3) how eClosings can help consumers and industry “save time and money by preventing last-minute surprises and unnecessary bottlenecks caused by outdated processes.”

Calif. Law Does Not Bar Recording of Cell Phone Calls by Participants, Federal Court Rules

A California federal court recently ruled that the state’s call recording statute does not apply to cell phone call participants. This decision should help companies that record consumer calls for monitoring purposes defeat class actions brought under the statute.

At issue in Young v. Hilton Worldwide Inc., et al. was the scope of Section 632.7 of the California Invasion of Privacy Act (CIPA), which applies to any person “who without the consent of all parties to a communication, intercepts or receives and intentionally records” (emphasis added) a call involving a wireless telephone. CIPA penalties are draconian, with violations potentially yielding damages of $5,000 per violation or triple the amount of actual damages, whichever is greater. Such penalties, together with several prior court decisions concluding that Section 632.7 applies to call participants because each party “receives a call,” have resulted in numerous class action lawsuits against companies that routinely record cell phone calls for monitoring purposes.

The plaintiff in Young alleged that Hilton violated Section 632.7 when it recorded a cell phone call he made to a customer service center to update his credit card information. In granting Hilton’s motion for judgment on the pleadings, the court accepted the defendants’ argument that, in enacting Section 632.7, the California Legislature was concerned about third-party interception of calls. According to the court, “[t]he statutory scheme makes it clear that [this section] refer[s] to the actual interception or reception of these radio signals by third parties and do[es] not restrict the parties to a call from recording those calls.” The court further observed that to the extent Hilton “received” the plaintiff’s call, it “had permission” to receive the call, and “service observing recordings are exempted.”.

- Barbara S. Mishkin and Mark J. Furletti

CFPB and Federal Banking Agencies Issue Guidance on Unfair or Deceptive Credit Practices in Light of Reg AA Repeal

Concurrently with a proposal from the Fed to repeal Regulation AA (12 CFR part 227), the CFPB and the federal banking agencies (Fed, OCC, FDIC, and NCUA) have issued interagency guidance regarding unfair or deceptive credit practices.  

The Fed adopted Reg AA in 1985 pursuant to a directive in Section 18(f)(1) of the FTC Act requiring the Fed to issue rules applicable to banks that were substantially similar to rules issued by the FTC to prohibit unfair or deceptive acts or practices by nonbanks. Reg AA was patterned on the FTC’s credit practices rule (16 CFR sections 44.1-.5) (FTC Rule) and was adopted by the Fed in reliance on the FTC’s findings that the prohibited practices were unfair or deceptive. 

Reg AA, as does the FTC Rule, generally prohibits (1) the use of certain provisions in consumer contracts such as confessions of judgment and security interests in household goods (other than purchase money security interests), (2) misrepresenting the nature and extent of a cosigner’s liability and failing to inform a cosigner of the nature of such liability prior to becoming obligated, and (3) pyramiding late fees. 

The Fed’s proposed repeal of Reg AA results from the Dodd-Frank Act’s repeal of the banking agencies’ rulewriting authority under Section 18(f)(1) of the FTC Act. In addition, Reg AA was excluded from the Fed’s authority transferred to the CFPB under Dodd-Frank. However, Dodd-Frank gave the CFPB independent authority to issue rules prohibiting unfair, deceptive, or abusive acts or practices. (The OCC never had authority to issue UDAP rules under the FTC Act, and, for that reason, the OTS version of the FTC Rule was effectively repealed by the provisions of Dodd-Frank transferring certain OTS functions to the Fed. In its proposal, the Fed notes that the NCUA is also planning to repeal its version of the FTC Rule.) 

The Guidance is intended to clarify that the repeal of Reg AA and other credit practices rules “should not be construed as a determination by the Agencies that the credit practices described in these former regulations are permissible.” The Guidance notes that notwithstanding the repeals, the agencies retain supervisory and enforcement authority regarding UDAPs. Accordingly the Guidance warns that the agencies “believe that, depending on the facts and circumstances, if banks, savings associations and Federal credit unions engage in the unfair or deceptive practices described in the former credit practices rules, such conduct may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act. The Agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct.” 

As the Guidance notes, the FTC Rule remains in effect for creditors within the FTC’s jurisdiction and, for nonbank creditors, can be enforced by the CFPB as well as the FTC. The Guidance also notes that the FTC Rule and the repealed credit practices rule required creditors to provide a prescribed “Notice to Cosigner.” The agencies state that that they believe creditors “have properly disclosed a cosigner’s liability if, prior to obligation, they continue to provide a 'Notice to Cosigner.'”  

It bears noting that some states have statutory provisions exempting a creditor from a state law requirement to give a state cosigner notice if the creditor gives the required federal notice. Since banks will no longer be subject to a federal law cosigner notice requirement, they should consult with counsel regarding how to proceed in such states.

- Barbara S. Mishkin

N.Y. Grand Jury Indicts 12 Online Payday Lenders and 3 Individuals

In a shot across the bow of online payday lenders who allegedly disregard state law where their borrowers reside, a New York County grand jury recently voted a criminal usury and conspiracy indictment against 12 companies allegedly involved in such lending and their owner, chief operating officer, and general counsel. Manhattan District Attorney Cyrus Vance issued a press release criticizing the “exorbitant interest rates and automatic payments from borrowers’ bank accounts” to which New York borrowers were subject. This appears to be the first enforcement action of its kind against payday lenders.

According to the indictment, prosecutors claim that the defendants offered loans to New York residents at annual interest rates that ranged from 350 to 650 percent, exceeding the state’s maximum of 25 percent. The indictment further asserts that the alleged scheme utilized a number of companies to create a “systematic and pervasive usury scheme” and conceal the defendants’ participation in distributing the loans.

While we are aware of past threatened criminal usury proceedings against payday lenders, The New York Times suggests that criminal usury charges against payday lenders “are rare,” and in our experience they are generally seen in the organized crime context. As far as we know, this is the first criminal case against a payday lender, but the Times reports that “this case is a harbinger of others that may be brought to rein in payday lenders that offer quick cash.” According to the Times, officials have indicated their intention to expand investigations to other entities that allegedly assist unlawful payday lenders.

As noted in a previous alert, the New York State Department of Financial Services (DFS) reached out to banks, debt collectors, and NACHA last August regarding their alleged roles in facilitating the distribution and collection of illegal payday loans. Last September, New York Attorney General Eric Schneiderman announced several settlements with a number of payday lenders and at that time said his “office will continue to crack down on an industry that exploits desperate consumers across our state.”

This action taken by the New York County District Attorney is an unprecedented step against payday lenders, and we believe that, in the future, other industries could also be targeted. For example, as we recently warned, the debt collection industry is under increasing government focus. All companies providing financial services to subprime customers should be vigilant in ensuring that they fully comply with applicable civil and criminal laws in every jurisdiction they touch, as well as emerging UDAAP standards addressing unfair, deceptive, and abusive acts and practices.

- Marjorie J. Peerce

New Jersey's 'Ban the Box' Law Signed by Governor Christie

The Opportunity to Compete Act, which seeks to help individuals with criminal histories reintegrate into the workplace, was recently signed by New Jersey Governor Chris Christie. The “ban the box” law will prohibit most New Jersey employers from asking applicants about their criminal histories until after a first interview. New Jersey joins numerous states and localities that have enacted such a law.

The new law will take effect March 1, 2015, making it unlawful for public and private employers with 15 or more employees to do either of the following:

  • Inquire about or require an applicant to disclose any information regarding the applicant’s criminal record during the application process and first interview
  • Publish advertisements that purport to exclude applicants who have been arrested or convicted of a crime or offense

 The law contains exceptions for inquiries during the initial application process for positions in law enforcement, corrections, the judiciary, homeland security, or emergency management, and for positions where a criminal history record background check is required by law.

Under this law, job applications that contain a box to check if the applicant has been convicted of a crime, or that ask about arrests or convictions in any manner, must be revised. However, the law does not prohibit employers from making inquiries and running criminal background checks on applicants later in the hiring process. It also does not bar adverse action by employers against applicants based on the applicant’s criminal record, provided that the record has not been expunged and the action is consistent with other applicable laws, rules, and regulations. Of course, employers should continue to handle any criminal background check and all information about criminal records in a manner consistent with their obligations under the Fair Credit Reporting Act and state and federal anti-discrimination laws.

The law prohibits counties and municipalities from adopting ordinances regarding criminal histories in the employment context, except for ordinances adopted to regulate municipal operations. It also preempts such ordinances adopted before the effective date of the Opportunity to Compete Act, such as Newark’s 2012 ordinance, which contains hiring process restrictions beyond “ban the box.”

The law signed by Governor Christie is a scaled-back, more business-friendly version of the original bill. Earlier proposed provisions would have prohibited employers from conducting criminal background checks before a conditional job offer and limited the offenses that could be considered by an employer. Also removed was the individualized assessment requirement, which would have required employers to document that they evaluated the results of a background check against specifically identified factors, such as the nature of the offense and how long ago it occurred and information provided by the applicant pertaining to rehabilitation. While these factors were removed from the New Jersey law, they are familiar to employers from the EEOC’s 2012 Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions Under Title VII of the Civil Rights Act of 1964. Our previous alert on this guidance is available here.

Violations of the law will result in civil penalties of up to $1,000 for the first violation, $5,000 for the second violation, and $10,000 for each subsequent violation. Importantly, the law excludes a private cause of action against an employer by an applicant.

Patricia A. Smith

California Creates Exemption from Finance Lenders Law for Certain Nonprofits

The state of California amended its Finance Lenders Law in an effort to help individuals obtain access to affordable, credit-building small dollar loans. The new law makes exempt from Finance Lenders Law a nonprofit organization that facilitates one or more zero-interest, low-cost loans with a minimum principal amount upon origination of $250 and a maximum principal amount upon origination of $2,500 if certain requirements are met. These requirements include, among other things, that the organization is exempt from federal income taxes, that no part of the net earnings of the organization inures to the benefit of a private person, and that the loan terms meet certain standards. 

In addition, the law requires organizations exempt under the provision to:

  • Offer a borrower a credit education program or seminar at no cost to the borrower
  • Report each borrower's payment performance to at least one consumer reporting agency
  • Underwrite each loan and ensure that a loan is not made if the organization determines that the borrower's total monthly debt service payments exceed a specified amount

The legislation becomes effective on January 1, 2015.

Marc D. Patterson

Copyright © 2014 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

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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