Legal Alert

Mortgage Banking Update - May 13, 2021

May 13, 2021
In This Issue:


This Week’s Podcast: The Eleventh Circuit’s Troubling and Unprecedented FDCPA Decision in Hunstein: Profound Implications for the Collections Industry

The ruling that a debt collector’s transmittal of debt information to its letter vendor could violate the FDCPA’s limits on third party communications has produced shock waves. After reviewing the court’s FDCPA analysis, we discuss the decision’s potential application to a range of third party service providers and to first-party creditors and the prospects for rehearing or SCOTUS review. We also share our thoughts on possible industry strategies for responding to the decision and look at the court’s analysis finding that the plaintiff had standing to bring his FDCPA claim.

Ballard Spahr Senior Counsel Alan Kaplinsky hosts the conversation joined by Stefanie Jackman and Burt Rublin, partners in the firm’s Consumer Financial Services Group.

Click here to listen to the podcast. Click here to read our blog post about Hunstein.

- Alan. S. Kaplinsky, Stefanie H. Jackman, Burt M. Rublin & Christopher J. Willis

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This Week’s Podcast: Recent Developments at the California Department of Financial Protection and Innovation: A Conversation with DFPI Commissioner Manny Alvarez

After discussing the pandemic’s impact on the DFPI’s activities, Commissioner Alvarez discusses the DFPI’s focus on diversity and inclusion, its creation of a new registration system for financial services companies, and its approach to enforcement priorities. The Commissioner also spoke to the impact of a Biden Administration, including possible areas of collaboration with the CFPB, and the role of its new Office of Financial Technology Innovation.

Tony Kaye, a partner in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation, joined by Dan McKenna, Practice Group Leader of the firm’s Consumer Financial Services Litigation Group.

Click here to listen to the podcast.

- Anthony C. Kaye, Daniel JT McKenna, Christopher J. Willis & Alan S. Kaplinsky

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MBA Provides Templates to Advise Borrowers of Upcoming LIBOR Transition

The Mortgage Bankers Association (MBA) recently released templates, one in a notice form and one in letter form, to advise borrowers with existing adjustable rate mortgage (ARM) loans that use the London Interbank Offered Rate (LIBOR) as the index of the upcoming transition away from LIBOR. The templates are available on the MBA’s LIBOR Transition Resources webpage.

The templates are designed to advise borrowers that in the future the LIBOR index will be replaced with another index, and that more information on the replacement will be provided in the future. The templates also advise borrowers that in addition to the replacement of the LIBOR index, the margin also may change, but that no other aspects of the note will change. The templates specifically point out that there will be no change to the maximum interest rate that the consumer may pay, or to the timing of interest rate resets.

Parties considering the use of the templates should compare them to the existing ARM notes in their portfolio and make changes as appropriate to conform with the notes.

In 2019 the MBA released a template to advise consumers considering ARM loans that LIBOR would be replaced in the future. That template also is available on the MBA’s LIBOR Transition Resources webpage.

- Richard J. Andreano, Jr.

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New Article Argues for use of Federal And State Laws Prohibiting Unfair Acts or Practices to Bring Discrimination Claims

An article recently published by the Student Borrower Protection Center titled “Discrimination is ‘Unfair’,” argues that the CFPB, FTC, state attorneys general and regulators, and in some cases private individuals, should consider challenging discrimination as an “unfair” practice covered by federal and state laws prohibiting unfair, deceptive, or abusive acts and practices. (The authors are two attorneys who are members of a law firm that frequently represents plaintiffs in discrimination cases.)

The article calls unfairness “an obvious fit for addressing common types of discriminatory conduct” because in the authors’ view, discriminatory conduct “fits neatly within” the Dodd-Frank Act and FTC definitions of an unfair act or practice. Under those laws, an act or practice is unfair if (1) it is likely to cause substantial injury to consumers; (2) the injury is not reasonably avoidable; and (3) the injury is not outweighed by countervailing benefits to consumers or competition. The article asserts that the use of an “unfairness-discrimination” theory would fill important gaps in the existing patchwork of antidiscrimination laws, most significantly practices not covered by the ECOA. The article further argues that both disparate treatment and disparate impact would be actionable under this view of UDAAP statutes.

The article asserts that agencies and states could use the unfairness discrimination theory immediately through supervision or enforcement and private parties could do so immediately through private actions where allowed by state law. According to the article, “[p]articularly in cases with strong evidence of intentional discrimination against traditionally protected classes, defenses that entities did not have sufficient notice of this application of unfairness statutes are unlikely to be persuasive.”

The article also calls upon “federal agencies with administrative authority over the unfairness laws [to] also pursue complementary regulatory actions,” such as first issuing “guidance and interpretive rules that do not require notice-and-comment rulemaking” and next engaging in formal rulemaking to adopt rules that apply the unfairness-discrimination theory.

According to the article, Rohit Chopra, President Biden’s nominee for CFPB Director, “has advocated this theory.” The article quotes Mr. Chopra as having said that “discriminatory practices often are three for three, causing grievous harm that cannot be avoided.” The “three for three” to which Mr. Chopra referred in the quoted language are the three elements of the definition of an unfair practice in the Dodd-Frank Act and the FTC Act.

Nevertheless, in our view, the idea that UDAP/UDAAP statutes could be used to bring discrimination claims in areas where Congress has not chosen to enact a specific statute seems like more of a wish than a real, practical possibility. Congress has enacted anti-discrimination laws in carefully-chosen areas – employment, housing, credit, public accommodations – and has limited the reach of each of the statutes in those areas. Interpreting the FTC Act (which has been around more than 100 years) to prohibit all discrimination would imply that Congress decided to “fill the gaps” in anti-discrimination legislation before the gaps even existed, which makes little sense. And the gaps that this argument is designed to fill were created by Congress in the manner in which it enacted legislation. We believe, and suspect a court would find, that it is Congress’ prerogative to address these “gaps,” and that it would be inappropriate for a court or administrative agency to do so.

The article’s assertion that disparate impact claims could be brought under UDAP/UDAAP statutes is even more lacking in support. The U.S. Supreme Court held in Inclusive Communities and Smith v. City of Jackson that Congress must use language in a statute to show an intent to apply an “effects test.” There is certainly no such language in the FTC Act or in the definition of “unfair” in Dodd-Frank.

It’s natural for consumer advocates to argue for expansive interpretations of consumer protection laws, but in this instance, we believe that interpreting UDAP/UDAAP statutes in the manner suggested by this article is a step well too far, that would be highly likely to be rejected by the federal courts.

- Christopher J. Willis

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California DFPI Issues Proposed Regulations to Implement New Debt Collection Licensing Act

On April 23, 2021, the California Department of Financial Protection and Innovation (“DFPI”) issued proposed regulations to implement the Debt Collection Licensing Act (“DCLA”).

Debt collector licenses are required beginning on January 1, 2022 but a debt collector that applies for a license before that date can continue to operate while the application is pending. In its Notice of Rulemaking Action, the DFPI states that it anticipates that final rules will become effective on or about November 19, 2021, thereby allowing debt collectors to apply for a license before January 1, 2022.

Specifically, the DFPI is proposing to add the following sections to subchapter 11.3 of title 10 of the California Code of Regulations setting forth the requirements for obtaining a debt collection license under the DCLA:

  • Section 1850 – Defines terms used in the regulations.
  • Section 1850.6 – Requires electronic filing of license application and related information through the Nationwide Multistate Licensing System (NMLS).
  • Section 1850.7 – Sets forth the license application and information requirements.
  • Section 1850.8 – Requires appointment of the commissioner as agent for service of process.
  • Section 1850.9 – Requires fingerprinting through the California Department of Justice.
  • Section 1850.10 – Requires investigative background report for non-residents of the U.S.
  • Section 1850.11 – Provides notices concerning information practices and privacy.
  • Section 1850.12 – Sets forth the process to challenge information in NMLS.
  • Section 1850.13 – Provides for sharing information with other government agencies.
  • Section 1850.14 – Clarifies “financial responsibility” for purposes of denying a license.
  • Section 1850.15 – Sets forth grounds for denying a license.
  • Section 1850.16 – Requires designated email address to receive communications from the department.
  • Section 1850.30 – Provides process for reporting changes to information in the license application.
  • Section 1850.31 – Provides process for reporting new officers, directors and other key personnel.
  • Section 1850.32 – Provides process to register new branch office or change of existing branch office.
  • Section 1850.50 – Requires surety bond of at least $25,000 and sets forth the bond form.
  • Section 1850.60 – Provides license is effective until revoked, suspended or surrendered.
  • Section 1850.61 – Provides process to surrender license.

The 45-day public comment period for the proposal ends on June 8, 2021. Comments can be sent by email to or by regular mail to Department of Financial Protection and Innovation, Attn: Sandra Sandoval, 300 S. Spring Street, Suite 15513, Los Angeles, California 90013.

We know that many in the industry have a number of questions about whether they will need to obtain a license, how existing licenses may (or may not) obviate the need to obtain a license, the scope of exemptions, and a host of other topics. This is a critical opportunity to raise those questions and advocate for the desired outcome. Our firm is already working with the DFPI on a number of matters and stands ready to assist in the comment submission process.

- Susan N. Nikdel

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CFPB Enters Into Consent Order with Reverse Mortgage Lender and Broker

The CFPB recently entered into a consent order with Nationwide Equities Corporation (Nationwide), which the CFPB refers to as a mortgage broker and mortgage lender that primarily provides jumbo reverse mortgage loans and Home Equity Conversion Mortgage Loans (HECMs). The CFPB asserts in the consent order that Nationwide engaged in direct mail advertising practices that violated the Mortgage Acts and Practices—Advertising Rule (the “MAP Rule,” also known as Regulation N), the closed-end advertising requirements of Regulation Z under the Truth in Lending Act (TILA), and the prohibition against unfair, deceptive or abusive acts or practices under the Consumer Financial Protection Act of 2010 (the “CFPA”).

With regard to the method and volume of advertising, the CFPB asserts that since December 2015 Nationwide has mailed hundreds of thousands of mortgage advertisements and distributed flyers to older homeowners and financial professionals whose clients were older homeowners in at least 36 states and the District of Columbia. The CFPB also asserts that hundreds of thousands of consumers have received at least one of Nationwide’s direct-mail advertisements, and thousands of consumers have obtained mortgages through Nationwide.

With regard to the asserted violations of the laws noted above, the CFPB claims that the direct mail advertisements and the flyers contain three main types of false, misleading or inaccurate representations:

  1. False or misleading representations about the costs of a reverse mortgage loan and the consequences of nonpayment.
  2. False or misleading representations about the nature of the mortgage credit product offered and the source of communications sent to consumers.
  3. False or misleading representations about the amount of cash or credit available, including the likelihood of obtaining a particular product or term.

The CFPB asserts that the following statements in advertisements constitute the first type of false or misleading representation, because they incorrectly implied that the consumer would not have to pay taxes or insurance:

  • Nationwide offered a loan “that allows senior homeowners to immediately increase their monthly cash flow TAX FREE” and “accomplish their goals without touching savings, investments, or current income.”
  • Nationwide claimed taking out a reverse mortgage loan “[e]liminates monthly mortgage payments” while allowing the borrower to “[s]tay in your home,” with “[l]oan proceeds [that] are tax-free.”

The CFPB noted that a consumer could lose their home to foreclosure for the nonpayment of taxes and insurance.

The CFPB asserts that the following statements in advertisements constitute the second type of false or misleading representation, because the statements misrepresented the nature of the mortgage credit product offered and the source of communications sent to consumers:

  • Certain solicitations sent to consumers with existing reverse mortgage loans provided that “THE TIME HAS COME TO UPDATE YOUR REVERSE MORTGAGE” and later repeated that the consumer’s current loan was “due for an update.”
  • One letter template was stamped “***IMPORTANT NOTICE***” and “DATED DOCUMENT OPEN IMMEDIATELY,” and warned, “[o]ur records indicate that you have not yet called to discuss your eligibility as a homeowner aged 62 or older for your property at [the consumer’s specific address]” and later described the reverse mortgage loan offered by Nationwide as a “Federally Insured Program that allows senior homeowners to immediately increase their monthly cash flow TAX FREE.”
  • Another letter template was purportedly from the “ADMINISTRATIVE OFFICE” and contained sections titled “NOTICE” and “STATUS.” It informed the consumer that her “waiting period expired” and that she had “not accessed [her] equity reserves.” The letter then listed the “equity reserves” seemingly available to the borrower.
  • One letter was purportedly from the consumer’s “Assigned Officer” within an “INFORMATION VERIFICATION DEPARTMENT” and was titled “REQUEST FOR VERIFICATION OF OCCUPANCY” and stamped “VERIFY.” The letter stated that the company “need[ed] to verify that you occupy this property as your Primary Residence” and that there are “current benefits you can take advantage of as long as you still occupy the property. Call us right away . . . so we can verify.”
  • One letter sent to 30,000 consumers with existing reverse mortgage loans claimed to have “exciting news regarding your reverse mortgage,” announcing that the consumer could “TAKE FULL ADVANTAGE OF YOUR REVERSE MORTGAGE” and “be eligible for more cash,” without having to pay any origination charges.
  • Another letter template distributed to 30,000 consumers told consumers with existing reverse mortgage loans that they may be “eligible to receive additional money by accessing more of the equity in your home.” The letter represented that this additional money would “come from the change in value and principal limit and would not change any of the rules or fundamentals of your existing reverse mortgage.”

With regard to solicitations that, in the view of the CFPB, suggested to the consumer that the solicitations were from the consumer’s current reverse mortgage lender offering a loan modification, the CFPB stated that in reality Nationwide was offering an entirely new reverse mortgage that would require a new credit check, appraisal, title search, initial mortgage insurance premium (MIP), and other costs associated with the loan. The CFPB noted borrowers refinancing an existing FHA Home Equity Conversion Mortgage (HECM) with a new HECM are required to pay an initial MIP of two percent of the maximum claim amount, which is the difference between the maximum claim amount for the new HECM loan and the maximum claim amount for the existing HECM being refinanced. It also appears that the CFPB believed that certain statements suggested that Nationwide is, or is affiliated with, a government agency.

The CFPB asserts that the following statements in advertisements constitute the third type of false or misleading representation, because the stated pre-approved amounts were not tailored to the borrowers or their homes:

  • Letters offered multiple consumers of different ages and with home values that varied the exact same “pre-approved” loan amount—$20,752.43. The letters advised consumers that they were “pre-approved” for the stated dollar amount and used phrases like, “We’ve done our homework. Your elevated status of Pre-Approved means you already have what it takes to qualify,” suggesting that the preapproved loan amount was based on some specific characteristics of the borrower or her home.

The CFPB also asserts that the following statements in advertisements constitute the third type of false or misleading representation, because Nationwide did not possess the information necessary to make representations that borrowers were “pre-approved” or eligible for specific terms of credit and, thus, misrepresented that it could arrange or offer a reverse mortgage loan with the specific credit terms referenced:

  • One letter sent to 5,000 borrowers stated that “THE TIME HAS COME TO UPDATE YOUR REVERSE MORTGAGE” and “you have been due for an update for [a number of months over 18].” The letter also included a pie chart indicating that specific amounts were available for distribution to the consumer should she refinance her loan.
  • Another letter sent 30,000 times during the Relevant Period claimed the borrower was “PRE-APPROVED” for a reverse mortgage refinance and was “eligible to receive additional money” which would “come from the change in value and principal limit and would not change any of the rules or fundamentals of your existing Reverse Mortgage.”
  • Another letter distributed to 15,000 consumers listed an “Estimated Available Amount” to the borrower and assured the borrower that “We’ve done our homework.”

The CFPB additionally asserts that the following statements in advertisements constitute the third type of false or misleading representation, because (1) Nationwide made a misleading comparison between a consumer’s current reverse mortgage loan and a hypothetical new reverse mortgage loan that would be available to the consumer, and (2) the statements misrepresented that taking out a second reverse mortgage would result in substantial savings to the consumer:

  • One letter sent to over 16,000 consumers promised that borrowers would achieve an “IMMENSE SAVING” by taking out a new reverse mortgage loan with the company due to HUD changes to MIP requirements, and that if the borrower elected to place the reverse mortgage proceeds in a line of credit, the amount “will continuously grow and earn interest—every single month!” The letter also stated that according to “research” and a “recent review” performed on the borrower’s account, the borrower could “greatly reduce [her] monthly expenses” and “save [] money and equity each month.”

With regard to the solicitations claiming substantial savings, the CFPB stated that the closing costs on a new loan were likely to be significant and could well outweigh the extra cash available through the refinanced loan. The CFPB also stated that the new loan terms Nationwide would offer a consumer would not necessarily be better than the terms of the consumer’s current reverse mortgage loan.

As noted above, the CFPB asserts that Nationwide sent solicitations directly to older homeowners and financial professionals whose clients were older homeowners. When addressing the MAP rule, the CFPB states that the rule’s prohibitions are not limited to advertisements sent directly to consumers, because the rule prohibits misrepresentations “in any commercial communication.” The CFPB notes that under the MAP rule a commercial communication includes statements “designed to effect a sale or create interest in purchasing good[s] or services.”

The MAP rule has a general prohibition against making any material misrepresentation, expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product. The MAP rule also sets forth a non-exclusive list of specific types of misrepresentations that violate the rule. The CFPB asserts violations of the prohibitions against the following specific types of misrepresentations:

  • The existence, nature, or amount of fees or costs to the consumer associated with the mortgage credit product, including but not limited to misrepresentations that no fees are charged.
  • The terms, amounts, payments, or other requirements relating to taxes or insurance associated with the mortgage credit product, including but not limited to misrepresentations about:
    • Whether separate payment of taxes or insurance is required; or
    • The extent to which payment for taxes or insurance is included in the loan payments, loan amount, or total amount due from the consumer.
  • The amount of the obligation, or the existence, nature, or amount of cash or credit available to the consumer in connection with the mortgage credit product, including but not limited to misrepresentations that the consumer will receive a certain amount of cash or credit as part of a mortgage credit transaction.
  • The existence, number, amount, or timing of any minimum or required payments, including but not limited to misrepresentations about any payments or that no payments are required in a reverse mortgage or other mortgage credit product.
  • The potential for default under the mortgage credit product, including but not limited to misrepresentations concerning the circumstances under which the consumer could default for nonpayment of taxes, insurance, or maintenance, or for failure to meet other obligations.
  • The association of the mortgage credit product or any provider of such product with any other person or program, including but not limited to misrepresentations that:
    • The provider is, or is affiliated with, any governmental entity or other organization; or
    • The product is or relates to a government benefit, or is endorsed, sponsored by, or affiliated with any government or other program, including but not limited to through the use of formats, symbols, or logos that resemble those of such entity, organization, or program.
  • The source of any commercial communication, including but not limited to misrepresentations that a commercial communication is made by or on behalf of the consumer’s current mortgage lender or servicer.
  • The right of the consumer to reside in the dwelling that is the subject of the mortgage credit product, or the duration of such right, including but not limited to misrepresentations concerning how long or under what conditions a consumer with a reverse mortgage can stay in the dwelling.
  • The consumer’s ability or likelihood to obtain any mortgage credit product or term, including but not limited to misrepresentations concerning whether the consumer has been preapproved or guaranteed for any such product or term.
  • The consumer’s ability or likelihood to obtain a refinancing or modification of any mortgage credit product or term, including but not limited to misrepresentations concerning whether the consumer has been preapproved or guaranteed for any such refinancing or modification.

With regard to the Regulation Z closed-end loan advertising requirements, the CFPB asserts a violation of the requirements that an advertisement for credit secured by a first lien on a dwelling must, if applicable, disclose that the advertised payments do not include amounts for taxes and insurance premiums, and that the actual payment obligation will be greater.

With regard to the prohibition against unfair, deceptive or abusive acts or practices under the CFPA, the CFPB simply states that the asserted violations of the MAP rule and the Regulation Z advertising requirements also violate such prohibition.

Among various conduct requirements, Nationwide agreed to designate a senior-level executive as the Advertising Compliance Official. The Advertising Compliance Official must review each mortgage advertisement template before any advertisement based on that template is disseminated to a consumer to ensure that it is compliant with the MAP Rule, Regulation Z, TILA, the CFPA, and the consent order. The Advertising Official also must document the review and, if the advertisement states an amount of cash that a borrower might receive, the documentation must state the method of arriving at that number and include any materials used to determine the availability of that amount.

Nationwide also agreed to pay to the CFPB a civil money penalty of $140,000.

Nationwide does not admit or deny any findings of fact or conclusions of law, except for admitting the facts necessary to establish the CFPB’s jurisdiction over Nationwide and the subject matter of the consent order.

- Richard J. Andreano, Jr.

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Another Maryland Threat to Bank Partner Model Lending

A Maryland administrative action recently removed to the state’s federal district court illustrates how Maryland law continues to present challenges for the bank partner structure used by many lenders.

Last month, Bank of Missouri, an FDIC-insured, Missouri state-chartered bank, and Atlanticus Service Corporation and Fortiva Financial, LLC, the Bank’s non-bank service providers, removed an administrative matter filed against them in January 2021 by the Maryland Department of Labor, Office of the Commissioner of Financial Regulation (OCFR) alleging that the Bank and Atlanticus/Fortiva violated Maryland law by failing to hold required Maryland lending and other licenses. According to the factual allegations in the OCFR’s Charge Letter:

  • The Bank offers in-store retail credit financing as well as store-branded credit cards to Maryland consumers.
  • The Bank retains ownership of the credit accounts and the debtor-creditor relationship with Maryland consumers for the life of the loan account.
  • Atlanticus/Fortiva assists Maryland consumers in obtaining an extension of credit from the Bank by accepting and processing credit applications from consumers.
  • Atlanticus/Fortiva performs all of the collections, servicing, payment and remittance operations in connection with the accounts.

The OCFR charges the Bank with having violated Maryland licensing laws regarding installment loans, consumer loans, and open-end/revolving credit. As to Atlanticus/Fortiva, the OCFR charges them with violating the licensing requirements of Maryland’s Credit Services Business Act and Collection Agency Licensing Act. The OCFR claims that the Bank’s failure to hold the required lending licenses makes the loans unenforceable and prohibits Atlanticus/Fortiva from collecting any amounts on the loans.

In their Notice of Removal, the Bank and Atlanticus/Fortiva claim that the Maryland Office of Administrative Hearings functions as a “state court” for purposes of the statute governing federal removal. They assert that the district court has federal question jurisdiction over the OCFR’s claims against the Bank because those claims are completely preempted by Section 27 of the Federal Deposit Insurance Act, which prescribes the interest rate that state-chartered, federally insured banks can charge and grants such banks interest rate exportation authority. They also argue that the court should exercise supplemental jurisdiction over the claims against Atlanticus/Fortiva because they are bank service companies and part of the same case or controversy as the completely preempted claims against the Bank.

In 2016, the OCFR brought an enforcement action against CashCall, a nonbank operating a high-rate bank model program. In the litigation that followed, Maryland’s highest court held that nonbanks cannot market loans originated by a bank without being licensed as credit services businesses, and affirmed $5.6 million in penalties against CashCall. It also concluded that Maryland’s Credit Services Business Act does not permit a credit services business to assist a consumer in obtaining a loan from any in-state or out-of-state bank, at an interest rate prohibited by Maryland law.

The new Maryland matter demonstrates that participants in bank model programs continue to face state licensing threats. In addition, legal challenges to the OCC and FDICMadden-fix” rules and the OCC’s “true lender” rule continue to create uncertainty for participants. As a result, participants would be well-advised to revisit their compliance with state licensing laws and their vulnerability to “true lender” and Madden challenges.

- Mark J. Furletti

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Second Circuit Ruling Clarifies When Data Breach Plaintiffs Have Adequately Pleaded Article III Standing

In a thoughtful opinion that diverges from how other circuit courts have addressed the issue, the Second Circuit recently issued a ruling clarifying the circumstances when data breach plaintiffs can rely on fear of identity theft to establish Article III standing.

The case is McMorris v. Carlos Lopez & Associates, LLP (CLA). CLA offers mental and behavioral health services to veterans, service members and their families. An employee at CLA accidentally emailed a spreadsheet containing social security numbers and other sensitive personal information of 130 CLA employees and former employees to CLA staff. Plaintiffs later initiated a class action in the Southern District of New York on behalf of all employees and former employees whose personal information was erroneously emailed, asserting negligence and consumer protection claims. The complaint did not allege that any plaintiffs were the victim of identity theft or that anyone outside of CLA had obtained the spreadsheet. Rather, plaintiffs asserted that they cancelled their credit cards and purchased credit monitoring to guard against “imminent” identify theft. The Southern District dismissed the complaint on grounds that plaintiff has not asserted an injury sufficient to establish Article III standing.

On appeal, the Second Circuit ruled that fear of identity theft can be sufficient for Article III standing, but held that the plaintiffs hadn’t established a substantial risk of identity theft in this particular case. Perhaps the most notable aspect of the opinion is the Second Circuit’s contention that the often claimed “circuit court” split on the issue of whether fear of identity theft is sufficient for Article III standing is illusory. Synthesizing the case law, the Second Circuit found that, in fact, no circuit court had ever held that a plaintiff lacks standing where the plaintiff had adequately plead a substantial risk of identity theft. In the Second Circuit’s view, the cases instead differ on what constitutes a “substantial risk of identity theft.”

To that end, the Second Circuit identified three factors for courts to analyze in assessing whether there is a substantial risk of identity theft: (1) whether the plaintiff’s data was exposed; (2) whether other consumers’ data that was also exposed has been misused; and (3) whether the data is sensitive and of a type likely to be misused.

Additionally, the Second Circuit addressed another often debated issue in data breach litigation: does spending money to guard against potential harm alone constitute an injury in fact? The Second Circuit ruled that even de minimis time and money spent to protect against identity theft can establish Article III standing where there is a substantial risk of identity theft.

McMorris may prove to be a landmark opinion. The Second Circuit’s opinion is the first to set forth a list of factors for courts to assess when determining whether there is a substantial risk of identity theft and it is likely that litigants, and potentially other courts, will cite the McMorris factors in future cases. Beyond the substantial risk test, plaintiffs and defendants will likely cite different aspects of the Second Circuit’s opinion to advance their arguments. Data breach plaintiffs will cite McMorris for the proposition that fear of future identity theft can establish standing, and to argue that there is not a circuit court split on this issue. Defendants on the other hand will cite the Second Circuit’s ruling that out of pocket expenses to guard against identify theft does not automatically create standing.

- Philip N. Yannella

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CFPB Brings Claim Against Former Debt Collection Company Executive and His Family for Allegedly Seeking to Fraudulently Transfer Assets to Undermine Earlier Consent Decree

Recently, the CFPB and New York Attorney General filed a complaint against Douglas MacKinnon and members of his immediate family to unwind the allegedly fraudulent conveyance of MacKinnon’s $1.6 million home made shortly after he learned his business practices were the subject of CFPB and NYAG investigations.

This complaint follows a 2019 consent decree, in which MacKinnon was one of three defendants who had entered a stipulated final judgment with the CFPB and NYAG. In that action, the CFPB and NYAG charged McKinnon and others with having purchased millions of dollars’ worth of consumer debt at a fraction of its value, then inflating the debts, and using illegal tactics – including, impersonating law enforcement officers, government agencies, and court officers – to extract as much money as possible from consumers. The stipulated order settling that action required MacKinnon and his co-defendants to pay $60 million – $40 million in consumer redress, and a $10 million penalty to the CFPB and a $10 million penalty to NYAG. However, the consent decree suspended the payment of these amounts in exchange for $10,000 in consumer redress and $1 to the CFPB.

The recently filed complaint alleges MacKinnon transferred ownership of his home to his wife and daughter in 2015 in exchange for just $1 shortly after learning of the federal and state investigations into his debt collection companies. Shortly thereafter, the complaint alleges, MacKinnon’s wife granted a mortgage of $900,000 to MacKinnon’s brother in order to give the impression that the property was encumbered and not available to pay any of MacKinnon’s creditors. In the complaint, the CFPB and NYAG ask the court to declare the transfer and subsequent mortgage void and order the sale of the property in order to satisfy, at least partially, MacKinnon’s outstanding debt to the federal and state governments. The CFPB reports that MacKinnon has not made any payments toward satisfying the judgment against him since the 2019 consent decree, and alleges that neither he nor his family members have cooperated in the efforts to obtain relevant financial information.

The CFPB issued a press release after filing the complaint in which Acting CFPB Director Dave Uejio strongly condemned MacKinnon’s actions and signaled that the CFPB intended the Complaint to act as a warning to other fraudsters. Mr. Uejio stated that “Douglas MacKinnon operated a brazen scheme, fraudulently inflating consumers’ debts, and he was equally brazen in trying to fraudulently conceal his own assets.” He went on to note that the Complaint “shows that attempts to defraud the federal government and evade the consequences of breaking the law will not succeed.” The press release also included NYAG Letitia James’s comment that she considered MacKinnon’s conduct to be a “complete disregard for the authority of the government to bring violators of the law to justice.” She also noted that “[n]ot a single dime has been paid to put money back into the pockets of New York’s consumers.”

- Elanor A. Mulhern

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FDIC Fines Bank $1.8 million for UDAP Violations in Collecting Commercial Debt

The FDIC’s settlement with Umpqua Bank announced May 10 is notable because the bank’s collection practices found to be unfair and deceptive involved commercial equipment financing offered by the bank’s wholly-owned subsidiary. The stipulated Order to Pay Civil Money Penalty requires the bank to pay a $1.8 million CMP.

The practices that the FDIC found to violate Section 5 of the FTC Act consisted of:

  • Charging various undisclosed collection fees to borrowers whose accounts were past due, such as collection call and letter fees and third-party collection fees.
  • Engaging in excessive and sequential collection calls to customers, even when customers requested the subsidiary to stop these calls.
  • Disclosing information about the customers’ debts to third parties.
  • Advising borrowers that the subsidiary would report delinquencies on commercial debt to consumer reporting agencies, when its policy and practice was not to report such delinquencies to consumer reporting agencies.

The bank also voluntarily paid approximately $1,628,000 in restitution to the 16,902 customers who were charged the undisclosed collection fees.

- Stefanie Jackman

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Did You Know?

Oklahoma Exempts Charitable Entities from Mortgage Licensing Provisions

Oklahoma recently revised its licensing provisions under its Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) to expressly exempt 501(c)(3) charitable entities meeting certain conditions from the SAFE Act mortgage licensing requirements.

The amendment will become effective on November 1, 2021.

- Aileen Ng

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Looking Ahead

The Consumerization of Small Business Lending: Significant Developments and Trends

A Ballard Spahr Webinar | May 25, 2021, 1:00 PM – 2:00 PM ET

Speakers: Alan. S. Kaplinsky, Mark J. Furletti, John D. Socknat & Aileen Ng


MBA’s Legal Issues & Regulatory Compliance Conference 2021

Online Only | May 25 - 26, 2021

Applied Compliance Track: QM: The New Rule and Path Ahead

Speaker: Richard J. Andreano, Jr.

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