Legal Alert

Mortgage Banking Update - June 10, 2021

June 10, 2021
In This Issue:


Ballard Spahr Files Amicus Brief on Behalf of Communications Client in Support of En Banc Review of 11th Cir. Decision Applying FDCPA Restriction on Third-Party Communications to Debt Collector’s Transmittal of Debtor’s Personal Information to Letter Vendor

On behalf of our client RevSpring, Inc., Ballard Spahr has filed an amicus brief in support of the petition for rehearing en banc filed in the Eleventh Circuit by the defendant in Hunstein v. Preferred Collection and Management Services. In that case, a unanimous Eleventh Circuit panel reversed the lower court’s dismissal of the plaintiff’s FDCPA claim, instead ruling that the plaintiff stated a claim by alleging that a debt collector’s transmittal of the plaintiff’s personal information to the vendor it used to generate and send collection letters “constituted a communication ‘in connection with the collection of any debt’ within the meaning of [FDCPA Section 1692c(b)].” That provision generally prohibits a debt collector from communicating with anyone other than the debtor and certain specified third-parties “in connection with the collection of any debt” without the debtor’s consent, court permission, or to effectuate a postjudgment judicial remedy.

In its amicus brief, RevSpring makes the following principal arguments in support of en banc rehearing:

  • To effectuate the purpose of the FDCPA, Section 1692c(b) should be construed to protect consumers from communications of the unfair, harassing, or deceptive variety without unnecessarily restricting ethical debt collectors.
  • The CFPB issued Regulation F, which implements the FDCPA, after briefing in the plaintiff’s appeal closed but before the panel rendered its opinion.
  • Regulation F expressly recognizes that debt collectors communicate with and rely on third-party vendors such as letter vendors.
  • Vendors assist debt collectors in complying with their consumer protection obligations.
  • Regulation F and other CFPB materials should be afforded deference under Chevron and Skidmore.

For the reasons asserted in its brief, RevSpring urges the en banc Court to reconsider the panel’s opinion and affirm the district court’s order dismissing the complaint for failure to state a claim or vacate the district court’s order and remand to the district court with instructions to consider the sufficiency of the complaint’s allegations in light of Regulation F.

The significance of the FDCPA issue in Hunstein to the debt collection industry is demonstrated by the high volume of amicus briefs that have been filed in support of rehearing en banc, including several from major industry trade groups.

- Stefanie Jackman & William Rooks

Back to Top   

Debt Collector Asks 11th Cir. for En Banc Review of Decision Applying FDCPA Restriction on Third-Party Communications to Debt Collector’s Transmittal of Debtor’s Personal Information to Letter Vendor

Last month, in a very troubling decision of first impression, a unanimous panel of the U.S. Court of Appeals for the Eleventh Circuit reversed the lower court’s dismissal of the plaintiff’s FDCPA claim, instead ruling that the plaintiff stated a claim where the plaintiff alleged that a debt collector’s transmittal of the plaintiff’s personal information to the vendor it used to generate and send collection letters “constituted a communication ‘in connection with the collection of any debt’ within the meaning of [FDCPA Section 1692c(b)].” That provision generally prohibits a debt collector from communicating with anyone other than the debtor and certain specified third-parties “in connection with the collection of any debt” without the debtor’s consent, court permission, or to effectuate a postjudgment judicial remedy. The panel’s decision in Hunstein v. Preferred Collection and Management Services sent shockwaves through the debt collection industry because of its potential broad reach beyond letter vendors to any service provider that receives from a debt collector that discloses a consumer owes a debt. On May 25, Preferred Collection and Management Services (“Preferred”) filed a petition for rehearing en banc with the Eleventh Circuit.

Before reaching the merits of the plaintiff’s FDCPA claim, the Eleventh Circuit panel considered whether the plaintiff had Article III standing to sue. In its discussion of applicable law, the panel indicated that a concrete injury sufficient to establish standing can be shown where intangible harm is closely related to a harm that has traditionally been regarded as a basis for a lawsuit in English or American courts. It observed that invasions of personal privacy claims, which include public disclosure of private facts, have traditionally been regarded as a valid basis for tort suits in American courts. According to the panel, the FDCPA violation alleged by the plaintiff satisfied this standard because it was analogous to a claim of public disclosure of private facts. In addition, the panel found that because Congress, in the FDCPA section on Congressional findings and statement of purpose, identified the invasion of individual privacy as one of the harms against which the FDCPA is directed, “Congress’s judgment” indicated that violations of Section 1692c(b) constitute a concrete injury. Accordingly, the panel concluded that the plaintiff had standing because the FDCPA violation that he alleged constituted a concrete injury.

In its petition for rehearing en banc, Preferred contends that the panel’s conclusion that the plaintiff had Article III standing is incorrect. In support of that position, Preferred makes the following principal arguments:

  • The decision deviates from other Eleventh Circuit precedent that holds that for Article III standing to exist, there must be a finding that the plaintiff’s alleged injury was particularized or personal. In fact, the panel expressed doubt that the harm alleged by the plaintiff occurred or was likely to occur.
  • Preferred’s electronic transmission of data to a private server maintained by its agent does not constitute the public disclosure of private facts. Instead, it is “the antithesis of ‘public’ disclosure” because “[t]he consumer has the only set of human eyes that sees the information actually contained in the letter.”
  • The FDCPA’s legislative history indicates that it “was enacted to prohibit abusive debt collection practices that can lead to an invasion of privacy ‘without imposing unnecessary restrictions on ethical debt collectors’.” The electronic transmission of data to a private server maintained by the debt collector’s agent for the purpose of facilitating the mailing of a letter to the consumer is not abusive. By expressly recognizing in the FDCPA the use of telegrams to transmit information to a consumer, Congress has set forth “its express approval of the ministerial use of ‘third-party agents’ for the purposes of facilitating non-abusive communications with a consumer.”
  • The Colorado Supreme Court has ruled that the use of an automated mailing service did not violate the Colorado state equivalent of FDCPA Section 1692c(b).
  • The panel’s opinion is inconsistent with the CFPB’s final debt collection rule which acknowledges without objection that many debt collectors use letter vendors.

We anticipate a flood of related amicus filings in the coming days.

- Stefanie Jackman

Back to Top

HUD Announces Settlement With California Housing Providers Equating LEP Status with National Origin Discrimination

On May 21, 2021, the U.S. Housing and Urban Development (“HUD”) announced that it had reached a settlement with California-based Cascade Village Apartments II, LP (“Cascade Village”), its management company, FPI Management, Inc. (“FPI”), and FPI’s portfolio manager to resolve allegations that the companies violated the Fair Housing Act and Title VI of the Civil Rights Act of 1964 on the basis of limited English proficiency (“LEP”) and national origin. Specifically, HUD alleged that Cascade Village and FPI failed to provide language access services to Vietnamese residents and retaliated against a Cascade Village employee for advocating for LEP residents to receive oral interpretation services and translated “vital documents.” It is notable that HUD issued a press release to publicize this conciliation agreement because it illustrates certain priorities for the Biden administration, as more fully described below.

The press release points out that the Fair Housing Act prohibits housing providers from discriminating against individuals based on their national origin, among other prohibited bases. It further states that Title VI of the Civil Rights Act also prohibits discrimination on the basis of national origin by recipients of federal financial assistance, and requires recipients of HUD funding (such as Cascade Village) to take reasonable steps to ensure meaningful access to affordable housing for LEP persons. (HUD’s position on Title VI of the Civil Rights Act and LEP status/national origin discrimination for recipients of federal funding is more fully described in the agency’s 2007 LEP guidance available here.) The press release also contains a key quote from HUD’s Acting Assistant Secretary Jeanine Worden:

Everyone who applies for or lives in HUD-assisted housing should be able to access critical information about that housing, such as the application process, the terms of their lease, and the apartment building’s rules….Language must not be a barrier to accessing affordable housing. Under fair housing laws, affordable housing providers have an obligation to make important information available to all applicants and tenants, including people whose primary language is not English.

Under the terms of the settlement, FPI agreed to provide $20,075 in compensation to 73 households residing at the property, with each household receiving $275 in the form of a check or rent credit. In addition, FPI is required to send a notification letter to each household in their primary language notifying them of the agreement with HUD, including that FPI will provide LEP applicants with free oral interpretation services and translated vital documents when required by law. The conciliation agreement defines “vital documents” as all documents identified in an attachment to FPI’s Language Access Plan dated August 2020, but that document is not linked to the HUD press release. However, Exhibit A to the conciliation agreement, which contains the required notification letter to Cascade Village tenants, indicates that a translated copy of the lease and community rules will be provided to each tenant. FPI also agreed to pay $10,000 to the employee who filed the complaint to resolve the retaliation issue.

This settlement follows on the heels of HUD’s recent issuance of a charge of national origin discrimination against several mortgage modification companies asserting that the respondents engaged in illegal and unfair mortgage modification assistance. As we recently reported, the basis of the charge alleging violations of the Fair Housing Act was that the respondents targeted Hispanic mortgage loan borrowers and thus violated the statutory prohibition against discrimination based on national origin. This second HUD settlement based on national origin and LEP status appears to indicate that the Biden administration will be focused not just on race, but also on national origin matters going forward.

- Richard J. Andreano, Jr., John L. Culhane, Jr., Amy M. Glassman & Lori J. Sommerfield

Back to Top

VA Addresses Options for Borrowers Facing Hardship Due to COVID-19

The U.S. Department of Veterans Affairs (VA) on June 3 updated guidance regarding home retention options and alternatives to foreclosure for borrowers experiencing financial hardships due to COVID-19. The VA previously provided guidance in Loan Guaranty Circular 26-21-07. In the update, the VA advises servicers that they should consider all home retention options and alternatives to foreclosure for such borrowers, and reminds servicers that Chapter 5 of the VA Servicer Handbook addresses available options and alternatives. The VA notes two types of loan modifications expressly allow for a servicer to expedite processing for a borrower affected by a disaster—the VA Disaster Modification and the Disaster Extend Modification.

The VA clarifies that without VA preapproval a servicer can enter into a VA Disaster Modification if the modification is made no later than 18 months after the date on which the COVID-19 national emergency ends. The VA also advises that a servicer can offer a VA Disaster Modification regardless of whether the borrower has entered into a COVID-19 forbearance plan and regardless of whether the COVID-19 national emergency caused the borrower’s default.

With regard to Disaster Extend Modifications, the VA advises that it is allowing such modifications to extend the loan’s original maturity date for 18 months, instead of the standard 12 months, in cases in which the loan is modified no later than 18 months after the date on which the COVID-19 national emergency ends. The VA also advises that a servicer can offer a Disaster Extend Modification regardless of whether the borrower has entered into a COVID-19 forbearance plan and regardless of whether the COVID-19 national emergency caused the borrower’s default.

- Richard J. Andreano, Jr.

Back to Top

FDIC Files Summary Judgment Motion in Lawsuit Challenging Its “Madden-Fix” Rule

The FDIC has filed a motion for summary judgment in the lawsuit filed by the Attorney Generals of six states and District of Columbia to set aside the FDIC’s “Madden-fix” rule. The filing also includes the FDIC’s opposition to the summary judgment motion filed by the AGs.

The lawsuit is pending before the same California federal district court judge (Judge Jeffrey S. White) who is hearing the lawsuit filed by three state AGs to set aside the OCC’s similar Madden-fix rule. Cross-motions for summary judgment have been filed in that case. Oral argument on the motions was scheduled for May 7, 2021 but on May 6, the Clerk issued a notice vacating the hearing without setting a new date.

In its summary judgment motion, the FDIC argues that its Madden-fix rule should be upheld under the two-step Chevron framework as a reasonable interpretation of Section 27 of the Federal Deposit Insurance Act (12 U.S.C. 1831d) because:

  • The rule passes Chevron step one because Congress has not spoken to the precise questions at issue. Nothing in Section 27 addresses at what point in time the validity of a loan’s interest rate should be determined for purposes of assessing compliance with Section 27, nor does anything in Section 27 address what happens to the validity of a loan’s interest rate upon transfer.
  • The rule passes Chevron step two because it is a reasonable interpretation of Section 27. The FDIC reasonably concluded that Congress could not have intended to give banks a right to make loans that would be “hampered by significant impairments to the loans’ resale value and liquidity such as would occur if a bank could not transfer enforceable rights in the loans they made.” The reasonableness of the FDIC’s interpretation is further demonstrated by court decisions adopting a similar construction of other statutes.

In their summary judgment motion, the AGs argue that the FDIC rule violates the Administrative Procedure Act because it exceeds the FDIC’s authority and impermissibly preempts state law and is arbitrary and capricious. In opposing the AGs’ motion, the FDIC’s arguments include:

  • Responding to the AGs’ argument that the rule exceeds the FDIC’s authority because the plain language of Section 27 applies only to interest that a bank can charge, the FDIC argues that the AGs’ argument does not properly view the statutory language in context. According to the FDIC, Section 27 regulates the terms of a loan contract and because loan contracts are transferable “logic and common sense suggest that Congress could not have intended to depart from well-settled principles that an assignor can transfer enforceable rights in its contracts—or at least not without an explicit statement showing that it was doing so, which it did not provide here.”
  • Responding to the AGs’ argument that the rule exceeds the FDIC’s authority because the FDIC can only regulate FDIC-insured banks and the rule regulates non-banks, the FDIC argues that “the rule regulates the conduct and rights of banks when they sell, assign, or transfer loans.” (emphasis included). Any indirect effects the rule has on non-banks does not place the rule outside the FDIC’s authority. The assignee’s ability to charge the contractual rate of interest follows from the fact that a bank’s statutory authority to make loans at particular rates necessarily includes the power to assign the loans at those rates.
  • Responding to the AGs’ argument that the rule impermissibly preempts state law by extending the preemption of state interest rate limits to buyers of loans originated by FDIC-insured banks, the FDIC argues that the AGs mischaracterize the rule. According to the FDIC, the rule “merely interprets the substantive meaning of [Section 27], it does not itself preempt state law.” Citing Smiley, the FDIC contends that an agency’s interpretation of the substantive scope and meaning of a preemptive statute does not itself preempt state law (rather, the statute does) and therefore does not trigger the presumption against preemption.
  • Responding to the AGs’ argument that the rule is arbitrary and capricious because the FDIC failed to give sufficient consideration to evidence that the rule will likely facilitate rent-a-bank schemes and failed to meaningfully address the true lender doctrine’s applicability to loan sales potentially covered by the rule, the FDIC argues that the rule would not protect such schemes but, “to the contrary, the rule would only apply if a bank actually made the loan.” The FDIC also asserts that it fully considered whether the rule needed to address the application of the true lender doctrine and that it reasonably determined that it did not because “while both the true lender question and the question addressed by the [Madden-fix rule] ‘ultimately affect the interest rate that may be charged to the borrower, the FDIC believes that they are not so intertwined that they must be addressed simultaneously by rulemaking’.” With regard to the AGs’ argument that the FDIC’s basis for the rule lacks evidentiary support because the FDIC has not shown that Madden has caused any significant effects on credit availability or securitization markets, the FDIC asserts that the APA does not require it to provide evidence that widespread negative effects would occur (or have occurred) absent the regulation. It contends that “before issuing a rule, an agency need not find that problems that need solving exist in the industry. Rather, the agency can decide that the problem is the gap or ambiguity in the statute.” (emphasis included). The FDIC asserts that “there is a rational connection between the problem the FDIC identified (the statutory gaps or ambiguity as to when validity is determined and what happened upon transfer) and the FDIC’s solution (an interpretation clarifying that validity is determined at the loan’s inception, and is not affected by the loan’s transfer.”

Under the modified scheduling order entered by the court:

  • The FDIC must file its reply by July 15, 2021.
  • Oral argument on summary judgment motions is scheduled for August 6, 2021.

- James Kim & Ronald K. Vaske

Back to Top

CFPB Files Another Status Report in Section 1071 Rulemaking Lawsuit

The CFPB has filed its fifth status report with the California federal district court as required by the Stipulated Settlement Agreement (Agreement) in the lawsuit filed against the Bureau in May 2019 alleging wrongful delay in adopting regulations to implement Section 1071 of the Dodd-Frank Act.

Section 1071 amended the ECOA to require financial institutions to collect and report certain data in connection with credit applications made by women- or minority-owned businesses and small businesses. Such data includes the race, sex, and ethnicity of the principal owners of the business. The Stipulated Settlement Agreement, which the court approved in February 2020, established a timetable for the Bureau to engage in the Section 1071 rulemaking and required the Bureau to provide status reports to the plaintiffs and the court every 90 days until a Section 1071 final rule is issued.

The CFPB has satisfied the first three deadlines in the Stipulated Settlement Agreement which relate to the SBREFA process. In September 2020 and October 2020, the Bureau satisfied the Agreement’s first two deadlines regarding, respectively, the Bureau’s release of a SBREFA outline of proposals under consideration and the convening of a SBREFA panel. In December 2020, the Bureau released the final report of the SBREFA panel, thereby satisfying the Agreement’s third deadline.

The next step mandated by the Agreement is for the parties to confer after the completion of the panel report regarding a deadline for the Bureau’s issuance of a Notice of Proposed Rulemaking (Section 1071 NPRM). The Agreement provides that if the parties agree on a deadline, they will jointly stipulate to the agreed date and ask the court to enter that deadline. Also, at any time that is more than 30 days after completion of the panel report, the plaintiffs can notify the Bureau that they want to ask the court to set a deadline.

In the new status report, the Bureau states:

The Bureau is continuing to work on the significant legal and policy issues that must be resolved to implement the Section 1071 regulations. As part of that process, the Bureau’s rulemaking staff has been briefing the Bureau’s new leadership regarding those issues to obtain policy decisions that are necessary for the preparation of the Notice of Proposed Rulemaking for the Section 1071 regulations.

The Bureau also states that “the parties have met and conferred regarding an appropriate deadline for issuance of the Section 1071 NPRM,” and that pursuant to the Agreement, if the parties agree on a deadline, they will jointly stipulate to the agreed date and request that the court enter that deadline.

In his publicly-shared statement to the staff of the Bureau’s Division of Research, Markets, and Regulations (RMR) outlining his regulatory priorities, Acting CFPB Director Uejio indicated that he has “pledged RMR the support it needs to implement [section 1071] without delay.” Mr. Uejio’s interest in prioritizing the Section 1071 rulemaking is likely to be shared by Rohit Chopra, if confirmed as CFPB Director. In addition, a Section 1071 NPRM issued under new CFPB leadership will likely be more closely aligned with the views of consumer advocates than an NPRM issued under former Director Kraninger’s leadership would have been. As a result, the plaintiffs can be expected to take a cooperative approach with new CFPB leadership regarding the timing of a Section 1071 NPRM.

- John L. Culhane, Jr. & Lori J. Sommerfield

Back to Top

Ballard Spahr Webinar Explores Consumer-Like Issues Arising in Small Business Lending

In our recent webinar, “The Consumerization of Small Business Lending: Significant Developments and Trends,” Ballard attorneys were joined by special guest Malini Mithal, Associate Director of the Federal Trade Commission’s Division of Financial Practices. Mark Furletti, Co-Chair of the firm’s Consumer Financial Services Group also participated in the webinar, together with John Socknat, a partner in the CFS Group, and Aileen Ng, an associate in the Group. Alan Kaplinsky, Senior Counsel in the Group, moderated the webinar.

Ms. Mithal discussed the FTC’s use of its enforcement authority to protect small businesses. Ballard Spahr attorneys discussed the application of various federal and state consumer protection laws to small businesses and new state disclosure laws that apply to commercial transactions.

Highlights of the webinar include the following:

  • FTC Enforcement. Ms. Mithal discussed the FTC’s increasing use of Section 5 of the FTC Act to protect small businesses from unfair or deceptive practices. She indicated that with small business financing practices, companies should not assume that small businesses are more sophisticated than individual consumers. Ms. Mithal noted the FTC’s focus on merchant cash advances and highlighted practices used by MCA providers that the FTC has cited as unfair or deceptive in its enforcement cases. Such practices included making false or misleading representations regarding financing terms to induce small businesses to use the provider’s services, charging fees that were not clearly or conspicuously disclosed, and using confessions of judgment. Ms. Mithal noted that guidance on how to make disclosures clearly and conspicuously is available on the FTC’s website.
  • Federal laws. Mark Furletti discussed how various federal laws other than Section 5 can impact small business financing. Such laws include the Equal Credit Opportunity Act, Fair Credit Reporting Act, Telephone Consumer Protection Act, Servicemember Civil Relief Act, Truth in Lending Act, and the Electronic Fund Transfer Act.
  • State disclosure laws. Aileen Ng discussed the new laws enacted by New York and California that require consumer-like disclosures for commercial financing transactions and the steps being taken to implement those laws.
  • Other state laws. John Socknat discussed the types of state laws that do not distinguish between consumer and commercial transactions and therefore could apply equally to both kinds of transactions. He observed that the nature of a product or transaction (i.e. how it actually operates and its terms), rather than how it is labeled, will determine its treatment under state law. John identified laws dealing with licensing, disclosures, and product terms as the primary types of state laws that need to be considered. He indicated that commercial financing could require up to four parties involved in a product or transaction to be licensed: a broker or other referral source, a lender, a servicer, and a purchaser of closed transactions. John noted that debt collector licensing could also come into play.
  • Interest and Usury. Mark Furletti also discussed the potential application of state usury laws to commercial transactions. Mark identified various factors that could determine if state usury laws apply to a particular transaction, such as the type of transaction, the amount involved, the charges imposed on the transaction, the type of entity contracting with the borrower, and whether the borrower has an absolute obligation to repay.

- Barbara S. Mishkin

Back to Top  

This Week’s Podcast: A Deep Dive into the Fair Credit Reporting Act Issues Arising From Use of the Consumer Data Industry Association (CDIA) Compliance Condition Codes for Disputed Account Information Furnished to Consumer Reporting Agencies

We take a close look at the CDIA code options available for direct and indirect consumer disputes, their relationship to FCRA compliance, CFPB scrutiny of code use in FCRA compliance exams of furnishers, and court decisions involving alleged improper coding of disputed accounts. We also share our thoughts on best practices for furnishers in coding disputed accounts.

Chris Willis, Co-Chair of Ballard Spahr’s Consumer Financial Services Group, hosts the conversation joined by Stefanie Jackman and Joel Tasca, partners in the Group.

Click here to listen to the podcast.

- Christopher J. Willis, Stefanie H. Jackman, Joel E. Tasca & Alan S. Kaplinsky

Back to Top   

HUD Addresses FHA Loan Eligibility of DACA Recipients and Documentation Requirements for Certain Other Non-Permanent Residents

The U.S. Department of Housing and Urban Development (HUD) recently addressed eligibility for FHA mortgage loans for Deferred Action for Childhood Arrival (DACA) recipients in Mortgagee Letter 2021-12. As previously reported, at the end of the Trump administration HUD announced that effective January 19, 2021, individuals who are classified under DACA with the U.S. Citizenship & Immigration Service (USCIS) and are legally permitted to work in the U.S. are eligible to apply for FHA mortgages.

In the Mortgagee Letter, HUD addresses the FHA requirement that individuals without lawful residency in the United States are ineligible for FHA-insured mortgage financing. HUD explains that “[t]his requirement was included in the policy, but FHA recognizes it was not terminology that had clear consistent meaning.” After briefly addressing the history and scope of DACA, HUD then states “FHA’s requirements for ‘lawful residency’ pre-date the establishment of DACA and thus FHA did not anticipate the scenario where a prospective borrower may be authorized by DHS to be present during the period of deferred action and eligible for work authorization. Because of this confusion, as announced in FHA INFO #21-04 under the prior Administration, FHA waived Handbook 4000.1 Section II.A.1.b.ii(A)(9)(c) in its entirety in order to provide further clarity regarding the eligibility of FHA-insured mortgage financing for DACA recipients for endorsements on or after January 19, 2021.”

HUD also addresses documentation requirements regarding employment authorization for citizens of the Federated States of Micronesia, the Republic of the Marshall Islands, and the Republic of Palau, and individuals with H-1B nonimmigrant classification and maintaining H-1B status. In particular, the documentation requirements for non-permanent residents in HUD Handbook 4000.1 are revised to provide as follows:

“[T]he Borrower is eligible to work in the United States provided the borrower provides either:

  • an Employment Authorization Document (USCIS Form I-766) showing that work authorization status is current;
  • a USCIS Form I-94 evidencing H-1B status, and evidence of employment by the authorized H-1B employer for a minimum of one year;
  • evidence of being granted refugee or asylee status by the USCIS; or
  • evidence of citizenship of the Federated States of Micronesia, the Republic of the Marshall Islands, or the Republic of Palau.”

- Richard J. Andreano, Jr.

Back to Top   

Professor Sovern’s Opt-In Arbitration Proposal Is Neither New Nor Supportable

Professor Jeff Sovern recently proposed that the CFPB issue a supposedly “new” arbitration rule “that prevents companies from blocking consumers from suing in court unless consumers specifically opted in to the arbitration clause” after being given a CFPB-mandated disclosure that if they do not sign and their rights are violated, they “may still sue us in court or later agree to arbitration.” In truth, there is nothing “new” about this proposal. It is just the latest spin on the decades-old argument by consumer advocates that arbitration agreements should only be entered into after a dispute has occurred, not before, because consumers are not fully cognizant of their rights until then.

The proponents of post-dispute arbitration agreements have never made a convincing case, nor does Professor Sovern. Limiting consumer arbitration to post-dispute controversies would severely curtail consumer arbitration because once a dispute has arisen, one side or the other, or both, inevitably use the in terrorem “threat” of expensive and prolonged litigation as a negotiating tool. That tactic is eliminated if the parties have agreed to arbitrate the dispute prior to the dispute arising. Thus, although post-dispute arbitration is a theory that may sound superficially appealing, it fails in real life. An empirical study by researchers at the University of California at Berkeley concluded that the “overriding problem” with post-dispute arbitration is that “it is extremely rare for both the plaintiff’s and defense’s attorneys in a case to select arbitration after the dispute has arisen” and, accordingly, both businesses and individuals “are hurt by a post dispute system.” David Sherwyn, “Because It Takes Two: Why Post-Dispute Voluntary Arbitration Programs Will Fail to Fix the Problems Associated with Employment Discrimination Law Adjudication,” 24 Berkeley Journal of Employment and Labor Law 1, 7, 68 (2003). By contrast, “[p]re-dispute arbitration agreements ensure that both parties are on the ‘same page’ regardless of the particulars of any subsequent dispute.” Victor E. Schwartz and Christopher E. Appel, “Setting the Record Straight About the Benefits of Pre-Dispute Arbitration,” 34 Legal Backgrounder No. 7, Washington Legal Foundation (June 7, 2019).

In addition, Professor Sovern’s proposal is predicated on three fundamental fallacies. First, Professor Sovern argues that giving consumers the right to “opt out” of arbitration is ineffective because consumers don’t understand arbitration clauses and fail to comprehend that they are waiving their constitutional right to a jury trial. That simply ignores that most arbitration clauses contain clear and conspicuous disclosures about the arbitration process and its legal consequences, including the fact that if a claim is arbitrated, there will be no right to a jury trial. Moreover, as the U.S. Supreme Court has held, under the Federal Arbitration Act if the business terms of a consumer contract are enforceable, the arbitration clause should also be enforced and cannot be singled out for special treatment. Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281 (1995) (“[w]hat States may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause”). Professor Sovern makes no effort to explain how his suggestion that the arbitration clause “be read out loud to the consumer” would work when millions of consumers typically receive their account agreements with arbitration provisions by mail.

Second, Professor Sovern incorrectly assumes that the CFPB would agree to recommend to consumers that they “NOT” opt in to arbitration because it is an “abusive practice.” This contradicts both the CFPB’s 2015 empirical study of consumer arbitration and its 2017 final arbitration rule, neither of which found the arbitration process to be per se harmful to consumers or to society as a whole. Indeed, contrary to Professor Sovern’s statement that “class actions … make economic sense,” the data in the CFPB study demonstrated not only that arbitration is faster and less expensive than litigation, but that consumers who arbitrate fare much better, recovering an average of $5,389 in individual arbitration compared to $32.35 recovered by the average class member. Class actions only make economic sense to counsel for the class, who according to the CFPB study recovered a whopping $425 million in fees compared to the pittance their clients received. Notably, the CFPB has encouraged its own employees to use alternative dispute resolution to resolve workplace disputes because it provides “faster and less contentious results” as well as “confidentiality.” United States Government Accountability Office, Report to Congressional Requestors, Consumer Financial Protection Bureau Additional Actions Needed to Support a Fair and Inclusive Workplace, pp. 48-49 (May 2016). At its core, Professor Sovern’s proposal embodies an ill-disguised policy preference for class action litigation over individual arbitration. Thus, despite his protestations to the contrary, it would be barred by the Congressional Review Act because it is “substantially the same” as the earlier CFPB rule barring the use of class action waivers that Congress vetoed. Allowing the consumer to opt in to an arbitration program, particularly one which the CFPB warns consumers not to do, is tantamount to a rule barring the use of arbitration altogether, something which is unsupported by the CFPB’s own record which demonstrated that arbitration is fair to consumers.

The third fallacy in Professor Sovern’s proposal is his insistence that arbitration agreements generally, and opt-out clauses specifically, fail to “explain to consumers why an arbitration clause is preferable” and incentivize companies “not to say anything about the matter.” The reality is that most companies strive to provide informative disclosures about arbitration to the consumer and typically give the consumer a period of 30 to 60 days to decide whether to opt out. That allows substantial time for consumers to consult in private with their lawyer, family or friends or spend time on the internet investigating the pros and cons of arbitration in order to make an informed decision. Most arbitration clauses also make clear that there is no penalty for opting out of the arbitration provision. And, asking a consumer to send a short opt-out notice back to the company if they wish to reject the arbitration provision is no more burdensome than asking putative class members to send back a written opt-out notice if they do not want to participate in the certified class – a procedure that passes constitutional muster as the U.S. Supreme Court has held. Phillips Petroleum Company v. Shutts, 472 U.S. 797, 812 (1985) (“due process requires at a minimum that an absent plaintiff be provided with an opportunity to remove himself from the class by executing and returning an ‘opt out’ or ‘request for exclusion’ form to the court”).

In sum, the CFPB would be well advised to disregard Professor Sovern’s proposal.

- Mark J. Levin

Back to Top   

This Week’s Podcast: A Close Look at the Use of Blockchain Technology in Consumer Finance, With Special Guest Debbie Hoffman, Associate General Counsel, Western Union

After reviewing how blockchain technology operates and the pandemic’s impact on its use, we discuss the technology’s main benefits and regulatory risks; its use in digital identity, anti-money laundering compliance, preventing wire transfer fraud, peer-to-peer lending, and decentralized finance; the role of “smart contracts” in consumer finance; how various companies are using the technology; and the technology’s link to cryptocurrency protocols.

Ballard Spahr Senior Counsel Alan Kaplinsky hosts the conversation.

Click here to listen to the podcast.

- Alan S. Kaplinsky & Christopher J. Willis

Back to Top   

Ninth Circuit Stays Mandate in Seila Law

The Ninth Circuit has granted Seila Law’s motion for a stay of the mandate pending its filing of a petition for a writ of certiorari in the U.S. Supreme Court.

After the Supreme Court ruled that the CFPB’s structure was unconstitutional and remanded the case for further consideration, a unanimous Ninth Circuit panel ruled that the civil investigative demand (CID) issued to Seila Law was validly ratified by former Director Kraninger and affirmed the district court’s decision granting the CFPB’s petition to enforce the CID.

Following a sua sponte request from a Ninth Circuit judge for a vote on whether to rehear the case en banc, a majority of the non-recused Ninth Circuit active judges voted against en banc reconsideration and rehearing en banc was denied. However, four judges joined in an opinion dissenting from the denial. In its motion for a stay of the mandate, Seila Law asserted that for the reasons given by the dissenters, “there is a reasonable chance that the Supreme Court will grant certiorari in this case.”

The order granting the stay of the mandate was issued by the three-judge panel that ruled former Director Kraninger had validly ratified the CID issued to Seila Law. The order provides:

The mandate is stayed for a period of 150 days from the date of this order. If appellant files a petition for writ of certiorari in the United States Supreme Court during the period of the stay, the stay shall continue until final disposition by the Supreme Court.

- Christopher J. Willis

Back to Top   

Two Senior Officials Reported to Be Leaving CFPB

According to an American Banker report, two senior CFPB officials, Bryan Schneider and Peggy Twohig, will be leaving the Bureau in the coming weeks.

Mr. Schneider has been serving as Associate Director of Supervision, Enforcement and Fair Lending. He was named to the position by former Director Kraninger.

Ms. Twohig has been serving as Assistant Director of Supervision Policy and Strategy. She joined the Bureau while it was being stood up following its creation by the Dodd-Frank Act.

- Christopher J. Willis

Back to Top   

CA DFPI Commissioner Alvarez Reported to Be Leaving Agency

American Banker has reported that Manny Alvarez, Commissioner of the California Department of Financial Protection and Innovation, will be leaving the agency on June 18, 2021.

According to the report, Governor Newsom is expected to appoint Chief Deputy Commissioner Chris Shultz, who currently oversees the DFPI’s business operations, as Acting Commissioner.

Commissioner Alvarez was recently our special guest for a podcast about developments at the DFPI. We hold Commissioner Alvarez in high regard and wish him the best in his future endeavors.

- Anthony C. Kaye

Back to Top   

Did You Know?

Texas Adds Licensing Requirement for Wrap Mortgage Loan Financing and Clarifies Licensing Exemptions for Residential Mortgage Loan Companies

Texas recently amended its Finance Code to provide for the licensing or registration of wrap mortgage lenders, which generally is defined a person who makes a residential mortgage loan to wrap around a seller’s existing mortgage loan to finance the purchase of residential real estate. Some exemptions include persons licensed to originate residential mortgage loans under other statutory provisions, for example, the Residential Mortgage Loan Company, Mortgage Bankers, and Consumer Loans chapters. The newly added chapter, titled Wrap Mortgage Loan Financing, also addresses disclosure requirements and wrap borrower’s rights, among other items.

Texas also amended its Residential Mortgage Loan Company licensing provisions to clarify certain exemptions, such as the de minimis exemption for an owner of residential real estate who makes no more than three, which has been amended from five, residential mortgage loans in a 12-month period.

The amendments will become effective on January 1, 2022.

New Hampshire Amends MLO Home State Licensing Requirements

New Hampshire recently amended its mortgage loan originator (MLO) licensing provisions to clarify that the home state licensing requirement to register in a licensee’s or applicant’s state where the principal office is located does not apply to MLOs.

The amendment will become effective on July 24, 2021.

- Aileen Ng

Back to Top  

Looking Ahead

Hot Legal Topics in Fair Lending & Housing

RESPRO Webinar | June 17, 2021, 2:00 PM EDT

Moderator: Richard J. Andreano, Jr. Speakers: Lori Sommerfield, Christopher J. Willis & Amy M. Glassman

Back to Top  

Subscribe to Ballard Spahr Mailing Lists

Get the latest significant legal alerts, news, webinars, and insights that affect your industry.