Supreme Court Passes on Decision in Midland Funding LLC. v. Madden

On June 27, 2016, the United States Supreme Court decided it would not review the Second Circuit’s ruling in Midland Funding LLC. v. Madden, letting stand the 2nd Circuit’s ruling that an assignee of a loan originated by a national bank cannot rely upon the bank’s ability to preempt state restrictions on interest rates.

In Madden, the Plaintiff brought a putative class action against Midland Funding, LLC (“Midland”), a non-bank lender/servicer, for violations of the Fair Debt Collection Practices Act and New York usury law. The Plaintiff, a New York resident, opened a credit card account with Bank of America in 2005. The account was subsequently consolidated with the accounts of FIA Card Services, N.A. (“FIA”), a national bank headquartered in Delaware. FIA sold the Plaintiff’s account to Midland after determining it was not collectible.  Madden alleged that in 2010, Midland sought collection of the debt  at the original interest at a rate of 27 percent per year which exceeds the usury rate under New York law.  The Plaintiff responded with the class action alleging usury under New York state law.

The United States District Court for the Southern District of New York held that the Plaintiff’s claims were preempted by the National Bank Act, denied class certification and granted summary judgment in favor of the Defendants. On appeal, the Second Circuit held that the National Bank Act does not preempt state usury laws when loans are assigned to non-bank assignees. The Court held that while Section 85 of the Act preempts state law limitations on interest rates, preemption does not transfer to a third-party, non-bank assignee enforcing the debt.

The United States Solicitor General (“SG”), upon invitation from the Supreme Court, urged the Supreme Court not to hear the appeal. While the SG disagreed with the Second Circuit’s ruling, it contended that the issue was not ripe for appeal because there was no identifiable circuit split on the issue.. The SG’s brief explained that the National Bank Act and “valid-when-made” common law theory grants non-bank acquirers of bank originated loans the right to enforce the loans consistent with the terms established by the national bank at origination, and noted the significant market disruption resulting from its ruling.

The case was returned to the trial Court for further adjudication in what will likely continue to be a widely followed case.

Supreme Court: Plaintiffs Must Allege “Concrete Injury” to Establish Standing to Bring FCRA Claim

On May 16, 2016, the United States Supreme Court ruled in Spokeo, Inc. v. Robins that consumers who bring claims under the Fair Credit Reporting Act (FCRA) must do more than allege a technical statutory violation to have standing to maintain an action in federal court. The Court held that Article III standing requires a “concrete injury” even in the context of a statutory violation. The decision may have sweeping relevance to a wide-variety of consumer finance laws and regulations that include private rights of action.

Spokeo, Inc. operates a people search engine that compiles consumer reports that Plaintiff Robins alleged was subject to the FCRA. Robins alleged in his class action complaint that Spokeo violated the FCRA by gathering and distributing incorrect information about him. The District Court dismissed Robins’ complaint for lack of standing, but the Ninth Circuit Court of Appeals reversed, holding that Robins’ allegations that his statutory rights were violated and he had a personal interest in the proper handling of his credit information sufficiently met the Article III standing requirement.

The Supreme Court reversed, calling the Ninth Circuit’s analysis “incomplete.” “As we have explained in our prior opinions, the injury-in-fact requirement requires a plaintiff to allege an injury that is both ‘concrete and particularized,’” the opinion noted. The Supreme Court determined that the Ninth Circuit’s analysis failed to consider the “concreteness” element of standing.

“Article III standing requires a concrete injury even in the context of a statutory violation. For that reason, Robins could not, for example, allege a bare procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III.” Writing for the six justice majority, Justice Alito wrote that not all technical statutory violations may meet the “concrete injury” requirement. “An example that comes readily to mind is an incorrect zip code. It is difficult to imagine how the dissemination of an incorrect zip code, without more, could work any concrete harm.”

Read more: Fortune; Wall Street Journal;

CFPB Issues Draft Rule Banning Arbitration Clauses Preventing Class Actions

On May 5, 2016, the Consumer Financial Services Bureau issued a proposed rule that would ban consumer financial services providers from including arbitration clauses in new contracts that prevent customers from filing or joining class actions. The proposed rule does not prevent companies from requiring consumers to arbitrate individual disputes.

In a statement accompanying the rule release, the CFPB claimed that allowing class actions will stop banks and other consumer finance providers from “sidestepping the legal system.” According to CFPB Director Richard Cordray, “[m]any banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”

In addition to banning contract terms that prevent customers from filing or joining class actions, companies would have to report arbitration claims and awards to the CFPB, which the agency said it may then publish. The CFPB also announced it would publish specific language that must be used in contracts to allow class actions.

The proposed rule would apply to most consumer financial products and services that the CFPB oversees, including lending money, storing money, and moving or exchanging money. Congress already passed a law prohibiting arbitration agreements in residential mortgage agreements.

The U.S. Chamber Institute for Legal Reform and U.S. Chamber of Commerce Center for Capital Markets Competitiveness issued a joint statement criticizing the rule, stating that the proposed rule presents the “biggest gift to plaintiffs lawyers in a half-century.”

“In the 50 years since the advent of modern-day class action lawsuits, plaintiffs lawyers have made millions of dollars in fees from these suits while consumers often receive little benefit. With this rule, the CFPB doubles down on that trend,” the press release said. “The proposed rule is a wolf in sheep’s clothing. The CFPB’s own study concludes that arbitration empowers consumers to resolve disputes easily and quickly on their own without having to hire a lawyer. Nevertheless, the CFPB’s rule will have the practical effect of eliminating arbitration for most consumers.”

Read more: Wall Street Journal (on-line); LA Times (on-line)

Florida BK Court Allows Borrowers to Challenge Foreclosure on Surrendered Property

On February 29, 2016, the United States Bankruptcy Court for the Southern District of Florida ruled that a borrower’s statement of intention to surrender real property does not preclude that borrower from later asserting a defense to a foreclosure proceeding if the bankruptcy trustee did not abandon the property to the lienholder. This decision departs from prior bankruptcy and district judge opinions, and expands the foreclosure defenses available to borrowers who indicate their intent to surrender property securing a mortgage loan in bankruptcy.

In In re Elkouby, the borrower filed a Chapter 7 bankruptcy during the pendency of foreclosure proceedings. The borrower’s bankruptcy filings included a statement of intention to surrender the real property, and she did not dispute the debt or claim the property as exempt. The bankruptcy trustee, however, did not administer the property. After the loan was discharged, the lienholder resumed foreclosure, but the debtor challenged the foreclosure. The lienholder moved to reopen the bankruptcy and to compel surrender. The court (Judge Laurel M. Isicoff) denied the motion. In issuing the ruling, Judge Isicoff recognized there is “an ongoing debate about the meaning of ‘surrender’ and what the consequences of surrender are.” Departing from other decisions, she reasoned that unless the borrower expressly abandons the property to the foreclosing lienholder (either by affirmative action or motion by the lienholder or by an order of the trustee), real property not administered by the bankruptcy trustee reverts back to the debtor at termination of bankruptcy proceedings. A lienholder may pursue lawful recourse, such as foreclosure, but the foreclosure may be challenged by the debtor. The Court noted that the special nature of Chapter 7 proceedings, which explicitly tasks the bankruptcy trustee with the right to distribute and dispose property, requires reversion back to the debtor absent administration.
This recent ruling appears to create a split in authority on a debtor’s ability to contest foreclosure proceedings where the borrower states an intention to surrender the property, and even surrenders the property in Chapter 7 bankruptcy proceedings.

In re Elkouby, Case No. 14-23934 (Bankr. S.D. Fla. Feb. 29, 2016)

Additional Resources: American Bankruptcy Institute- Rochelle’s Daily Wire: “Courts Split on Whether Surrender Entails Waiver of Defenses to Foreclosure

CA Supreme Court: Borrowers May Bring Wrongful Foreclosure Actions Challenging Deed of Trust Assignments


The California Supreme Court recently held that borrowers have standing to bring wrongful foreclosures claims based on challenges to an assignment of the note and deed of trust to a securitized trust.

• The decision rejects multiple lower court decisions holding that borrowers lack standing to challenge loan assignments.

• While the decision is an interim victory for borrowers who have defaulted on their loan, its holding is limited to whether a borrower has standing to assert wrongful foreclosure claims based assignments, without addressing what evidence is required to prove such a claim.

• The decision expands the claims available in California to challenge a foreclosure.
In this update, we assess the details of the decision and how it will likely cause an increase in wrongful foreclosure litigation.


FCC Issues 138-Page Order Addressing TCPA Questions

On July 10, 2015, the Federal Communications Commission issued its highly anticipated “TCPA Omnibus Declaratory Ruling and Order” addressing a number of petitions and comments concerning interpretation of the Telephone Consumer Protection Act of 1991. The Order addresses a wide variety of TCPA topics, including the meaning of certain statutory terms and the application of provisions to today’s technology.  Among other important topics, the Order:

  • Defines (or “reaffirms,” according to the Commission) the FCC’s autodialer definition.
  • Discusses third-party liability for TCPA violations.
  • Tries to clear up ambiguity regarding consent and revocation of consent.
  • Addresses re-assigned cell phone numbers, including the creation of a one-call safe harbor for calls to reassigned numbers under certain situations.
  • Confirms that a one-time text message sent immediately after a consumer’s request for the text does not violate the TCPA or FCC rules or regulations.
  • Exempts certain health-care related messages.
  • Addresses call-blocking technology.

Petitions challenging the FCC’s TCPA Order were filed within days of its July 10 issuance in at least two courts of appeal.  See, ACA Int’l v. Fed. Comm’ns Comm’n, No. 15-1211 (D.C. Cir. filed July 10, 2015) (petition for review), consolidated with Sirius XM Radio, Inc. v. Fed. Comm’ns Comm’n, No. 15-1218 (D.C. Cir. filed July 14, 2015) (petition for review); Prof’l Ass’n for Customer Engagement, Inc. v. Fed. Comm’ns Comm’n, No. 15-2489 (7th Cir. filed July 14, 2015) (petition for review).  Among other arguments, these petitions claim that the Order is arbitrary and capricious, constitutes an abuse of discretion, and exceeds the FCC’s statutory authority.

The TCPA includes statutory penalties of up to $1500 per violation, without any proof of actual damage.  According to a WebRecon report on litigation trends, TCPA lawsuits increased 30 percent from September 2013 to September 2014, from 1,338 to 1,908, including an increase in TCPA class action lawsuits.

Read more:  Perkins Coie Update:  “The July 2015 TCPA Omnibus Declaratory Ruling and Order:  The Good, the Bad, and the Ugly

Supreme Court Decides “Underwater” Debtors Cannot Lien Strip Second Mortgages in Bankruptcy

On June 1, 2015, the U.S. Supreme Court ruled in Bank of America v. Caulkett that borrowers cannot void second mortgages under Chapter 7  bankruptcy protection if the secured property’s value falls below the amount owed on the first mortgage.  In a unanimous decision, the Court held that bankruptcy courts may not use Section 506(d) of the Bankruptcy Code to “strip off” junior liens on property if the value of the property used as collateral is less than the amount the debtor owes to the senior lien holder — that is, when the loan is “underwater.”   The Court’s decision affects the right of junior lienholders to collect on loans in the event of a debtor’s declaration of bankruptcy and the treatment of previously secured, but subordinate, debt in bankruptcy proceedings.

Read more:  The Wall Street Journal: High Court: Underwater Homeowners Can’t Void Second Mortgage in Bankruptcy

New York Times:  Supreme Court Ruling Little Help to Struggling Homeowners


CFPB Issues Third Fair Lending Report to Congress

On April 28, 2015, the Consumer Financial Protection Bureau (“CFPB”) released its third Fair Lending Report to Congress.  The report summarizes the CFPB’s fair lending activities during the 2014 calendar year.  The report largely focuses on the efforts of the CFPB’s Office of Fair Lending, which according to Director Cordray’s comments in the report “provides oversight and enforcement of Federal fair lending laws; coordinates the Bureau’s fair lending efforts with Federal agencies and State regulators; works with private industry, fair lending, civil rights, consumer and community advocates to promote fair lending compliance and education; and provides annual reports on these efforts to fulfill its fair lending mandate.”

The report includes a focus on two markets:

Mortgage Lending: The report makes clear that during 2014, mortgage lending was a “key priority” for the Office of Fair Lending in  both enforcement and supervision.  The integrity of the data disclosed under the Home Mortgage Disclosure Act (HMDA), and potential fair lending risks in connection with redlining, underwriting, and pricing are identified as areas of focus.

Auto Lending: The report identifies the indirect auto lending industry as another critical area of focus during 2014.  The report notes that the CFPB considered the use of discretionary pricing policies which it contends has resulted in discrimination against certain minorities in violation of the Equal Credit Opportunity Act (ECOA).  It noted that during the past two years, several supervisory reviews allegedly revealed discretionary dealer markup and compensation policies that may discriminate against certain minorities.

The report also notes fair lending activities in the credit card market, including a CFPB enforcement action against a company that allegedly failured to provide certain consumers with debt relief offers because of national origin.

According to the report, the CFPB’s fair lending enforcement activities during 2014 resulted in financial institutions paying approximately $224 million in monetary relief to over 300,000 consumers.


SEC Brings First Enforcement Action Against Credit Ratings Agency

On January 21, the Securities and Exchange Commission (SEC) announced a settlement with a credit rating agency regarding its rating of certain commercial mortgage-backed securities (CMBS). According to the announcement, the ratings agency agreed to pay the SEC more than $58 million to settlement the SEC’s charges, plus an additional $19 million to settle parallel cases announced by the New York Attorney General ($12 million) and the Massachusetts Attorney General’s office ($7 million).  The SEC alleged that the ratings agency (i) misrepresented its conduit fusion CMBS ratings methodology; (ii) published a “false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress;” and (iii) failed to maintain and enforce internal controls regarding changes to its surveillance criteria. In a separate administrative order, the SEC instituted a litigated administrative proceeding against the former head of the agency’s CMBS Group for “fraudulently misreprent[ing] the manner in which the [ratings agency] calculated a critical aspect of certain CMBS ratings in 2011.”

Read more:  SEC CMBS Order #1#2 and #3;  USA Today (SEC charges ratings agency over ratings);

CFPB Proposes Expanded Foreclosure Protections, New Servicer Obligations

On November 20, 2014, the Consumer Financial Protection Bureau (CFPB) issued a proposed rule expanding protections offered to borrowers who have defaulted on residential mortgages.  The proposed rule, if adopted following a 90 day comment period, would add to the agency’s mortgage servicing rules that became effective earlier this year.  A central part of the proposal would require that mortgage servicers provide additional foreclosure protections to borrowers who have already taken advantage of loss mitigation opportunities and subsequently defaulted.  The rule would also add additional servicing transfer requirements on loan servicers, and add protections for surviving family members and others who inherit or receive property.  The CFPB’s press release summarized the new servicer obligations.

  • Require servicers to provide certain borrowers with foreclosure protections more than once over the life of the loan: Currently, a mortgage servicer must give the borrower certain foreclosure protections, including the right to be evaluated under the CFPB’s requirements for options to avoid foreclosure, only once during the life of the loan. Under the proposed rule, servicers would have to give those protections again for borrowers who have brought their loans current at any time since the last loss mitigation application and again defaulted.
  • Expand consumer protections to surviving family members and other homeowners: If a borrower dies, CFPB rules currently require that servicers promptly identify and communicate with family members, heirs, or other parties, known as “successors in interest,” who have a legal interest in the home. The proposal would expand the circumstances in which consumers would be considered successors under the rules and the protections offered to such successors.
  • Require servicers to notify borrowers when loss mitigation applications are complete: The proposal would require servicers to notify borrowers promptly that the application is complete.
  • Loss mitigation obligations of new servicer during servicing transfers:  The proposal provides that generally a transferee servicer must comply with the loss mitigation requirements within the same timeframes that applied to the transferor servicer. If the borrower’s application was complete prior to the transfer, the new servicer generally must evaluate it within 30 days of when the prior servicer received it. For involuntary transfers, the proposal would give the new servicer at least 15 days after the transfer date to evaluate a complete application. If the new servicer needs more information in order to evaluate the application, the borrower would retain some foreclosure protections in the meantime.
  • Clarify servicers’ obligations to avoid dual-tracking and prevent wrongful foreclosures: The rules currently prohibit a servicer from proceeding to foreclosure once they receive a complete loss mitigation application from a borrower more than 37 days prior to a scheduled sale. The proposal purports to clarify what steps servicers and their foreclosure counsel must take to protect borrowers from a wrongful foreclosure sale.
  • Clarify when a borrower becomes delinquent: The proposed rule attempts to clarify that delinquency, for purposes of the servicing rules, begins on the day a borrower fails to make a periodic payment. Under the proposal, when a borrower misses a payment but later makes it up, if the servicer applies that payment to the oldest outstanding periodic payment, the date of delinquency advances. The proposal also would allow servicers the discretion, under certain circumstances, to consider a borrower as having made a timely payment even if the borrower’s payment falls short of a full payment by a small amount.
  • Provide more information to borrowers in bankruptcy: Currently, servicers do not have to provide periodic statements or loss mitigation information to borrowers in bankruptcy. The proposal would generally require servicers to provide periodic statements to those borrowers, with specific information tailored for bankruptcy. Servicers also currently do not have to provide certain disclosures to borrowers who have told the servicer to stop contacting them under the Fair Debt Collection Practices Act. The proposal would require servicers to provide written early intervention notices to let those borrowers know about loss mitigation options.

The proposed rule is subject to a 90 day comment period.  A full copy of the rule is available at the following link:  Amendments to the 2013 Mortgage Rules under the Real Estate Settlement Procedures Act.