CFPB Issues Final Rule Banning Class Action Waivers In Financial Services Contracts

The Consumer Financial Protection Bureau (CFPB) finally moved forward today to ban class action waivers in mandatory arbitration clauses found in certain consumer financial services contracts.

In October 2015, the CFPB published its multiyear study on arbitration provisions in consumer financial contracts and an outline of the proposal under consideration. It then convened a Small Business Review Panel to gather feedback. The Bureau also sought comments from stakeholders — the public, consumer groups, and industry —before moving forward with rulemaking. In May 2016, the Bureau issued its proposed rule. The public responded with more than 110,000 comments during the comment period that followed. 

The CFPB’s new rule ensures consumers’ right to participate in class action lawsuits. It applies to consumer financial products and services, including those entities that lend money, store money, and move or exchange money. Specifically, it covers extensions of consumer credit; automobile leases; debt management and settlement services;  providing credit information directly to consumers; providing accounts under the Truth in Savings Act and Electronic Fund Transfer Act; transmitting and exchanging funds; certain payment processing services; check cashing services; and related debt collection activities. Congress already prohibits arbitration agreements in residential mortgages.

Individual arbitration clauses are still permitted. But if a company includes an arbitration clause in a new contract, specific contractual language must be used.  

The CFPB also attempts to make the individual arbitration process “more transparent by requiring companies to submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration.” It will collect information regarding a company’s non-payment of arbitration fees and failure to follow arbitration fairness standards. As explained in the Bureau’s press release, “[g]athering these materials will enable the CFPB to better understand and monitor arbitration, including whether the process itself is fair. The materials must be submitted with appropriate redactions of personal information. The Bureau intends to publish these redacted materials on its website beginning in July 2019.”

The rule becomes effective 60-days after publication in the Federal Register and applies to contracts entered into more than 180-days thereafter. Several obstacles could delay, or even prevent, it from going into effect, however. The rule could be repealed under the Congressional Review Act. Affected parties could sue to overturn the rule on grounds that it is an abuse of discretion or beyond the authority given to the CFPB by the Dodd-Frank Act. Or, it could be delayed by a new Director of the Bureau (Director Cordray’s term ends in July 2018).  

Reed Smith’s financial services attorneys have for many years helped to draft arbitration clauses for consumer contracts, and enforced such provisions through motions to compel arbitration. We have closely followed the Dodd-Frank rules, including this final rule. Should the final rule remain in place, we can advise you on how current arbitration clause language will need to change, how to preserve rights under present contracts, and, as always, how to protect your rights in court.

Stay tuned for updates as we continue to unpack the 775-page rule.

 

Businesses Receive Relief in TCPA Revocation Claims

In a watershed ruling for businesses facing the recent onslaught of Telephone Consumer Protection Act (TCPA) claims, the Second Circuit Court of Appeals held that consumers cannot revoke their consent to receive automated or prerecorded cell phone calls if they previously consented to receive those calls as part of a binding contract. See Reyes v. Lincoln Automotive Fin. Servs., No. 16-2104-cv, slip op. (2d Cir. June 22, 2017).

In Reyes, the plaintiff entered into a binding auto lease agreement, which contained a provision stating that he expressly consented to be contacted using “prerecorded or artificial voice messages, text messages, emails and/or automatic telephone dialing systems” at the cell phone number he had provided on his application.  When the plaintiff defaulted on his car lease and he started receiving collection calls on his cell phone, he allegedly mailed a letter revoking his consent to receive further calls, but they continued.

The New York federal district court granted summary judgment to the defendant in part on the basis that “the TCPA does not permit a party to a legally binding contract to unilaterally revoke bargained-for consent to be contacted by telephone.” On appeal, the Second Circuit affirmed the district court’s decision, holding that “the TCPA does not permit a party who agrees to be contacted as part of a bargained-for exchange to unilaterally revoke that consent, and we decline to read such a provision into the act.”

In reaching this ruling, the Second Circuit reasoned that the “text of the TCPA evidences no intent to deviate from common law rules in defining ‘consent.’” The court distinguished between (i) “gratuitous actions” under the tort law, such as voluntarily providing one’s cell phone number on a loan application without exchanging any consideration, versus (ii) providing consent “as an express provision of a contract to lease an automobile.”  In the former case, where the consent was purely voluntary, revocation is allowed at any time.  But in the latter case, where consent is provided as a term of a binding agreement, that consent “become[s] irrevocable” because “one party may not alter a bilateral contract by revoking a term without the consent of the counterparty.”  Given Congress’ silence about revocation in the TCPA, the Second Circuit was not willing to conclude that “Congress intended to alter the common law of contracts.”  The Second Circuit further rejected the plaintiff’s argument that any ambiguities should be construed in the consumers’ favor because the statute contained no ambiguity on the revocation point.

Take-away:  Businesses face thousands of TCPA lawsuits each year based on alleged revocations of prior express consent.  This Second Circuit decision creates a powerful defense to these claims as long as the defendant can show that the plaintiff’s prior express consent to receive automated or prerecorded calls was given as part of a binding contractual agreement.  If so, the plaintiff cannot unilaterally revoke that consent as a matter of law.  While this decision only is binding in the Second Circuit, it can and should be used by defendants as persuasive precedent across the entire country.

D.C. Circuit Court Strikes Opt-Out Notice Requirement For Certain Faxes

On Friday, in a decision certain to please the business community as well as the Chair and new majority of the Federal Communications Committee, the D.C. Circuit struck down parts of the FCC’s October 30, 2014 Order, 29 F.C.C. Rcd. 13998 (FCC 14-164), requiring that solicited faxes (those sent with consent of the recipient) must contain opt-out notices in order to avoid violating the TCPA. See Bais Yaakov of Spring Valley, et al v. FCC (No. 14-1234). In a 2-1 decision, the majority held that the FCC lacked authority under the statute to regulate solicited faxes. The D.C. Circuit thus limits liability under the TCPA to just unsolicited fax advertisements, as its plain language states.

This ruling vindicates the two Republican FCC Commissioners, now Agency Chair Ajit Pai and Commissioner Michael O’Reilly, both of whom dissented in 2014 when the Commission’s fax Order was adopted. The ruling should also moot pending lawsuits based solely on the absence of an opt-out notice in faxes sent with the recipient’s express permission or invitation.

One caution is worth noting though. The decision does not eliminate the need to honor opt-out requests, thus creating a potential issue of fact for litigants.  On the one hand, this should make it much harder for plaintiffs’ attorneys to succeed at class certification because whether any particular person opted out of receiving faxes is an individualized factual issue.  On the other hand, however, it becomes harder for a defendant to refute a claim that a particular plaintiff revoked his or her consent before receiving an allegedly offending fax.

Under the FCC’s 2014 Order, onerous as the requirement to include an opt-out notice in every fax was, the business community had certainty as to what was required in communicating with customers or potential customers by fax. Now, it is incumbent on businesses to review their existing procedures or implement new procedures to defend against allegations that they have ignored or mishandled attempts by consumers to withdraw consent.

It is also worth pointing out that Bais Yaakov was argued before a three judge panel consisting of D.C. Circuit Judges Brett Kavanaugh and Nina Pillard, and Senior Circuit Judge Raymond Randolph on November 8, 2016.  Oral argument in the all-important TCPA case ACA International, et al. v. FCC, also before the D.C. Circuit, was argued a few weeks earlier, on October 19, 2016, before Judges Pillard, Sri Srinivasan, and Harry Edwards.  Now that Bais Yaakov has been decided, one can assume that decision in ACA cannot be far behind, and with it more certainty with respect to the definition of an “automatic telephone dialing system” and — hopefully — some much needed, practical relief, such as in the case of reassigned telephone numbers.

Before one starts uncorking the champagne, however, it is worth noting that Judge Pillard, the only judge on both the panel that heard Bais Yaakov and the panel that heard ACA, was the lone dissenter in the just decided fax case.  In her dissent, Judge Pillard focused on consumer harm and the need to address what she referred to as “a fusillade of annoying and unstoppable advertisements.” In her view, Congress expressly delegated authority to the FCC to implement a prohibition on unsolicited fax advertisements, and the opt-out notice requirement gave practical effect to that ban.

In any event, it shouldn’t be long now until we see how Judge Pillard and the rest of the D.C. Circuit’s ACA panel weighs in on this ever-evolving area of the law.

Ohio Federal Court Rules That Bank Is Not Liable Under Ohio Securities Act For Providing Ordinary Banking Services To Customers Who Operated Ponzi Scheme

In a January 10, 2017 decision, United States District Judge Thomas M. Rose in the Southern District of Ohio ruled that plaintiffs, who claimed to be investors in a Ponzi scheme operated by customers of PNC Bank, failed to state a claim against PNC Bank, National Association and The PNC Financial Services Group, Inc. (collectively, “PNC”) for allegedly violating the Ohio Securities Act, Ohio Rev. Code § 1707.01, et seq. Cruz v. PNC Bank, N.A., No. 3:16-cv-292, slip op. (S.D. Ohio Jan. 10, 2017).  Plaintiffs alleged that PNC was liable for their losses because the alleged ringleaders of the fraud, William and Connie Apostelos (who are currently awaiting trial on various federal criminal charges), deposited virtually all of the funds they raised from investors into a PNC business account and made interest payments to investors from the account.  Plaintiffs claimed that by providing the Aposteloses with account services and allegedly allowing them to use PNC facilities, PNC participated in the sale of unregistered securities by the Aposteloses.

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Rasheed Al Rushaid v. Pictet & Cie – New York Court of Appeals Rules In A 4-3 Decision That Foreign Bank Is Subject To Personal Jurisdiction Based On Allegedly Repeated And Intentional Use of Correspondent Accounts

In Rasheed Al Rushaid v. Pictet & Cie, the New York Court of Appeals ruled in a November 22, 2016 decision that a foreign bank’s allegedly intentional and repeated use of correspondent bank accounts in New York was sufficient to subject the bank to personal jurisdiction.  The Court concluded in a 4-3 decision that the bank’s use of correspondent accounts as part of an alleged conspiracy to launder looted funds was “purposeful” under the transacting business prong of New York’s long-arm statute. In reaching this conclusion, the Court rejected the Appellate Division’s finding that the bank and its client manager were not subject to jurisdiction because they “merely carried out their clients’ instructions.”

Background

Plaintiff Rasheed Al Rushaid (“Rushaid” or “Plaintiff”) filed suit against Swiss bank Pictet & Cie (“Pictet”), its general partners, and one of its client relationship managers, Pierre-Alain Chambaz (“Chambaz”) in New York state court, alleging that they assisted three employees in concealing money in connection with a kickback scheme relating to an oil rig project operated by Al Rushaid Petroleum Investment Corporation (“ARPD”), a Saudi company owned by Plaintiff.   The three ARPD employees allegedly received kickbacks and bribes from vendors located around the world in exchange for purchasing products at inflated prices and ignoring deficiencies in the vendors’ services.

Plaintiff alleged that Defendants aided the scheme by laundering and concealing the funds.  Specifically, Plaintiff alleged that Chambaz, a Pictet client relationship manager, created a sham company in the British Virgin Islands – TSJ Engineering Consulting Co., Ltd. (“TSJ”) – and then opened and managed accounts for TSJ, as well as individual accounts for the ARPD employees.  According to the amended complaint, the vendors wired bribes in favor of “Pictet and Co. Bankers Geneva” to Pictet’s New York correspondent bank accounts and then Pictet credited the funds to TSJ’s Geneva-based account. The money was later divided up and transferred in Geneva to the ARPD employees’ individual accounts at Pictet.

The Supreme Court granted Defendants’ motion to dismiss for lack of personal jurisdiction under CPLR 3211(a), concluding that Defendants’ alleged use of the correspondent accounts was passive not purposeful.  The Appellate Division affirmed.

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California Amends Identity Theft Requirements for Debt Collectors

The California legislature has amended the existing requirements for debt collectors who receive consumer claims of identity theft with the Identity Theft Resolution Act (“Act”). See AB 1723; Cal. Civ. Code § 1785.16.2.[1]  The Act does not take effect until January 1, 2017, but creditors should immediately start implementing new policies and procedures for debt collectors to follow to ensure that the creditor’s interest is protected under the amendments.

Under the Act, the time frame for reviewing claims of identity theft has been dramatically reduced for debt collectors. Once the debt collector receives the police report, written statement, and other information required under the law, it will have 10 business days to start an investigation of the dispute.  After concluding its review, the debt collector must send the results of its investigation to the consumer within 10 business days.  The timeframe under the Act is in stark contrast to current law, which sets no time frame for when a debt collector must investigate a consumer’s claim of identity theft, or when the debt collector must notify the creditor associated with the account or any consumer reporting agency (“CRA”) to which the debt has been reported.  Current law only requires a debt collector to cease collection of a debt upon receipt of a police report filed by a consumer and a written statement alleging identity theft regarding the debt at issue.

While investigating the debtor’s claim of identity theft, the debt collector must review and consider all of the information provided by the debtor as well as information available to the debt collector in its file or from the creditor. The debt collector may apply common sense.  For example, if the debtor has previously affirmed the debt or acknowledged it, that fact can be considered in determining whether the claim of identity theft is valid or made in good faith. The debt collector should document all communications and provide a clear explanation if it is decided that the claim is not valid.  As mentioned above, once the debt collector concludes its review, it must send its decision to the debtor within 10 business days, notifying the debtor in writing  that he or she is still responsible for the debt, as well as the basis for that determination.  The debt collector may recommence collection activities only after making a good faith determination that the evidence presented does not establish the debtor is not responsible for that specific debt.

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FCC Adds New Wrinkle to Collection of Federally Backed Debts

Federal Communications Commission announced new rules on Thursday that imposes limitations on private collection agencies and servicers seeking to collect on behalf of federal debts.  While the TCPA places limitations around many autodialed calls, it provides an exception to liability for federal debt collection calls, such for as some mortgages and student loans.   Under the new rules, however, debt collectors can now only place three calls or texts per month to people with loans “owed to or guaranteed by the United States.”  The new limitation applies regardless of how many separate accounts a single borrower has with the caller and only consumers at risk of delinquency can be called.  The caller is required to inform the borrower that he or she has the right to stop calls at any point.  In addition, the FCC clarified that a borrower’s do-not-call instruction remains in place even if an account is transferred to a new servicer.  There are also new restrictions around contacting borrowers’ family or friends.

The FCC’s new requirements are likely to impact both large and small institution that act as servicers on federal debts.  “The commission is establishing strong, pro-consumer limits on robocalls to collect federal debt,” FCC Chairman Tom Wheeler said in a statement. “These protections are particularly important following a January Supreme Court ruling that federal government entities conducting official business are not subject to robocall limits unless Congress says otherwise. Our decision implements Congress’ directive and responds to thousands of comments from consumers expressing frustration with robocalls and urging clear, strong limits on debt-collection calls.”

Illinois Supreme Court Expands Who Can Seek TILA Rescission

A recent Illinois Supreme Court opinion may expose banks to a flood of TILA rescission claims by anyone who claims an ownership interest in mortgaged property.  The state supreme court ruled that the right to rescind includes “each consumer whose ownership interest is or will be subject to the security interest” or “is subject to the risk of loss.” Financial Freedom Acquisition v. Standard Bank & Trust Co. et al., 2015 IL 117950 (9/24/2015), rehearing denied, OneWest Bank N.A. v. Standard Bank & Trust Co., et al., (11/23/2015. 

The Financial Freedom decision permitted the trustee for a reverse mortgage to rescind the loan signed by the deceased borrower after a foreclosure action had been filed.  More recently, an appellate court relied upon the Financial Freedom decision to reverse the dismissal of a TILA claim by a co-mortgagor who did not sign the loan and remanded the case to the trial court. Lakeview Loan Servicing, LLC v. Pendleton, 2015 IL App (1st) 143114 (12/24/2015).  It may now be possible for an heir of a mortgagor to demand TILA rescission since the heir would have an ownership interest in the property.  Will this decision permit a creditor of a mortgagor, claiming an ownership interest in the property, to demand TILA rescission? 

There are decisions from other jurisdictions that limit TILA rescission to the obligor who signed the loan. See, e.g., In re Smith-Pena, 484 B.R. 512 , 528 (Bankr. D. Mass. 2013) (“To the extent [Regulation Z] grants a right of rescission to a person who incurred no obligations on the transaction, it is an irrational construction of [TILA] that does not bind this Court.”).  However, the Illinois supreme court rejected these cases (and the clear wording of the law) and relied upon the provisions of Regulation Z and commentary in the Code of Federal Regulations. 

 

Third Circuit Affirms Summary Judgment for M&T in RESPA Class Action Involving Private Mortgage Insurance Reinsurance

Andrew Soven, Dan Booker and Molly Campbell secured a precedential Third Circuit victory of a putative class action asserted against firm client M&T Bank Corp. and its subsidiaries claiming that, under the Real Estate Settlement Procedures Act (“RESPA”) and unjust enrichment, M&T operated an illegal captive reinsurance scheme.  Originally filed in the U.S. District Court for the Middle District of Pennsylvania, plaintiffs alleged that M&T Bank and its reinsurer colluded with private mortgage insurers, referring customers to those insurers and receiving in return reinsurance agreements that required M&T Mortgage Reinsurance to take on little or no actual risk.  Plaintiffs also alleged that M&T fraudulently concealed the reinsurance scheme such that plaintiffs were unable to bring their claims within the limitations period.  After allowing discovery related to the timeliness of plaintiffs’ claims, the District Court granted summary judgment for M&T finding plaintiffs’ claims were untimely and not subject to equitable tolling. 

The Third Circuit agreed, ruling that plaintiffs had not exercised reasonable diligence in investigating any potential claims such that the limitations period could be tolled.  Specifically, the limitations period runs from the date of the occurrence of the violation, which in this case, began at the closing of plaintiffs’ mortgage loans.  Because M&T specifically provided plaintiffs opt out forms concerning the captive reinsurance, thereby evidencing plaintiffs’ knowledge about the reinsurance arrangement, the court held that equitable tolling could not rescue the otherwise barred claims.  Cunningham v. M & T Bank Corp., No. 15-1412, ___ F.3d___, 2016 WL 683372, at *3 (3d Cir. Feb. 19, 2016).  The court also rejected plaintiffs’ argument that their inaction should be excused until they were put on notice by attorneys investigating the captive reinsurance claims in late 2011.  The Third Circuit’s decision also may end actions pending against other banks represented Reed Smith in similar cases.  Law360 covered this case, and that account can be found here.  https://www.law360.com/articles/761476

The court’s enforcement of RESPA’s statute of limitations stands in contrast to the decision issued by the Consumer Financial Protection Bureau (“CFPB”) in In the Matter of PHH Corp., File No. 2014-CFPB-02, Decision of the Director, Doc. 226 at 10 (2015).  In PHH, which is based on similar purported RESPA violations, the CFPB ruled that that the Consumer Financial Protection Act’s (“CFPA”) statute of limitations did not apply to administrative RESPA proceedings brought by the CFPB because “the CFPA gives the bureau a choice: it may enforce laws administratively or in court.”   PHH has appealed the decision to the D.C. Circuit, and oral argument is scheduled for April 12, 2016.  If the decision is affirmed in the D.C. Circuit, it is possible that financial institutions still might face potential liability through CFPB proceedings even though courts such as the Third Circuit have concluded that private plaintiffs’ claims are time-barred.

 

Pa. Judge Strikes Class Allegations in Bank of America Suit

Reed Smith attorneys secured a decertification of a putative class action asserted against Bank of America, N.A. in the U.S. District Court for the Eastern District of Pennsylvania on February 3, 2016.  The Honorable Petrese B. Tucker struck class allegations from a suit accusing Bank of America NA and co-defendant McCabe Weisberg & Conway, PC of charging unauthorized and illegal foreclosure-related attorneys’ fees. Specifically, Plaintiffs alleged that a foreclosure complaint filed in July 2012, which contained a flat fee for counsel fees was an improper demand for payment under their mortgage.  Arguing that such fees may not have been incurred at the time the foreclosure complaint was filed, Plaintiffs sought to represent a class of similarly situated Pennsylvania borrowers.

On August 11, 2014, Judge Tucker granted partial dismissal of several of Plaintiffs’ claims, including those brought under the Racketeer Influenced and Corrupt Organizations Act (RICO) and Fair Debt Collection Practices Act (FDCPA), as well as Act 6.   Although, the Judge did not dismiss Plaintiffs’ claims that Defendants violated Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL), the court’s most recent ruling held that applicable law precluded Plaintiffs from pursuing their UTPCPL claim on a class-wide basis.

Judge Tucker agreed with Defendants’ argument that the principle of justifiable reliance, which requires detailed consideration of a person’s reliance on an alleged misrepresentation, was too individualized and claim specific to allow class-wide certification:

[T]his court would need to know whether the payment was made after service of the foreclosure complaint, assume that putative plaintiff read the foreclosure complaint and believed it to be true, and further assume that any partial payment made by the putative plaintiff was meant to be applied to the attorneys’ fees listed and not to any other amounts. These are individual inquiries unsuitable for class adjudication. Allowing certification to proceed on the mere proof of payment would, in sum, amount to an outright presumption of justifiable reliance.

Davis v. Bank of Am., N.A., 2016 U.S. Dist. LEXIS 13333, *16 (E.D. Pa. Feb. 3, 2016).  The court also held that a class certification was not practicable due to the highly individualized findings needed to determine ascertainable loss, another element of a prima facie case under the UTPCPL.  As such, Plaintiffs were unable to satisfy the predominance requirement for class certification – although their UTPCPL claim was permitted to go forward on an individual basis.     

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