Maryland Legal Alert for Financial Services

In This Issue:

WATCH YOUR INCENTIVE PROGRAMS

CFPB AUTO-DEBIT CONSENT ORDER

LIABILITY UNDER FDCPA FOR FILING TIME-BARRED PROOFS OF CLAIM?

FORECLOSURE TRUSTEE CANNOT BE "DEBT COLLECTOR" UNDER FDCPA

LOAN DOCUMENTS MAY WAIVE CREDITOR BANKRUPTCY RIGHTS

MANDATED INTEREST RATES INCREASE FOR ESCROW/SPECIAL PURPOSE ACCOUNTS

WATCH YOUR INCENTIVE PROGRAMS

The CFPB recently released a compliance bulletin addressing the use of incentive compensation programs in connection with the marketing of consumer financial products/services.

In the bulletin, the CFPB acknowledges that not all incentive compensation programs are suspect, but the CFPB cautioned that such programs need to be carefully structured and monitored to avoid consumer harm. 

The bulletin highlights several incentive compensation features that the CFPB views as problems:

• Unrealistic sales goals that encourage employees to open accounts without consumer knowledge/consent or through deception,
• Incentive compensation based on the terms of a transaction (e.g., based on interest rate), and
• Paying more incentive compensation for some types of transactions when other types would be more beneficial to consumers. 

The bulletin outlines the CFPB's expectations for properly structured incentive compensation programs:

• Incentive compensation programs need to be subject to oversight by board/management and be subject to written policies/procedures,
• Employees and managers must be properly trained concerning company policies/procedures and applicable law,
• Employees must be carefully monitored for potential violations of company policies/procedures (company must take swift action when violations are discovered), and
• Consumer complaints should be regularly analyzed to ensure that incentive compensation is not inadvertently causing poor consumer service/treatment. 

Financial institutions should review their incentive compensation programs to make sure that they meet CFPB expectations.

Please contact Christopher Rahl for questions concerning this topic.

CFPB AUTO-DEBIT CONSENT ORDER

A recent CFPB consent order highlights the importance of properly drafted authorizations for automatic loan payments (by Automated Clearinghouse or credit/debit card). The consent order involved a lender that extends high-cost open-end credit primarily to military borrowers. The lender's credit documentation included a very short authorization for automatic loan payments and described the recurring payment debit date as "on or before the contractual due date." Regulation E requires that authorizations for recurring debits to a consumer deposit account be voluntary and be clear and readily understandable to consumers. 

In the CFPB's eyes, the lender's use of "on or before" language was not specific enough for consumers to readily understand when their payments would actually be debited.  Lenders that use voluntary authorizations for loan payments should make sure that their authorizations are: (1) set apart from other disclosure language (or appropriately highlighted); (2) voluntary; and (3) clearly specify the debit amount and the date when each payment will be debited. 

For questions concerning this topic, please contact Christopher Rahl.

LIABILITY UNDER FDCPA FOR FILING TIME-BARRED PROOFS OF CLAIM?

We previously reported how the U.S. Supreme Court has granted review of a case from the 11th Circuit to determine if a debt buyer violates the Fair Debt Collection Practices Act (FDCPA) by filing a proof of claim in a bankruptcy proceeding concerning a debt where the underlying statute of limitations had expired (see our November 2016 Legal Alert). As we reported previously, the 11th Circuit decision appears to be the minority position, with the Third, Fourth and Seventh Circuits reaching contrary results and holding in favor of the debt buyers.

The Consumer Financial Protection Bureau (CFPB) has recently filed an amicus brief urging the Supreme Court to affirm the 11th Circuit decision and hold that the FDCPA applies to debt buyers who file time-barred claims. In its brief, the CFPB argues that the Bankruptcy Code does not preclude application of the FDCPA to bankruptcy proceedings, and that the FDCPA's ban on misleading representations and unfair practices prohibits such filings. 

The CFPB noted that time-barred claims are often submitted "by companies whose business model depends on the legal unenforceability of the relevant debts." Addressing an argument that the filing of such claims primarily impacted other creditors and not consumers, the CFPB asserted that the interest of the consumer could be harmed to the extent that such debts from other creditors may exist after the consumer emerges from bankruptcy.

Please contact Robert Gaumont with questions about this topic.

FORECLOSURE TRUSTEE CANNOT BE 'DEBT COLLECTOR' UNDER FDCPA

The Ninth Circuit Court of Appeals recently rejected reasoning provided by both the Fourth Circuit and Sixth Circuit and affirmed a district court's holding that a trustee of a deed of trust is not a "debt collector" under the Fair Debt Collection Practices Act (FDCPA). The Ninth Circuit reasoned that a trustee was not a debt collector when it initiated a non-judicial foreclosure in accordance with California law, because the actions of the trustee served only to perfect a security interest and were not properly viewed as attempts to collect a debt. Because California law required a trustee to mail a notice of the outstanding debt to the property owner after the trustee recorded its notice of default, the act of holding a trustee liable under the FDCPA could create conflict with the federal statute and a state's foreclosure laws. The Ninth Circuit further opined that its principal disagreement with decisions from other circuits like the 4th Circuit (see our April 2006 Legal Bulletin), was that other Circuits viewed the objective of foreclosure as the payment of money, while the Ninth Circuit viewed foreclosure as protecting and recovering upon a security interest (and therefore outside of the FDCPA).

Please contact Robert Gaumont if you have any questions about this topic.

LOAN DOCUMENTS MAY WAIVE CREDITOR BANKRUPTCY RIGHTS

While it is universally recognized that a debtor cannot waive its right to file for bankruptcy, there is little authority concerning whether a creditor can waive its bankruptcy rights in pre-bankruptcy agreements. The issue was raised in a bankruptcy case in the Northern District of Illinois. 

The case involved an unsecured creditor's challenge of the right of certain secured creditors to enforce their rights under Sec. 1111(b)(1)(A) of the Bankruptcy Code. Under that section, the claim of a non-recourse creditor is treated as though the creditor has recourse. As a result, if the creditor's collateral value is insufficient to pay the creditor's claim in full, the creditor (unless it elects otherwise) will have an unsecured deficiency claim for the balance. The objection was based on boilerplate language in one of the loan documents of the secured creditors which provided that "no recourse shall be had … under any law." The unsecured creditor argued that "any law" included the Bankruptcy Code and thus the secured creditors had waived their right to assert an unsecured deficiency claim in the bankruptcy case. 

The Bankruptcy Court overruled the objection and held that the secured creditors had not waived their bankruptcy right. The court's decision was based on its reading of all of the loan documents, as opposed to the single document on which the objection was based.  

While the secured creditors prevailed, what is remarkable about the court's decision is not its reading of the loan documents, but its ruling on the issue of whether a creditor can waive its bankruptcy rights under its loan documents. As to that issue, the court held that unlike a debtor, a creditor can waive its bankruptcy rights. The court supported its ruling with citations to decisions which have upheld inter-creditor or subordination agreements in which creditors give up their right to participate in a bankruptcy case in favor of another creditor. 

While the court's decision on the waiver issue is questionable, creditors should be careful that their loan documents or credit agreements do not inadvertently include language that could be read to bar them from exercising their rights in bankruptcy. 

For questions concerning this topic, please contact Christopher Rahl.

MANDATED INTEREST RATES INCREASE FOR ESCROW/SPECIAL PURPOSE ACCOUNTS

Maryland law requires depository institutions doing business in Maryland that make first lien residential real property loans and maintain escrow accounts for those loans to pay a minimum rate of interest on the escrow accounts. Maryland law also requires Maryland-chartered banks that offer certain short term "special purpose" deposit accounts (for example, Christmas Club Accounts) to pay a minimum rate of interest on those deposit accounts. The minimum rate of interest on these accounts is based on the weekly average yield of U.S. Treasury Securities adjusted to a constant maturity of one year as of the first business day of the calendar year. The minimum rate of interest to be paid on these accounts for 2017 is 0.89% (i.e., the statutory prescribed rate as of January 3, 2017, the first business day of 2017). This is up from 0.61% which was the minimum rate to be paid in 2016.

For questions concerning this topic, please contact Christopher Rahl.