The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) suffered an embarrassing setback in federal district court earlier this week, when a federal district judge denied the Bureau’s motion for entry of a consent judgment on the grounds that the proper party had not consented to entry of the judgment on behalf of the defendants. Back in September 2017, shortly before former Director Richard Cordray left the agency, the Bureau filed a complaint along with a consent judgment against 15 student loan securitization trusts (the “Trusts”). The complaint alleged that the Trusts, through servicers and sub-servicers, engaged in unfair and deceptive practices in connection with servicing and collection of private student loans. The action was filed the same day that the Bureau entered into an administrative consent order with one of the Trusts’ successor sub-servicers, Transworld Systems, Inc.

Oddly, rather than also enter an administrative consent order against the Trusts, the Bureau instead filed a complaint and motion for approval of a consent judgment in federal district court. The Bureau’s motion for entry of the proposed consent judgment stated only that the Bureau moved for the Court to approve and enter the judgment, which was described as having been “executed by Plaintiff [the CFPB] and Defendants National Collegiate Student Loan Trusts [the Trusts]”. The proposed consent judgment was signed by two attorneys from the law firm McCarter & English, LLP (“M&E”), purportedly on behalf of the Trusts. The motion said nothing about any dispute regarding M&E’s authority to act on behalf of the Trusts.

Within days of the Bureau’s filings, a number of Trust-related parties intervened in the matter to argue against entry of the proposed consent judgment on various grounds. Among those grounds was that the Owner Trustee of the Trusts had not consented to entry of the proposed consent judgment (because it believed the terms of the judgment violated the terms of the Trust agreements), and that the Trusts could only act through the Owner Trustee. In addition, with respect to one of the Trusts, the Trust instruments provided that consent of the Note Insurer to the Trust was also required for the Trust to enter into such a settlement.

After a lengthy period of discovery and briefing, the district court ruled that under the governing Trust documents and governing Delaware law, the Owner Trustee was the only party with the authority to bind the Trusts. The court found that the beneficial owners of the Trusts had initially directed the Owner Trustee to execute the proposed consent judgment, but the Owner Trustee refused to do so on advice of counsel that the beneficial owners’ instruction was invalid under the Trust agreements. The beneficial owners then instructed M&E to execute the proposed consent judgment. But because the Owner Trustee had not acted for the Trusts, the court held that M&E did not have the authority to agree to the proposed consent judgment on behalf of the Trusts.

In addition, the court found that, with respect to one of the Trusts, consent from the Note Insurer to the Trust was also required in order to bind the Trusts. The court noted that “the CFPB admits as much” and goes on to quote from the CFPB’s brief noting that the Note Insurer’s “approval does not appear to have been given in this case.”

In light of these findings, the district court denied the Bureau’s motion to enter the proposed consent judgment.

It is rare for a court to reject a proposed settlement in an enforcement action that is allegedly consented to by the government and the defendant. Typically, the entry of such judgments is a rubber stamp. It is probably rarer still for a court to find that a government agency “settled” a matter with parties that lacked authority to do so. This embarrassing outcome for the Bureau leaves it with contested litigation on its hands in a matter that it sought to settle years ago. In addition to denying the Bureau’s motion for entry of the proposed consent judgment, the district court has ordered the CFPB to respond to a pending motion to dismiss on the grounds that the Trusts are not “covered persons” and therefore not subject to the prohibition on unfair, deceptive and abusive acts or practices (UDAAP) in the CFPB’s organic statute. The CFPB’s response to that motion is due June 19.

On May 20, 2020, the Office of the US Comptroller of the Currency announced its final rule overhauling the Community Reinvestment Act regulations. The CRA requires insured depository institutions to participate in investment, lending, and service activities that help meet the credit needs of their assessment areas, particularly low- and moderate-income  communities and small businesses and farms. The last major revisions to the CRA regulations were made in 1995. This Legal Update summarizes the changes to the final rules and the implications for national banks and federal savings associations subject to the final rule.

Read more in Mayer Brown’s Legal Update.

On Friday, the United States Office of the Comptroller of the Currency (“OCC”) finalized a regulation regarding the “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred” by national banks and federal savings associations. Initially proposed in November 2019, the regulation provides that interest on a loan that is permissible under provisions of federal banking laws establishing the interest authority of national banks and federal savings associations is not affected by a sale, assignment, or transfer of the loan—effectively permitting subsequent holders of loans originated by OCC-regulated entities to take advantage of the originators’ “Interest Exportation Authority.” The rule will be effective 60 days after publication in the Federal Register.

Continue Reading The OCC Finalizes “Madden Fix” Regulation, Codifying the “Valid-when-Made” Doctrine as Applicable to Loans Made by National Banks and Federal Savings Associations

On May 15, House Democrats passed on the Heroes Act, a $3 trillion package that revives, among other things, many of the severe debt collection-related restrictions House Democrats have been pushing since the start of the pandemic.  Although the Heroes Act has no promise of becoming law, the Act, combined with other federal and state debt collection proposals and emergency regulations, may inform future legislative and regulatory proposals as temporary financial services relief programs come to an end. In this Legal Alert, we analyze the various federal and state debt collection-related actions that may offer a glimpse into the future of debt collection as we know it.

Read more at Mayer Brown’s Legal Update.

On May 15, 2020, the House of Representatives passed the Health and Economic Recovery Omnibus Emergency Solutions Act (H.R. 6800, or the “HEROES Act”). The legislation is a controversial behemoth. It would provide another round of stimulus checks and student loan forgiveness, impose a 12-month eviction moratorium, expand mortgage forbearance relief, provide a safe harbor and liquidity facility for mortgage servicers, and impose significant restrictions on debt collection activity during the COVID-19 public health emergency. While Republicans and Democrats are butting heads over the bill, its financial protections for veterans and servicemembers could survive.

Separate from the bill’s generally applicable restrictions on debt collection activity mentioned above (summarized in Mayer Brown’s Legal Update), the bill would suspend the debt collection activities of the Department of Veterans Affairs (“VA”) during the emergency period. Specifically, if the bill were enacted, the VA would be prohibited from collecting or recording debts arising from certain veterans’ health care and other VA-administered benefits. The VA also would be prohibited from issuing a notice of debt to a consumer reporting agency, allowing interest to accrue on the debt, or applying any administrative fee to the debt. Those prohibitions would apply until 60 days after the end of the emergency period. While those prohibitions expressly apply to the VA’s collection activities, to the extent the agency refers delinquent debts to the private sector for collection, the prohibition also may affect the ability of those entities to pursue the debts or collect interest or fees.

The HEROES Act also would amend the Servicemembers Civil Relief Act by adding certain protections for servicemembers who receive stop movement orders in response to local, national, and global emergencies. The amendments would provide those servicemembers the right to cancel residential leases, vehicle leases, and internet, cable, and phone contracts without penalty. That amendment seeks to prevent the “double-billing” of servicemembers who were previously issued orders to move, but then received a stop movement order due to the pandemic, and who may have housing or vehicle leases or utility contracts in separate locations. Currently, a servicemember who received relocation orders to deploy for 90 days or more could terminate those leases or contracts without penalty, but there was no express protection if he or she then received a stop movement order. The amendment would not, however, require refunds for lease payments already made. The amendment would apply retroactively to orders issued on or after March 1, 2020, and would be permanent – unlike some of the HEROES Act’s other provisions, this stop-movement relief would not expire at the end of the COVID-19 emergency period.

The Senate leadership is not expected to allow consideration of the HEROES Act as it stands, and President Trump has promised to veto it in any case. However, there may be bipartisan support for some of the Act’s protections. Senate Veterans’ Affairs Committee Chairman Jerry Moran (R-Kan.) and Ranking Member Jon Tester (D-Mont.) introduced the same SCRA amendments as a separate bill just weeks ago. Accordingly, the financial protections for veterans and servicemembers may be rescued in the end.

On May 14, 2020, the Consumer Financial Protection Bureau (“CFPB”) filed a proposed stipulated final judgment and order (the “Order”) against Chou Team Realty, LLC (“Monster Loans”) and several related individuals and entities to resolve alleged violations of the Fair Credit Reporting Act (“FCRA”), the Telemarketing Sales Rule (“TSR”), and the prohibition on unfair, deceptive, or abusive acts or practices (“UDAAP”). The Order demonstrates the CFPB’s continued scrutiny of the use of credit reports and claims made by debt settlement services providers in their advertisements.

The CFPB filed a complaint against Monster Loans and others in the U.S. District Court for the Central District of California on January 9, 2020. The complaint alleged that mortgage lender Monster Loans purchased prescreened lists of consumers with student loans from a credit reporting agency (“CRA”) and shared those lists with other companies. Monster Loans allegedly certified to the CRA that it would use the lists to make firm offers of credit for mortgage loans and market its own mortgage products. Instead, according to the complaint, Monster Loans shared the pre-screened lists with other companies, which used the lists to market debt settlement services to consumers with student loans.

The CFPB also alleged that a “sham” entity called Lend Tech was used to obtain pre-screened lists from a CRA. Specifically, Lend Tech certified to a CRA that it would use prescreened lists to make firm offers of credit for mortgage loans. Instead, it allegedly sold these lists to other companies, including companies that used them to market student loan debt settlement services. Lend Tech allegedly never operated as a mortgage brokerage company, and had only been used to obtain pre-screened lists from the CRA. The CFPB alleged that Monster Loans helped Lend Tech pass the CRA’s due diligence screening, including by providing an approval letter agreeing to fund loans brokered by Lend Tech. Lend Tech did not settle with the CFPB under the Order.

The FCRA governs the collection, assembly, and use of consumer report information, and requires that entities have a permissible purpose in order to obtain a consumer report. Permissible purposes include obtaining a consumer report without a consumer’s consent for purposes of making “a firm offer of credit.” A “firm offer” is an offer that will be honored (subject to certain exceptions) if the consumer continues to meet the specific criteria used to select the consumer for the offer. 15 U.S.C. § 1681a(l). As noted above, the CFPB alleged that Monster Loans and Lend Tech certified to the CRA that they would use the prescreened lists that they obtained to make firm offers of credit for mortgage loans but did not do that.

The CFPB alleged that using or obtaining prescreened lists to market debt settlement services is not a permissible purpose under the FCRA. It also alleged that the companies’ certifications to the CRA did not state that the prescreened lists were being obtained for use by other companies or for the purpose of marketing debt settlement services. The CFPB further alleged that Monster Loans did not actually use the pre-screened lists to make firm offers of credit. It is unclear from the filings whether Monster Loans ever actually marketed any loans.

In addition to the FCRA allegations, the Bureau alleged that non-settling student loan debt settlement company defendants who obtained prescreened lists from Monster Loans and Lend Tech violated the TSR and the prohibition on UDAAP. These defendants allegedly collected advance fees in violation of the TSR and made misleading statements asserting that (1) consumers would obtain lower interest rates by consolidating their federal student loans, (2) consumers would improve their credit scores by consolidating their loans, and (3) the United States Department of Education would become the “new servicer” on their loans. The complaint alleges that Monster Loans and a non-settling individual defendant “substantially assisted” these violations by the debt relief settlement companies.

Under the Order, the settling defendants would be:

  • Permanently banned from offering or providing debt settlement services;
  • Permanently banned from using or obtaining prescreened reports;
  • Prohibited from using or obtaining consumer reports for any business purpose other than mortgage lending; and
  • Prohibited from the disclosure of consumer information.

The Order also includes the following monetary penalties and redress:

  • Monster Loans: $18 million for the purpose of providing redress to customers who were charged fees by student loan debt settlement defendants, although this amount is suspended subject to Monster Loans’ payment of $200,000 in monetary redress and compliance with certain other obligations listed in the Order. Monster Loans will also pay a nominal $1 civil money penalty based on its attested inability to pay.
  • Thomas Chou, the president of owner of Monster Loans, and TDK Enterprises, LLC, through which Chou owned interests in the non-settling student loan debt settlement defendants: Disgorge $403,750 in profits for the purpose of providing redress. Chou will pay a $350,000 civil money penalty.
  • Sean Cowell, co-founder of Monster Loans and its Chief Visionary Officer, and Cre8labs, Inc., through which Cowell owned interests in the non-settling student loan debt settlement defendants: Disgorge $406,150 in profits, although this amount was suspended based on inability to pay. Cowell will pay a $100,000 civil money penalty.

Many consumer lenders use prescreened lists from CRAs in order to make firm offers of credit to consumers. This settlement highlights the need for such lenders to carefully consider the FCRA’s requirements regarding the use of prescreened lists.

After a number of failed efforts and amid the COVID-19 national emergency, Virginia enacted a law that requires student loan servicers to obtain a license. On April 22, 2020, Virginia House Bill 10 and the identical Senate Bill 77 (collectively, the “Legislation”) were enacted into law after state representatives agreed to certain recommendations made by Virginia’s Governor earlier last month. Although eleven other states require student loan servicers to obtain a license, registration, or make a notice filing, Virginia’s new law is unique in that it could reach a much wider range of companies.

Continue Reading Virginia Enacts One of the Broadest Student Loan Servicer Licensing Laws

Against the backdrop of the COVID-19 pandemic and the economic stress it is imposing on residential mortgage borrowers, lenders and servicers, the Consumer Financial Protection Bureau recently released a compliance bulletin and policy guidance regarding the handling of information and documents in mortgage servicing transfers. While not specifically motivated by the COVID-19 crisis, Bulletin 2020-02 is quite timely, with the pandemic’s economic disruption likely leading to both voluntary and involuntary changes in servicers of mortgage loans. This Legal Update provides background and further detail and notes practical considerations for servicers.

Read more in Mayer Brown’s Legal Update.

The COVID-19 national emergency has caused unprecedented economic disruption. The federal government was quick to enact relief measures for federal student loan borrowers who may be experiencing financial hardship as a result of the pandemic. Last week, nine states announced a coordinated effort to partner with private student loan servicers and offer relief for private student loan borrowers.

The relief measures announced by these states are very similar to those announced by New York in early April. However, there are critical differences between these relief measures and those provided to federal student loan borrowers under the CARES Act. Those differences include whether relief measures are automatically applied to borrowers’ accounts, whether relief measures halt the accrual of interest on borrowers’ loans, the type of relief available, the duration of such relief, and whether the relief is mandatory or voluntary. This Legal Update provides an overview of the multi-state initiative and critical differences between this initiative and relief programs already in place.

Read more in Mayer Brown’s Legal Update.