Last Week, This Morning

October 7, 2024

Below you will find several key developments in the financial services industry, including related developments in information privacy and data security, from the past week. We add an "Amicus Brief(ly)¹" comment to each item, where we briefly (see what we did there?) note for friends (and again?) of CounselorLibrary the important takeaways from the developments outlined in the email. Our legal reporters - CARLAW, HouseLaw, InstallmentLaw, PrivacyLaw, and BizFinLaw - provide more comprehensive, real-time updates of federal and state laws, regulations, litigation, and other industry items of interest. For a personal guided tour and free trial of any of these legal reporters, please contact Michael Willer at 614-855-0505 or mwiller@counselorlibrary.com.

On October 3, the Consumer Financial Protection Bureau released a chart that summarizes how an entity may determine if it is required to register an order under the Bureau's nonbank registration final rule, which was issued on June 3, 2024. Generally, according to the CFPB, an entity that is subject to an order must register the order with the nonbank registry if the order is a "covered order" and the entity is a "covered nonbank," as those terms are defined in the final rule.

The CFPB's nonbank registration final rule - the "Registry of Nonbank Covered Persons Subject to Certain Agency and Court Orders Final Rule" - provides for the creation of a nonbank registry that will collect information about nonbank companies subject to certain publicly available agency and court orders that impose obligations on them based on alleged violations of specified consumer protection laws. Covered nonbank companies also generally must provide an annual attestation from a senior executive regarding the company's compliance with the order. The final rule provides covered nonbank companies certain timeframes to comply with its requirements, including submission of registrations. The CFPB's webpage for the nonbank registry portal and public database - https://www.consumerfinance.gov/data-research/nbr-submission/ - states that the Bureau intends to open the portal for registration on October 16, 2024. The webpage provides additional resources for covered nonbank companies when registering with the nonbank registry and complying with the nonbank registration final rule.

Amicus brief(ly): There are not many (if any?) financial services providers that are fans of this CFPB registry. But the CFPB has been pretty good in the past several years about being clear about what it wants and how it wants it. The simple, straightforward chart is a helpful tool in the form of a decision tree, which is a very common corporate tool for demonstrating process flow. Attentive non-bank providers that have been subject to a federal or state consent order in the past seven years have likely already decided whether they have to register, but this tool allows for another review and confirmation of that position in an easy-to-use format.

On October 1, the Consumer Financial Protection Bureau issued an advisory opinion to remind debt collectors of their obligation to comply with the Fair Debt Collection Practices Act and Regulation F's prohibitions on false, deceptive, or misleading representations or means in connection with the collection of any medical debt and unfair or unconscionable means to collect or attempt to collect any medical debt.

The advisory opinion, which was published in the Federal Register on Friday, October 4, explains that debt collectors are strictly liable under the FDCPA and Reg. F for engaging in the following unlawful practices when collecting medical bills:

• collecting an amount not owed because it was already paid. This includes instances where a bill was already fully or partially paid by the consumer, insurance, or a government payor such as Medicare or Medicaid.
• collecting amounts not owed due to federal or state law. This includes instances where a law prohibits obligating a person on certain debts. For example, a state workers' compensation scheme may make employers or insurers responsible for qualifying medical expenses, rather than patients.
• collecting amounts above what can be charged under federal or state law. This includes, for example, collecting amounts that exceed limits in the federal No Surprises Act, a law that aims to reduce unexpected medical bills. It also includes collection of amounts that exceed a state's common law remedies for claims when there is no express contract.
• collecting amounts for services not received. This includes "upcoding," where a patient is charged for medical services that are more costly, more extensive, or more complex than those actually rendered.
• misrepresenting the nature of legal obligations. This includes collecting on uncertain payment obligations that are presented to consumers as amounts that are certain, fully settled, or determined.
• collecting unsubstantiated medical bills. Debt collectors must have a reasonable basis for asserting that the debts they collect are valid and the amounts correct.

Amicus brief(ly): The CFPB published this advisory opinion in the Federal Register pretty quickly after release and, with Friday's publishing date, the advisory opinion becomes applicable on December 3. Debt collectors are fully aware that most of the collection practices identified as unlawful in the advisory opinion violate the FDCPA and are impermissible, like collecting debts already paid, collecting amounts not due for some other reason, and trying to collect more than the law allows. Notwithstanding all the noise in the past year or so about medical debt collections, debt collectors do not try to collect invalid debts and, quite to the contrary, are in the business of attempting to collect valid debts. While there is not really anything new in this announcement, the CFPB says in the advisory opinion that debt collectors "are responsible for ensuring that they do not collect or attempt to collect amounts that have been charged for services that have not actually been rendered." Is it enough to rely on the medical provider's representations and warranties about the debts in the collection services agreement? That is not clear from this advisory opinion, but debt collectors collecting medical debt should make sure they have robust debt validation procedures to ensure that when a consumer claims that she was "upcoded" for a more expensive treatment than she received, the debt collector can go back to the medical provider to investigate and resolve that claim. Medical debt collection remains very much at the forefront of the CFPB's regulatory agenda this year.

On October 1, in response to the major damage caused by Hurricane Helene, the Federal Housing Administration issued guidance reminding FHA-approved mortgagees of their responsibilities when originating and/or servicing FHA-insured forward mortgages and home equity conversion mortgages on properties located in presidentially declared major disaster areas ("PDMDA"). The guidance addresses, among other things, damage inspection requirements for properties with pending mortgages or endorsements located in a PDMDA, forbearance relief for borrowers with a mortgaged property or place of employment located in a PDMDA, and other loss mitigation efforts by mortgagees.

On October 2, in a related development, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the National Credit Union Administration, the Office of the Comptroller of the Currency, and state financial regulators issued an interagency statement on supervisory practices regarding financial institutions affected by Hurricane Helene. In the interagency statement, the agencies "encourage financial institutions to work constructively with borrowers in communities affected by Hurricane Helene. Prudent efforts to adjust or alter terms on existing loans in affected areas are supported by the agencies and should not be subject to examiner criticism." The interagency statement also addresses, among other things, challenges experienced by financial institutions after the hurricane concerning the reopening of facilities; compliance with publishing and other requirements for branch closings, relocations, and temporary facilities; and compliance with regulatory reporting requirements.

Amicus brief(ly): The impact of Hurricane Helene on the southeastern U.S. has been devastating. Regulators are usually pretty quick to let regulated companies know when it is OK to bend the rules to accommodate victims of a natural disaster, and that is what happened here with the FHA and the other federal agencies. These regulatory statements are particularly important where there are specific account servicing and safety-and-soundness rules that closely govern the conduct of the servicer. Companies not regulated by these federal agencies and not subject to strict servicing rules have more flexibility to institute customer accommodations following natural disasters, as they typically employ hardship programs to allow affected consumers to recover. That kind of customer service will be important for Florida consumers this week as another hurricane bears down on the state from the Gulf of Mexico. Stay safe, Florida.

On October 3, the Massachusetts attorney general announced a settlement with a mortgage loan servicer, resolving allegations that it violated Sections 35A and 35B of the Massachusetts foreclosure laws and the Massachusetts debt collection regulations in connection with its servicing of a portfolio of primarily second-lien mortgages originated prior to the financial crisis of 2008. According to the assurance of discontinuance, the mortgages at issue were largely originated as part of "80-20" mortgage transactions, in which first and second liens were originated together in a single transaction that commonly financed 80% of the principal balance through a first mortgage and 20% through a second mortgage. The servicer subject to this settlement was not the originator of the loans. In instances where the 80% loan was modified or otherwise remained in effect, the 20% loan remained secured by the property, and in instances where the 80% loan was foreclosed upon, the 20% loan became unsecured debt.

Specifically, the AG alleges that the servicer failed to provide monthly statements for these second-lien mortgages for many years, in violation of Regulation Z, which implements the Truth in Lending Act. The AG also alleges that the servicer delayed communicating with borrowers for many years before it initiated attempts to collect on the second-lien mortgages and failed for years to send required notices under Section 35B, which requires servicers to make a good faith effort to help borrowers avoid foreclosure by notifying them of their right to pursue a modified loan. This delay allegedly resulted in large unpaid balances that prevented borrowers from successfully modifying their mortgage loans under Section 35B. In addition, the AG alleges that when the servicer did send the required Section 35B notices, it unlawfully charged up-front payments as a prerequisite to entering into a mortgage loan modification. Further, the AG alleges that the servicer generally failed to comply with the requirements of Section 35B when processing borrowers' requests for modified mortgage loans.

With respect to the debt collection allegations, the assurance of discontinuance states that the servicer, among other things, attempted to collect on time-barred second mortgage debts, misinformed borrowers that their debts had never been accelerated when they had been previously accelerated by a prior servicer or owner and were time-barred, contacted borrowers by telephone in excess of two calls in any 7-day period, and failed to send borrowers a specified debt validation notice within five business days after the initial debt collection communication.

The assurance of discontinuance requires the servicer to pay $300,000 to the Commonwealth of Massachusetts and to permanently cease collecting and attempting to collect the debts of its entire Massachusetts mortgage loan portfolio. The servicer is also prohibited from selling or transferring its mortgage loan portfolio or the servicing rights thereto to any other entity.

Amicus brief(ly): Well, the gift of overstatement is evidently not limited to the CFPB. The Massachusetts attorney general refers to valid, unpaid junior-lien mortgage loans as "ancient" "zombie" debts in the press release about this settlement - not exactly an objective, even-handed description of those loans. But the AG does share some helpful reminders about Massachusetts law for servicers, especially with respect to the loss mitigation requirements of "35B" and the AG's debt collection conduct regulations that apply to anyone not subject to the state's collection agency licensing law. The latter includes a laundry list of permitted and prohibited collection conduct, as well as a few affirmative disclosure requirements. If that does not sound familiar to any servicer operating in Massachusetts, we commend you to the AG's debt collection website and, from there, to the regulations. The AG takes enforcement of its consumer debt collection regulations seriously.

On September 29, California Governor Gavin Newsom signed Senate Bill 940, which, for consumer contracts entered into, modified, or extended on or after January 1, 2025, prohibits a seller from requiring a consumer, as a condition of entering into a contract, to agree to a provision that requires the consumer to arbitrate outside of California a claim arising in California or to arbitrate a controversy arising in California under the substantive law of a state other than California. Any provision of a consumer contract that violates these prohibitions is voidable by the consumer. Existing law, the Consumer Contract Awareness Act of 1990, defines a consumer contract as a writing prepared by a seller that provides for the sale or lease of goods or services or the extension of credit, as specified, for personal, family, or household purposes.

S.B. 940 also gives consumers the option to have a dispute adjudicated pursuant to the Small Claims Act instead of through arbitration, if a consumer contract requires a dispute under the contract to be arbitrated and the dispute may be adjudicated pursuant to the Small Claims Act. In addition, the new law requires the State Bar to create a program to certify alternative dispute resolution firms, providers, or practitioners.

Amicus brief(ly): Important to this development is the definition of "consumer contract," which is broad and includes extensions of credit. So "sellers" includes creditors - not just credit sellers, like car dealers, but other credit providers. The new law does not ban consumer arbitrations altogether, but it limits the ability of creditors and other "sellers" to require consumers to agree up front to arbitrate disputes arising out of a California credit or sale contract: (1) outside California, and (2) subject to the rules of another state. Arbitration is a valuable tool for resolving claims, so it will be important to review California arbitration agreements before the end of this year to ensure that new agreements after January 1 comply with California's new restrictions (or that, when possible, they elect the Federal Arbitration Act to control disputes); provisions that are inconsistent with California law are voidable at the consumer's option.

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¹ For the unfamiliar, an “Amicus Brief” is a legal brief submitted by an amicus curiae (friend of the court) in a case where the person or organization (the “friend”) submitting the brief is not a party to the case, but is allowed by the court to file the brief to share information or expertise that bears on the issues in the case.