Safeguarding The CFPB’s Arbitration Rule

image by Nick Youngson http://nyphotographic.com/

 

I was one of the many signatories of this letter to Senators Crapo (R-ID) and Brown (D-OH) opposing H.R. Res. 111/S.J. Res. 47, “which would block the Consumer Financial Protection Bureau’s new forced arbitration rule.” the 423 signatories all agree “(1) it is important to protect financial consumers’ opportunity to participate in class proceedings; and (2) it is desirable for the CFPB to collect additional information regarding financial consumer arbitration.” The letter, reads, in part,

Class action lawsuits are an important means of protecting consumers harmed by violations of federal or state law. Class actions enable a court to see that a company’s violations are widespread and to order appropriate relief. The CFPB’s study shows that, over five years, 160 million class members were awarded $2.2 billion in relief – after deducting attorneys’ fees. Class actions are especially important for small dollar claims, because the time, expense and investigation needed for an individual claim typically make no sense either for the consumer or for an attorney. Additionally, class actions provide behavioral relief both for the plaintiffs and the public at large, incentivizing businesses to change their behavior or to refrain from similar practices.

Individual arbitrations are not a realistic substitute for class actions. Compared to the annual average of 32 million consumers receiving $440 million per year in class actions, the CFPB’s study found an average of only 16 consumers per year received relief from affirmative claims and another 23 received relief through counterclaims; in total, those consumers received an average of $180,770 per year. While the average per-person arbitration recovery may be higher than the average class action payment, the types of cases are completely different. The few arbitrations that people pursue tend to be individual disputes involving much larger dollar amounts than the smaller claims in class actions. Most consumers do not pursue individual claims in either court or arbitration for several reasons: they may not know their rights were violated; they may not know how to pursue a claim; the time and expense would outstrip any reward; or they cannot find an attorney willing to take an individual case. Thus, if a class action is not permitted, most consumers will have no chance at having their dispute vindicated at all. Class actions, on the other hand, are an efficient method of resolving claims impacting a large number of people.

The U.S. legal system depends on private enforcement of rights. Whereas some countries invest substantial resources in large government agencies to enforce their laws, the United States relies substantially on private enforcement. The CFPB’s study shows that, in those cases where there was overlap between private and public enforcement, private action preceded government enforcement 71% of the time. Moreover, consumer class actions provide monetary recoveries and reform of financial services and products to many consumers whose injuries are not the focus of public enforcers. American consumers can’t solely depend on government agencies to protect their rights.

Reporting on individual arbitrations will increase transparency, broaden understanding of arbitration, and improve the arbitration process. As scholars, we heartily endorse the information reporting requirements of the rule for individual arbitrations. This reporting will address many questions that have gone largely unanswered, due to the lack of transparency that currently exists in this area of law. For example, the public will now know the rate at which claimants prevail, whether it is important to be represented by an attorney, and whether repeat arbitrators tend to rule more favorably for one side than the other. The reporting will permit academic study, which will prompt a necessary debate on how to strengthen and improve the process.

In conclusion, we strongly support the CFPB rule as an important step in protecting consumers. We believe it is vital that Congress not deprive injured consumers of the right to group together to have their day in court or block important research into the arbitration process.

Consumer Protection Changes in 2017

hand-1592406_1280

Business News Daily quoted me in 6 Big Regulatory Changes That Could Affect Your Business in 2017. It reads, in part,

It’s a new year and there’s a new incoming administration. That means there are likely some big-time regulation changes in the pipeline, not to mention changes that were already on the agenda. Some proposals will fail, while others will pass, but all of them could significantly affect your business in 2017 and beyond.

Top of the list this year are the potential repeal of the Affordable Care Act, the currently suspended change in Department of Labor overtime regulations, and minimum wage or paid sick leave efforts at local and state levels. However, there are a bevy of other potential changes on the horizon that the savvy entrepreneur should be aware of as well.

Here are some of the proposals we’re keeping an eye on this year, and how they might affect small businesses.

*     *     *

3. Consumer Financial Protection Bureau (CFPB) arbitration rules

Proposed rules from the federal CFPB would prohibit what are known as mandatory arbitration clauses in financial products. Those clauses essentially prevent consumers from filing class-action lawsuits against the company in the event that something goes wrong. The rules would instead leave people to litigate on their own, a time-consuming, costly endeavor that often has very little payoff in the end.

“It is expected that the Obama administration will issue the final rule before President-elect Trump’s inauguration,” David Reiss, research director of the Center for Urban Business Entrepreneurship at the Brooklyn Law School, said. “Entrepreneurs with consumer credit cards should expect that they could join class actions involving financial products. They should also expect that credit card companies will be more careful in setting the terms of their agreements, given this regulatory change.”

Reiss added that the final adoption or rejection of these rules is also subject to the Congressional Review Act, which empowers Congress to invalidate new federal regulations. Even if the rules were adopted, Congress could ultimately reject them.

“Republicans have been very critical of the proposed rule, which they see as anti-business,” Reiss said.

Loan Mod Racketeering?

James Cagney in "Public Enemy"

James Cagney and Mae Clarke in “Public Enemy”

Bloomberg BNA Banking quoted me in BofA Must Face RICO Claims on Loan Modifications (behind paywall). It opens,

Bank of America must face claims that it and another company violated federal anti-racketeering laws by denying loan modifications to eligible borrowers, a federal appeals court said Aug. 15 ( George v. Urban Settlement Svcs., 10th Cir., No. 14-cv-01427, 8/15/16 ).

The ruling by the U.S. Court of Appeals for the Tenth Circuit reinstates purported class claims by Richard George and other borrowers that Bank of America and Urban Settlement Services (“Urban”), a settlement company, feigned compliance with guidelines under the Home Affordable Modification program (HAMP) while modifying as few loans as possible.

A district court dismissed the claims, saying the plaintiffs failed to sufficiently allege the existence of an association-in-fact enterprise under the Racketeer Influenced and Corrupt Organizations Act (RICO), but the Tenth Circuit reversed, saying they made a “facially plausible” claim.

The ruling sends the case back to the district court to consider that and other allegations.

Case Moves Forward

The decision is the latest in connection with HAMP, a 2009 Treasury Department effort aimed at stabilizing the housing market that was closely related to disbursement of government funds to banks under the Troubled Asset Relief Program. Bank of America received $45 billion in TARP funds.

The plaintiffs are represented by Steve Berman, Ari Y. Brown, Kevin K. Green, and Tyler S. Weaver in the Seattle and San Diego offices of Hagens Berman Sobol Shapiro.

“We are more than pleased the court has ruled our complaint has sufficiently alleged that Bank of America’s massive HAMP mortgage-modification program was in fact a RICO enterprise,” Berman, the firm’s managing partner, said in an Aug. 15 statement. “For years, we have tirelessly fought this major Wall Street kingpin to right the wrongs it committed against hundreds of thousands of homeowners and taxpayers who footed the $45 billion government bailout BoA took in, only to have it used to propagate a scheme to squeeze every dollar from BoA customers and wrongfully foreclose thousands of homes in the process.”

Bank of America spokesman Rick Simon said the bank denies the claims, which he said paint a false picture of the bank’s practices and its employees.

“In fact, Bank of America has been an industry leader in HAMP and other beneficial mortgage modifications,” Simon told Bloomberg BNA in an Aug. 15 e-mail. “We are reviewing the Circuit court’s decision and considering our options.”

The lawsuit, which involved loans originally held by Countrywide Home Loans, said Bank of America and Urban were part of a fraudulent scheme to keep borrowers from acquiring permanent HAMP loan modifications, allegedly because defaulted loans were more profitable.

They said Urban functioned as a “black hole” for HAMP-related documents submitted by borrowers, ensuring that trial modifications would not be made permanent.

Tenth Circuit Reverses

In its September 2014 ruling, the district court said the plaintiffs failed to allege, as required by RICO, that Bank of America was distinct from the alleged racketeering enterprise.

The Tenth Circuit reversed in a decision by Judge Nancy Moritz, who wrote for a three-judge panel. The plaintiffs, she said, “don’t contend that either a parent corporation or its subsidiary corporation is the enterprise. Rather, they assert that BOA and Urban—two separate legal entities— joined together, along with several other entities, to form and conduct the affairs of the BOA-Urban association-in-fact enterprise.”

According to the plaintiffs, she said, Bank of America and Urban “performed distinct roles within the enterprise while acting in concert with other entities to further the enterprise’s common goal of wrongfully denying HAMP applications.”

That is enough to “plausibly allege” that Bank of America meets the “enterprise” requirement, she said.

Crisis Cases Continue

Brooklyn Law School Professor David Reiss said the decision shows that financial crisis-era litigation is not over. “This case is an example of litigation that arises from the supposed fixes for the crisis—fixes that were often implemented poorly, as can be seen from a variety of cases and regulatory actions,” Reiss told Bloomberg BNA in an Aug. 15 e-mail.

The lawsuit alleged in part that documents submitted by borrowers were intentionally “scattered” across various computer databases and systems, allegedly with the goal of creating the appearance that borrowers had not completed the paperwork required to convert their trial plans into permanent modifications.

Reiss called it significant that the court accepted, for purposes of a motion to dismiss, the plaintiffs’ theory that the alleged “black hole” treatment of documents could rise to the level of a RICO violation.

“While courts have held against defendants in individual cases with similar facts, the possibility that they could hold against lenders and servicers in a class action raises the stakes quite a bit for defendants,” Reiss said.

Arbitration and the Common Man

photo by Eric Koch

Arthur Miller

Arthur Miller, the playwright who brought us Death of A Salesman, wrote an essay titled Tragedy and The Common Man. It opens,

In this age few tragedies are written. It has often been held that the lack is due to a paucity of heroes among us, or else that modern man has had the blood drawn out of his organs of belief by the skepticism of science, and the heroic attack on life cannot feed on an attitude of reserve and circumspection. For one reason or another, we are often held to be below tragedy-or tragedy above us. The inevitable conclusion is, of course, that the tragic mode is archaic, fit only for the very highly placed, the kings or the kingly, and where this admission is not made in so many words it is most often implied.

When I read the financial services industry’s critique of the CFPB’s proposed rule regarding Arbitration Agreements, it sounds like they believe that litigation, like tragedy “is archaic, fit only for the very highly placed, the kings or the kingly . . .”

The U.S. Chamber of Commerce has criticized the CFPB for proposing this rule because it will, according to them,

cause significant harm to the very consumers it is supposed to protect. The regulation will effectively eliminate the ability of consumers to use arbitration to seek redress for allegedly improper late fees, overdraft fees, or other small individualized claims that they cannot otherwise resolve with their financial service companies’ customer service departments. A “solution” in search of a problem, the bureau’s rule would replace arbitration — a consumer friendly system that is fast, convenient, and inexpensive — with America’s broken class action system. That’s great for class action plaintiffs’ attorneys but a bad deal for consumers.

It sounds to me like the Chamber believes that the consumer is below litigation-or litigation is above them and should be reserved for the kingly alone.

The fact remains, however, that the Chamber has pushed for mandatory arbitration because it is good for the large corporations who count themselves among its members.  And, in fact, the proposed rule would not eliminate the “ability of consumers to use arbitration;” rather, it would prohibit financial services corporations from using arbitration agreements “to bar the consumer from filing or participating in a class action . . .” (Proposed Rule at 1)

You can be sure that the financial services industry will be commenting broadly and deeply on this rule. Those who care about consumer protection from a policy perspective should be sure to put in their two cents too.  Comments are due in early August. so get crackin’.

TRID Trials

compliance definition

The Consumer Financial Protection Bureau issued the TILA-RESPA Integrated Disclosure (TRID) Rule which went into effect more than six months ago. The TRID Rule were designed to enhance consumer protections in the mortgage application process.  The mortgage industry has been very concerned about its ability to comply with the rule and has also highlighted the fact that borrowers now face longer waits to close as a result of the new regulatory regime. Many in the industry are calling for changes to TRID, but they are not yet in the offing. As far as I can tell, the main problems with TRID are just transition issues as the massive mortgage industry has to change in many ways, large and small, to comply with the new regime.

Kroll Bond Rating Agency has issued an RMBS Commentary which expects TRID to have only a limited impact on residential mortgage-backed securities enhancement levels. Kroll seems to be taking a reasonable position regarding the industry’s failure to consistently comply with the TRID Rule.

The commentary provides some useful information to those who follow TRID developments. Kroll believes that it “is possible many TRID-Eligible Loans originated in the near term will contain at least one technical error under TRID. Such violations, even if corrected in good faith, may carry assignee liability.” (1) At the same time, Kroll “believes the potential assignee liability stemming from TRID violations is both limited and quantifiable.” (1) It is worth contrasting this measured assessment with the histrionics that the credit rating industry displayed with the assignee liability provisions of many of the state anti-predatory lending laws that were enacted in the early 2000s.

Kroll does draw a distinction between the many TRID errors that are cropping up during this transition time and those that might occur over and over again without correction. The latter, of course, could be a magnet for class actions. That seems to me like a good outcome, particularly where the lender has been made aware of the violations by third parties.

While the mortgage industry has reasonably requested clarification of some aspects of the TRID Rule, the industry itself should be seeking to modernize and automate its processes to address not only TRID-induced changes but also the industry’s 20th century mindset. The modern mortgage closing is far from a paragon of technological efficiency.