Editor's Note

June is crowded with celebrations. It feels like a Tokyo subway. June is the month of weddings, graduations, flag days, and dad daze. June 15 is the 800th anniversary of the Magna Carta. This month we acclaim Summer Solstice, Gay Pride Month, and National Aquarium Month. And who could forget National Accordion Awareness Month? Seriously? Anyone "un-aware" of an oncoming accordion deserves to be smacked. Just ask Darwin. In June, we applaud Candy Month, which means July is Cavity Month. Cow-befrienders rejoice with Dairy Month, and cat-lovers revel in National Adopt-a-Cat Month. This month, there are days to honor donuts, ice cream soda, chocolate ice cream, chocolate éclairs, yo-yos, sewing machines, and nursing assistants. "Enough already," you're probably thinking, "get to the transition." Thanks for asking.

Forget all that. June is when our Summer Issue lands in your inbox. In this issue, the CFPB reports that arbitration is bad and litigation is good, Congress hints at Dodd-Frank reform, we have mortgage stuff, operations stuff, preemption and privacy and TCPA stuff, a little of this and a lot of that. Lots to celebrate. Alas, no accordion music.

Until next time, have a great summer and, when you're finished, kindly put the bop back in the bop shoo-bop shoo-bop and return the ram to the rama-lama ding-dong. My baby said.

ARBITRATION

The Other Shoe Drops

The CFPB released its long-awaited Report to Congress on arbitration agreements in consumer financial contracts. The Report's conclusion, and Director Richard Cordray's remarks, were as expected: that consumers are better served by litigation— and particularly, class action litigation—than by agreements to arbitrate disputes. The Report addresses nine key areas, including the prevalence and features of arbitration agreements, consumer understanding of arbitration agreements, the types and resolutions of claims in arbitration and in court, and the value of class action settlements. Although the Report comes in at over 700 pages, the CFPB recognized that it lacked sufficient information to evaluate several critical areas. Want to know more? Read our Client Alert.

For more information, contact James McGuire at jmcguire@mofo.com or Nancy Thomas at nthomas@mofo.com.

Like Oil and Water

Another court has considered the interplay between the Bankruptcy Code and the Federal Arbitration Act, this time in a case about a payday loan servicer's proof of claim. Moses v. CashCall, 781 F.3d 63 (4th Cir. 2015). Plaintiff filed for bankruptcy, and the servicer CashCall filed a proof of claim. Plaintiff then filed an adversary proceeding (1) seeking a declaratory judgment that the loan was void and (2) asserting a claim for violation of a state debt collection statute. CashCall moved to withdraw its proof of claim or, in the alternative, to compel arbitration. The court affirmed the lower courts' conclusion that plaintiff's declaratory judgment claim was a constitutionally core claim under the Bankruptcy Code, so sending that claim to arbitration would "inherently conflict with the Bankruptcy Code's purposes." Id. at 72. However, the court reversed the lower courts' refusal to send the debt collection claim to arbitration because the claim was not a constitutional core claim and its connection to the core declaratory judgment claim was too attenuated to overcome the presumption in favor of arbitration.

For more information, contact Mike Miller at mbmiller@mofo.com.

BELTWAY

You Sue Me, I'll Sue You

On April 17, 2015, Quicken Loans Inc. filed suit against the DOJ and HUD. See Quicken Loans Inc. v. United States, Case No. 2:15- cv-11408 (E.D. Mich.). Quicken asserts that despite being ranked the highest-quality lender issuing FHA-backed loans, the company has been unfairly subject to a lending practices investigation for more than three years. As part of that investigation, Quicken, the largest FHA lender, alleges that it has been subject to intimidation and threats from the DOJ and HUD's inspector general. Quicken claims to be a target of a political agenda under which the DOJ is "investigating" and pressuring large, high-profile lenders into paying nine- to ten-figure sums and publicly "admitting" wrongdoing. Not to be outdone, the following week DOJ sued Quicken under the False Claims Act for allegedly improperly underwriting mortgages and reaping the benefits of Federal Housing Administration insurance payouts. See United States v. Quicken Loans Inc., Case No. 1:15-cv-00613 (D.D.C.).

For more information, contact Joe Rodriguez at jrodriguez@mofo.com.

Operation Choke Point Marches On

The DOJ recently reached its third bank settlement under Operation Choke Point, agreeing with Plaza Bank of Irvine, California, on a $1.225 million deal for the bank's alleged failure to report a payment processor's relationship with fraudulent merchants. The Justice Department alleged that top executives at Plaza Bank were also investors in a third-party processor that worked with fraudulent merchants to take unauthorized withdrawals from consumer accounts between July 2007 and mid-2010. The bank allegedly did not end the relationship even though approximately half of the debits made through the processor were rejected by customers' banks and the bank received hundreds of consumer warnings. Further, the bank's chief operating officer allegedly brushed aside concerns raised by the top compliance officer around some of these activities without acknowledging the conflict of interest. See United States v. Plaza Bank, Case No. 1:15-cv-00394 (C.D. Cal. filed Mar. 12, 2015).

For more information, contact Ollie Ireland at oireland@mofo.com.

Watch Those Check Registers

The FDIC is looking at implementing new recordkeeping standards for a limited number of FDIC-insured institutions with a large number of deposit accounts. In its ANPR, the FDIC seeks feedback on ways to strengthen deposit account recordkeeping requirements and administration at institutions with a large number of deposit accounts. The ANPR includes a number of additional topics for consideration, such as what types of new data requirements would benefit a rapid and efficient insurance determination process and the threshold size or type of institutions that would be subject to potential new requirements. The deadline for comments is July 27, 2015.

For more information, contact Ollie Ireland at oireland@mofo.com.

Regulatory Relief Redux

A bill that would bring changes to the financial regulatory system passed out of the Senate Banking Committee on Thursday with only Republican support, but Democrats indicated some areas where they may be able to find common ground as negotiations continue. The Financial Regulatory Improvement Act of 2015, introduced by Banking Committee Chairman Richard Shelby, R-Ala., moved out of committee on a party-line 12-10 vote. The Shelby bill is widely seen as the most extensive overhaul of the financial system since the Dodd- Frank Act. Among other things, the bill would ease regulations on community banks and credit unions, broaden the Dodd-Frank exemptions for smaller banks, and make several changes to the Federal Reserve.

For more information, contact Joe Rodriguez at jrodriguez@mofo.com.

BUREAU

Can You Hear Me Now?

On May 12, 2015, the CFPB filed proposed consent orders in federal courts that would settle allegations that two wireless carriers unfairly permitted their customers to be charged by establishing billing and processing systems that enabled third-party merchants to bill consumers for unauthorized purchases. The CFPB initially brought suit in December against one carrier, but in a significant new development, the CFPB filed suit and a proposed related consent order involving a second carrier.

The alleged UDAAP violations are significant, as these cases are among the first instances where the CFPB has taken action against companies that, prior to the enactment of the Consumer Financial Protection Act, were not traditionally subject to the enforcement authority of federal financial regulators. Specifically, the CFPB alleged that the carriers extended credit to, and processed payments for, consumers and therefore are "covered persons" under the Consumer Financial Protection Act.

For more information, read our client alert or contact Obrea Poindexter at opoindexter@mofo.com.

$19.4 Million Returned to Consumers, with Nary a Press Release

Although it seems like the CFPB announces a new consent order nearly every day, the Bureau isn't always in it for the glory. Sometimes, even though an examination reveals violations of law, the Bureau does agree to forgo public enforcement in favor of non-public supervisory actions to resolve the violations. In the most recent issue of Supervisory Highlights, the CFPB disclosed that non-public supervisory actions involving companies that were found to have violated federal consumer protection laws had resulted in $19.4 million in monetary relief to more than 92,000 consumers in the second half of 2014. Of course, the $19.4 million returned to consumers via non-public action is small compared to the hundreds of millions the Bureau claimed in public restitution last year, but it's not clear whether that means the Bureau is more likely to seek solely behavioral changes in supervisory actions, or just doesn't opt for the non-public route that often.

For more information, contact Nancy Thomas at nthomas@mofo.com.

Reg Z Disclosures in 140 Characters or Less #goodluck

Speaking of Supervisory Highlights, Supervision's post-exam observations for the second half of 2014 ran the gamut, from compliance with the Title XIV mortgage origination rules, to ECOA, to FDCPA violations in student loan collections, to overdraft fee disclosure practices. One of the more interesting mortgage origination observations was that institutions were not subjecting social media advertising to monitoring or compliance audit. According to Supervision, loan originators advertised the length of payment, amount and number of payments, and finance charges on social media without providing disclosures required under Regulation Z. You can fit all those disclosures into 140 characters or less, right? For analysis of this observation and the other juicy tidbits from Supervisory Highlights, check out our blog post "Winter 2015 Supervisory Haiku-lights."

For more information, contact Jessica Kaufman at jkaufman@mofo.com.

Credit Card Market Review, Round Two

In March, the CFPB announced a "Request for Information Regarding Credit Card Market." It follows the 2009 CARD Act's requirement that the CFPB conduct a review of the consumer credit market every two years. This second time around, the Bureau is focused on revisiting some familiar topics, including the continuing effect of the CARD Act on the credit card market; add-on products; rewards; deferred-interest products; fee harvester cards; online disclosures; and grace periods. But the review will also explore a couple of new "areas of interest"—debt collection practices, including supervision of third-party debt collectors; and ability to pay implementation. The request signals the Bureau's continued focus on potential UDAAP and ECOA violations by lenders, particularly with respect to newer products, as well as its increasing attention to debt collection issues.

For more information, read our Client Alert or contact Obrea Poindexter at opoindexter@mofo.com.

Narrative Consumer Complaints Are Happening

Despite apparent impracticalities, the CFPB has moved ahead with its plan to allow consumers submitting complaints to its Consumer Complaint Database to go public with narrative descriptions of their complaints. On March 19, the Bureau announced the change and encouraged consumers to "lift their voices" into a potentially cacophonous chorus that could pose reputational challenges for consumer financial services companies. During the comment period, industry commenters pointed out that the narratives would be unverified even though they posed great potential reputational risk, and that privacy law restrictions meant there was no practical way for companies to respond to narrative complaints with a narrative. The Bureau's response? In short: too bad. The Bureau says its limited verification protocol, which includes confirming that a commercial relationship exists between the consumer and the company identified and that the complaint is submitted by the identified consumer or his or her authorized representative, is enough to keep complaints honest. And although the Bureau acknowledges that "unstructured company narratives may not effectively provide companies with a mechanism to balance a consumer's narrative," it thinks it can solve that problem by permitting companies to choose from "a finite list of optional structured responses" to each complaint.

For more information, contact Angela Kleine at akleine@mofo.com.

CFPB Outlines Approach to Payday Loan "Debt Traps"

The long march toward payday loan regulation continues. At a field hearing on March 26, the CFPB outlined the proposal it is considering to regulate payday lending. The proposal would cover short- and long-term payday loans, as well as vehicle title loans, deposit advance products, and certain high-cost installment and open-end loans. The CFPB views these products as "debt traps," and the proposal would "requir[e] lenders to take steps to make sure consumers can repay their loans." In broad strokes, the CFPB's outline provides for two different approaches to the "elimination" of "debt traps": prevention and protection. Prevention is based on the lender determining the consumer's ability to repay, and protection focuses on restricting product terms to ensure that consumers can affordably repay their debt. The CFPB is also considering restrictions on payment collection practices that, in the CFPB's view, may result in excess fees for consumers.

For more information, check out our blog post or contact James McGuire at jmcguire@mofo.com.

CFPB Ain't Afraid of No Ghost Debt Collectors

In April, the CFPB sued the "ringleaders of a robo-call phantom debt collection operation, their companies, and their service providers," alleging that the debt collectors, using various aliases, "allegedly deployed automated calls to threaten, harass, and deceive consumers in attempts to collect debt the consumers did not owe." In the CFPB v. Universal Debt & Payment Solutions, LLC, et al. Complaint, the Bureau alleged that the collectors' automated calls, placed through a telemarketer, often threatened "arrest, wage garnishment, and 'financial restraining orders'" if consumers did not pay the debt collectors. The Bureau claims the alleged scam generated millions in fraudulently obtained payments for the individuals behind it. The Bureau also sued the debt collectors' payment processors, asserting that these processors were liable for knowingly or recklessly providing substantial assistance to the debt collectors and for failing to "conduct reasonable due diligence to detect the unlawful conduct," approving merchant applications that bore indicia of fraud, and ignoring warnings of fraud from payment networks and customers.

For more information, contact David Fioccola at dfioccola@mofo.com.

Debt Collector "Impersonating" Prosecutors

The CFPB settled with another debt collector in March, this time for allegedly impersonating prosecutors, threatening criminal prosecution or jail time if consumers did not pay debts related to bounced checks. Debt collector National Corrective Group allegedly operated under contracts with state and local prosecutors' offices to collect on bounced checks through diversion programs, and contacted debtors using letterhead from those agencies without their approval. The CFPB says doing so gave customers the false impression that prosecutors had determined the consumers were eligible for diversion programs, and "intimidated consumers into paying hundreds of dollars of extra fees to avoid potential criminal prosecution." The proposed consent order would prohibit these practices, and impose a small $50,000 civil monetary penalty (which, the Bureau noted, would have been bigger if not for "the poor financial condition of the companies" and their principal).

For more information, contact Mike Miller at mbmiller@mofo.com.

CFPB to Card Issuers: Unsubscribe (for Now)

In April, the CFPB announced a final rule suspending for one year the requirement established under TILA and implemented by Regulation Z that credit card issuers submit their card agreements to the CFPB on a quarterly basis. During the suspension period, the CFPB will work to develop a "streamlined and automated electronic submission system" that will enable issuers to upload agreements directly to the Bureau's online repository. Notwithstanding the final rule, issuers still must post credit card agreements on their websites.

For more information, contact Obrea Poindexter at opoindexter@mofo.com or read our client alert.

Military Allotment Processor Dinged for Camouflage Fees

In April, the CFPB went after military allotment processor Fort Knox National Company and its subsidiary Military Assistance Company for charging servicemembers "millions of dollars in hidden fees." Military allotments began as a way for servicemembers to deduct payments for sending money home or paying creditors before automatic bank payments and electronic transfers were common. If the servicemember unknowingly continues the deductions after a creditor is fully paid, though, residual funds can accumulate. Under a consent order with the Bureau, the two entities agreed to pay about $3.1 million to servicemembers for allegedly failing to disclose that they were charging recurring service fees for residual balances that servicemembers did not know were in their accounts.

For more information, contact Leonard Chanin at lchanin@mofo.com.

One-Two Punch Against Morgan Drexen

Litigation between the CFPB and debt-relief services firm Morgan Drexen has been contentious for months. But in May, Morgan Drexen received a double blow. First, the D.C. Circuit declined to hear Morgan Drexen's challenge to the CFPB's constitutionality, saying that Morgan Drexen could pursue its constitutional claims in the enforcement action that is ongoing in California. Then, later that month, the trial court in the enforcement action imposed the sanction of default judgment for what the court found was deliberate falsification of evidence—namely, fake bankruptcy petitions created after the CFPB served discovery requests. The court noted that the falsification was "blatant" and that Morgan Drexen had deceived even its own trial counsel.

For more information, read our blog posts, or contact David Fioccola at dfioccola@mofo.com.

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Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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