CFPB Moves Forward With Proposal To Ban Class Action Waivers In Arbitration

The Consumer Financial Protection Bureau has published its long anticipated 377-page proposed rule to bar banks and regulated financial institutions from including class action waivers in mandatory arbitration provisions in consumer contracts.

Mandatory arbitration clauses, and class action waivers, are pervasive in financial contracts. According to a study by the CFPB in 2015 arbitration clauses are used by 53% of credit card contracts, 44% of checking account agreements, 92% of prepaid card agreements, and 84% of storefront payday loan agreements.

The proposed rule would prohibit covered institutions from “using a pre-dispute arbitration agreement to block consumer class actions in court and would require providers to insert language into their arbitration agreements reflecting this limitation.” The rule would apply to a range of financial products, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto and title loans, payday and installment loans, and student loans. Under the proposal, institutions would also be required to submit records of arbitral proceedings to the CFPB. According to the Bureau, it “intends to use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action.”

The proposed rule does not go so far as to outright ban mandatory arbitration clauses in full. But if implemented, the rule would likely have the practical effect of ending most consumer arbitrations because financial institutions will be reluctant to incur costs defending class actions while paying for arbitration.

The proposed rule will be open to public comment for ninety days, and a final rule is anticipated possibly by mid-2017. The CFPB has stated that the rule would have an effective date 30 days after publication of the final rule.

The CFPB’s proposal is consistent with regulators general pushback against arbitration. The CFPB already prohibits mandatory arbitration of disputes related to most mortgage loans and home equity agreements. Mandatory arbitration provisions are also barred from payday loans, vehicle-title loans and similar transactions involving members of the military. In the brokerage industry, the Financial Industry Regulatory Authority bars firms from prohibiting participation in class actions. The Labor Department’s newly published fiduciary-duty rule for financial advisers will permit only arbitration clauses that do not include a class waiver. The Department of Education and The Centers for Medicare and Medicaid Services are likewise considering restrictions on arbitration.

Federal Regulator Issues Proposed Rule Aimed at Incentive Compensation Policies of Banking Organizations

On April 21, 2016, the National Credit Union Administration (collectively, with the Office of the Comptroller of the Currency, Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, and U.S. Securities and Exchange Commission, the “Regulators”), issued a proposed rule (the “Proposed Rule”) designed to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of those organizations under Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Read more about the impact of the proposed rule.

Recent changes to the German regulatory situation for debt funds

Pursuant to recent legislative changes, certain investment funds are now entitled under certain conditions to originate or restructure loans in Germany without the need to obtain a banking licence for lending. Due to the legislative changes, it is now easier to originate or restructure third party loans for certain types of German alternative investment funds (AIFs), and various types of German funds now have broad possibilities to grant shareholder loans or to acquire loans. For EU AIFs, it is now generally easier to originate or restructure loans in Germany. Even foreign (i.e. non-EU) funds may now grant or restructure loans in Germany, but subject to much stricter requirements than those for EU AIFs. This Reed Smith alert sets out an overview of the changes and the updated situation.

To read the entire Reed Smith Client Alert, please click here.

New decision on bank’s duties regarding interest rate swaps

The 11th senate of the German Federal Supreme Court again had to deal with the duties of a bank recommending interest rate swap agreements. In this context, the German Federal Supreme Court re-affirmed on 22 March 2016 – XI ZR 425/14 – its position that a bank dealing with a customer interested in the conclusion of an interest rate swap has a core duty to advise this customer. In this context, the bank also has to disclose to its customer a negative market value of the interest rate swap at the time of the conclusion of such swap.

To continue reading about this decision, please click here.

2015 FinCEN Enforcement Trends

To read a review of FinCEN’s enforcement efforts in 2015 and 2014 , which reveal a marked trend away from its longstanding focus on depository institutions and toward otherwise unregulated financial institutions, as well as an increased focus on pursuing penalties against individuals, view the Reed Smith client alert here.

Fourth Circuit Rules FDCPA Does Not Apply to Consumer Finance Company Collecting Debt on Its Own Behalf, Even if It Acquired the Debt After Default

Reed Smith secured a precedential victory in the Fourth Circuit for client Santander Consumer USA Inc., holding that the Fair Debt Collection Practices Act (“FDCPA”) does not apply to a consumer finance company trying to collect debts owed to itself. In Henson v. Santander Consumer USA Inc., No. 15-01187, the court held that such a company is not a “debt collector” subject to the FDCPA when the company purchased the debts in a portfolio of consumer debts—even if some of the debts were in default when acquired.

Because the FDCPA imposes numerous restrictions and requirements on debt-collection activities, it is crucial for consumer finance companies to know when it applies to them. But whether the FDCPA applies to particular debt-collection efforts depends on whether the company is a “debt collector” or a “creditor” under the Act’s notoriously complex definitional provisions.

In Henson, the plaintiffs alleged that they and a class of other borrowers obtained loans from CitiFinancial Auto, and that Santander violated the FDCPA by attempting to collect on those loans after they had defaulted on them. The plaintiffs argued that Santander is a debt collector under the FDCPA, not a creditor, because the loans were in default when Santander acquired them.  On appeal, plaintiffs were supported by amicus briefs filed jointly by the AARP, the National Consumer Law Center; the National Association of Consumer Advocates; Civil Justice, Inc.; Public Justice Center, Inc.; Maryland Consumer Rights Coalition, Inc.; and the Maryland attorney general.

Santander, represented by Travis Sabalewski and Robert Luck of Reed Smith’s Financial Industries Group, first persuaded the Maryland District Court to dismiss the claim. On appeal, Kim Watterson and Richard Heppner of the Appellate Group persuaded the Fourth Circuit three-judge panel to affirm in a precedential opinion by Judge Paul V. Niemeyer. The Fourth Circuit adopted Santander’s view that, despite the FDCPA’s “somewhat complex and technical regulation of debt collector practices,” the statute’s plain language and purpose showed that “it generally does not regulate creditors when they collect debt on their own account and that, on the facts alleged by the plaintiffs, Santander became a creditor when it purchased the loans before engaging in the challenged practices.” The court also rejected the plaintiffs’ and their amici’s reliance on various definitional exceptions to subject Santander to FDCPA regulation.

The Fourth Circuit’s ruling—on a question of first impression in the Circuit—provides consumer finance companies needed clarity on the scope of FDCPA liability.

German Banking Market is on the Move

The German banking market is on the move. This presents opportunities for foreign investors who would like to enter the German financial market. However, in order to acquire an interest in a German financial institution, i.e. credit or financial services institution, an investor has to comply with a couple of specific regulatory requirements.

To continue reading, please click here to view the entire Reed Smith Client Alert.

OCC Announces Shift in Enforcement Policy: Increased Focus on Internal Risk Management and Personal Liability of Bankers

The Office of the Comptroller of the Currency (“OCC”), the primary federal regulator for most large banks, recently issued a new policy on agency enforcement actions seeking civil money penalties (“CMPs”) against institutions and individuals.  There are several key developments that will directly affect institutions and the directors, officers, employees, major shareholders, and vendors associated with them.  These developments include a shift in the weight that the OCC will accord certain aggravating and mitigating factors when determining whether to bring a CMP action and how much of a penalty the OCC will seek, increased expectations for maintaining a robust internal compliance program, and a possible increase in CMP actions brought against specific insiders associated with an institution.

Read the full alert.


CFPB Takes First Action Against Company for Lax Data Security Practices

The Consumer Financial Protection Bureau (“CFPB”) has announced its first data security enforcement action. On Wednesday (March 2), the CFPB released a consent order against Dwolla, an online payment platform company, alleging it failed to maintain adequate data security practices despite representations made on the company website and in communications with consumers that the company has implemented practices that exceed industry standards. As a result, Dwolla must pay out $100,000 in penalties and endeavor to repair its security initiatives.

To read more about the action, view our Technology Law Dispatch post.