FDIC Finalizes Limits on Qualified Financial Contracts

Written by: Angie Fletcher

On Wednesday, the FDIC finalized restrictions on qualified financial contracts (QFCs) of state-chartered non-Fed-member banks for which the FDIC is the primary federal regulator (FSIs).  The types of QFCs that are impacted by this rule include derivative transactions, repurchase agreements, reverse repurchase agreements, and securities lending and borrowing agreements. The purpose of the rule is to facilitate an orderly resolution of a failed institution by limiting the ability of the firm’s QFC counterparties to terminate contracts immediately upon the entry of the covered entity or one of its affiliates into resolution.

The rule will require FSIs and their subsidiaries to ensure that covered QFCs to which they are a party provide that any default rights and restrictions on the transfer of the QFCs are limited to the same extent as they would be under the Dodd-Frank Act and the FDI Act.  Additionally, covered FSIs would be prohibited from being a party to QFCs that would allow a QFC counterparty to exercise default rights against the covered FSI based on the entry into resolution proceeding under the FDI Act, or any other resolution proceeding of an affiliate of the covered FSI. Also amended under this rule is the definition of “qualified master netting agreement” in the FDIC’s capital and liquidity rules, and certain related terms in the FDIC’s capital rules to ensure that the regulatory capital and liquidity treatment of QFCs to which a covered FSI is a party would not be affected by the restrictions on such QFCs.

The rule is substantively identical to QFC rules finalized by the Federal Reserve and OCC that apply to institutions supervised by those agencies.  The final rule, finalized September 27, 2017, will take effect January 1, 2018.  For more information, click here to view the ABA Banking Journal article discussing the rule.

September 29, 2017 at 2:21 pm

CFPB Rule Blocks Class Action Bans in Arbitration Clauses

Written by: Jennifer Salisbury

Yesterday, the Consumer Financial Protection Bureau (CFPB) issued a final rule blocking certain financial institutions – including banks, credit card companies, student lenders, payday lenders, debt collectors, and credit reporting companies – from including class action bans in arbitration clauses. The rule does not take effect immediately, and applies only to contracts signed after March 2018.  Arbitration clauses are not banned altogether, but companies will be required to submit certain information about individual arbitration cases to the CFPB, which will be published on the CFPB’s website beginning in July 2019.  For more information, click here to view the Law360 article discussing the rule.

July 11, 2017 at 9:48 am

Is a Buyer of Defaulted Debt a “Debt Collector” for Purposes of the FDCPA?

Written by: Lisa Connolly

“Disruptive dinnertime calls, downright deceit and more…” On June 12, 2017, the U.S. Supreme Court issued a unanimous opinion in Henson vs. Santander Consumer USA, Inc., 582 U.S. _____ (2017), holding that a company who purchases debt and seeks to collect such debt for itself and not on behalf of a third-party creditor is not a “debt collector” subject to scrutiny under the Fair Debt Collection Practices Act (“FDCPA”).

The Key Issue.  The key issue in this case revolves around the FDCPA’s definition of the term “debt collector” and whether Santander Consumer USA, Inc. (“Santander”) satisfies the definition of “any person who regularly collects … debts owed or due…another”.  15 USC 1692(a)(6).  The FDCPA was enacted in order to address and protect consumers from abusive debt collection practices by debt collectors.  15 USC 1692(e).  In general, the FDCPA applies to consumer transactions in which a consumer is obligated to pay money arising out of a transaction for personal, family, or household purposes.  15 USC 1692(a)(5).

Whether a person or company falls under the scrutiny of the FDCPA depends on whether such person or company is a “debt collector”. Subject to certain exclusions, a person or company is a “debt collector” for purposes of the FDCPA if (i) the principal purpose of such person or company’s business is the collection of debts or the enforcement of security interests, (ii) such person or company regularly collects or attempts to collect debts owed to a third party, or (iii) in the collection of its own debts, such person or company uses a different name indicating that a third person is collecting or attempting to collect such debts.  15 USC 1692(a)(6).  Creditors who originate debt are typically excluded as a “debt collector” so long as they are collecting their own debts in their own name.  15 USC 1692(a)(6)(F).

Background.  As background, four consumer petitioners received secured automobile loans from a consumer finance company, Citi Financial Auto (“Citi”), and thereafter defaulted on the loans due to non-payment; this resulted in the foreclosure and repossession of petitioner’s vehicles and pursuit of deficiency balances owed to Citi.  Santander, a consumer finance company in the business of buying defaulted consumer debt, briefly serviced Citi’s defaulted loans during the time Citi held the loans, including petitioner’s loans.  Subsequently, Santander purchased a portfolio of defaulted automobile loans from Citi, including those of petitioner, and attempted to collect the debt it acquired on its own account.  Petitioners brought class action claims against Santander alleging that Santander violated the FDCPA.  The District Court and the Fourth Circuit rejected petitioner’s argument that the FDCPA applied to Santander, finding that Santander was not a “debt collector” under the FDCPA due to the fact that Santander did not regularly collect debts “owed…another”.

Analysis.  In bringing its claims, petitioners argued that Santander was necessarily a debt collector subject to the FDCPA because prior to Santander’s purchase of Citi’s defaulted loans, it serviced Citi’s defaulted loans; once Santander became the holder of such loans, Santander effectively sought to recover on a debt for a third party. Petitioners also pointed to the word “owed” under the FDCPA to suggest that the timing and type of the debt exposed debt purchasers to scrutiny for seeking to collect debts previously owed to third parties, but excluded from any scrutiny loan originators who maintain ongoing relationships with debtors and who never collect debt for third parties.

In addition to arguing semantics that would broadly define a “debt collector” to include a debt purchaser, petitioners also pitched a public policy argument pushing the idea that a broad interpretation of the statute would best uphold consumer protections and the intent of Congress in its enactment of the FDCPA. The Court rejected petitioner’s claims, agreeing with Santander: Santander became a creditor collecting its own loans once it purchased and began collecting upon such loans, and was thus excluded from FDCPA.

Narrow Ruling.  In the Court’s narrow ruling, the Court declined to consider two issues not previously raised by petitioners: (i) whether debt buyer that regularly collects debts on its own account and services third-party debt is a “debt collector” under the FDCPA, and (ii) whether there is a threshold of debt that a debt purchaser must own to be exempt under the “principal purpose” definition of a “debt collector” – those engaged “in any business the principal purpose of which is the collection of debts.” §1692a(6). These issues are likely to be further litigated, and may open the door for potential liability to debt buyers in the future.

Ultimately, the court’s ruling resolves a circuit split in favor of banks and finance companies that seek to collect upon the debt that they purchase.

Concluding Thoughts.  Heralded as a judge with judicial philosophy and style nearly identical to that of Justice Scalia, Justice Gorsuch’s appointment to the Supreme Court left many of us anticipating what mark he would make on a bench often dominated by the originalist views of Justice Antonin Scalia. In his first opinion, Justice Gorsuch proves he is a witty textualist who is not afraid to break the rules of grammar for dramatic effect, challenge canons of construction, and delve into linguistic analysis, all while remaining sensitive to policy concerns and, in the end, recognizing that in the context of the plain language of the statute such concerns “present many colorable arguments…a fact that suggests…these are matters for Congress, not this Court to resolve.”

June 19, 2017 at 9:12 am

Written by: Lindsay Harden

Yesterday the OCC issued Frequently Asked Questions (“FAQs”) to supplement OCC Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance.” The FAQs provide helpful guidance to banks on subjects including working with fintech companies, reducing oversight costs for lower-risk third-party relationships, and engaging in marketplace lending arrangements with non-bank entities. Portions of this guidance may be particularly useful for community banks who wish to leverage resources by distributing costs among multiple banks. For example, the OCC clarified in the FAQs that banks using a common third-party service provider may collaborate with each other to meet certain OCC expectations with respect to performing due diligence, contract negotiation, and ongoing monitoring responsibilities. The FAQs also make clear that a bank may outsource certain compliance management functions or collaborate with a group of banks to manage cybersecurity issues, as additional cost saving alternatives.

June 8, 2017 at 2:11 pm

Federal Banking Agencies Remind Banks of Appraisal Waiver Process

Written by: Jennifer Salisbury

On Wednesday, federal banking agencies issued a reminder of two approaches financial institutions can use to ease the shortage of qualified appraisers that is slowing down closing times. First, temporary practice permits allow state-certified or licensed appraisers to provide services in other states.  Second, a financial institution may qualify for a temporary waiver of the requirement to use a state-certified or licensed appraiser if the institution faces documented scarcity of appraisers that has led to “significant delays” in appraisers on federally related transactions in a specific geographic area.  For more information, click here to view the ABA Banking Journal article discussing this topic.

June 2, 2017 at 3:33 pm

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