Firm News

The New York Department of Financial Services (NY-DFS) has issued a proposed regulatory framework for virtual currencies. The proposed regulations will require virtual currency companies to obtain licenses named “BitLicenses.” By releasing the proposed “BitLicense” rules, New York became the first state to propose a regulatory structure specifically designed for virtual currencies. This Alert is first in a series on virtual currency regulation…
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On December 10th, the Consumer Financial Protection Bureau (CFPB) entered into a consent order with CareCredit LLC. CareCredit agreed to refund up to $34.1 million to borrowers who were allegedly subject to deceptive credit card enrollment practices.

Prompted by consumer complaints, the CFPB’s investigation focused on enrollment practices at health care providers’ offices for deferred interest credit card plans. The CFPB allegedly found incidences where health care providers: (i) orally misrepresented that the plan has no interest for 12 months as distinct from a deferred interest promotion, (ii) did not provide consumers with copies of the credit agreement or Truth in Lending Act (TILA) disclosures, (iii) failed to disclose the interest rate on the plan once the promotional period expired and (iv) finished incomplete applications and submitted them on behalf of borrowers. The CFPB also noted the lender’s limited involvement in the credit card enrollment process and the lack of training provided to health care providers, many of whom did not understand deferred interest credit cards.
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JPMorgan Chase Bank, N.A. and certain affiliates (“Chase”) entered into orders with the Office of the Comptroller of the Currency (“OCC”) and Consumer Financial Protection Bureau (“CFPB”) for alleged unfair billing of certain add-on identity theft products, which included credit monitoring and credit report retrieval, and unsafe and unsound practices in connection with the bank’s non-home loan debt collection litigation practices and non-home loan compliance with the Servicemembers Civil Relief Act (“SCRA”). Read More

The Federal Trade Commission recently released .COM DISCLOSURES, HOW TO MAKE EFFECTIVE DISCLOSURES IN DIGITAL ADVERTISING, updating its 2000 staff guidance DOT COM DISCLOSURES. The FTC has authority to enforce general consumer protection laws that prevent advertisements from being deceptive, unfair or otherwise in violation of FTC rules and to require disclosures to be presented clearly and conspicuously. According to the FTC, whether a disclosure meets this standard is measured by performance — that is, how consumers actually perceive and understand the disclosure in the context of the entire ad… Read More

An Illinois Appellate Court has held that a collection agency had standing to sue a debtor in its own name under Illinois law but that the collection agency’s complaint was deficient because it failed to include documents evidencing the debt’s assignment as required by Illinois law. Unifund CCR Partners v. Shah, No. 1-10-0855, 2011 WL 477725 (Ill. App. Ct. Feb. 1, 2011).

In Unifund, a credit card issuer sold a delinquent credit card debt. The purchaser sold the debt to another third party who assigned a legal interest in the debt to another entity for purposes of collection while retaining an equitable interest in the debt. The legal interest was again assigned to another entity who sued the debtor to collect the outstanding balance. To support the chain of title, the collection agency attached to the complaint an employee’s affidavit explaining the series of transactions along with purported documents evidencing the sale and assignment of the debt. The debtor moved to dismiss, arguing that the materials purporting to establish the assignment of his debt were inadequate because crucial information regarding the account was scattered over multiple documents. The trial court denied the debtor’s motion to dismiss.

On appeal, the Court of Appeals analyzed whether the collection agency had standing to sue the debtor even though the debt was assigned to it for collection purposes only. The Court indicated that the Illinois Code of Civil Procedure appears to limit standing to a party who is an assignee and owner of a debt, but that the Illinois Collection Agency Act (CAA) explicitly permits a collection agency who is assigned a debt for collection purpose to bring suit in its own name. The Court concluded that the more specific CAA should control and held that the collection agency had standing to bring suit in its own name if it pleads and proves that it has legal title to the account receivable assigned to it for collection purposes only. The Court then analyzed whether the collection agency adequately plead that it was the assignee of the original creditor.

The court indicated that the CAA permits an assignment to be established by a written contract of assignment, which can be established through multiple documents that are incorporated by reference into the contract of assignment. The contract of assignment, however, must contain the information required by the CAA including the date of assignment, the consideration paid and the identifying information for the account. The Court held that the collection agency failed to adequately plead the assignment because the affidavit attached to the complaint was not permitted by the CAA and the other documents attached to the complaint did not adequately set forth the consideration paid nor identify the assigned account.

The Unifund case illustrates that courts may hold collection agency’s to a high standard when bringing suit on assigned debts by requiring affidavits that are supported by detailed documents evidencing the chain of title.

• Margaret Stolar and Chuck Gall

The notice of assignment requirement under the Florida Consumer Collection Practices Act (“CCPA”) has recently been amended. The CCPA provides that it does not prohibit the assignment, by a creditor, of the right to bill and collect a consumer debt. However, the assignee now must give the debtor written notice of such assignment as soon as practical after the assignment is made, but at least 30 days before any action to collect the debt. The assignee is a real party in interest and may bring an action to collect a debt that has been assigned to the assignee and is in default. Fla. Stat. Ann. § 559.715. The prior version of the CCPA merely required an assignee to provide a notice within 30 days after assignment. Importantly, the CCPA now prohibits actions to collect the debt within 30 days after giving the notice.

Debt buyers and collectors should review their communications and collection practices with Florida residents to make sure that they comply with the amended law.

• Margaret Stolar and Chuck Gall

The Appellate Court of Illinois, First District, recently held that a credit card agreement was an unwritten contract subject to Illinois’ five-year statute of limitations, rather than its 10-year statute of limitations. Portfolio Acquisitions, L.L.C. v. Feltman, No. 1-07-3004, 2009 WL 1444791, at *8 (Ill. App. Ct. May 20, 2009).

In Portfolio Acquisitions, a debt buyer sued a consumer in 2005 for a credit card debt charged off in 1999. The debt buyer’s second amended complaint indicated that the consumer applied for a credit card and agreed to pay for amounts charged, but failed to make required payments. The debt buyer attached to the complaint copies of a signed application, cardholder agreements and account statements setting forth the last payment or charge date. The consumer filed a motion to dismiss the complaint, arguing that the debt buyer’s suit was untimely because it was filed after the expiration of the five-year statute of limitations for unwritten contracts. The trial court dismissed the complaint.

The appellate court agreed with the trial court that the suit was time-barred by Illinois’ five year statute of limitations for unwritten contracts and that the 10-year statute of limitations for written contracts did not apply. The court indicated that a contract may be deemed written for purposes of the Illinois statute only if the parties are identified and all essential terms are in writing and ascertainable from the instrument itself without resort to parol evidence. The court found that there was no written contract because parol evidence would be required to show (i) all essential terms and conditions of the contract under consideration, (ii) the relationship of the parties and (iii) the consumer’s receipt and acceptance of the essential terms.

The court stated that the credit card account statements attached to the complaint were not “other evidence of indebtedness” subject to the 10-year statute of limitations because parol evidence would be needed to establish mutual assent, the consumer’s promise to pay and lack of objection to the statements.

Without much explanation, the court also found that the debt buyer could not rely on a “composite document theory” to prove the existence of a writing and the application of the 10-year statute of limitations based on all the documentation provided.

The court did not grant summary judgment for the plaintiff on plaintiff’s federal Fair Debt Collection Practices Act claim for improperly bringing suit. Both the debt buyer and its law firm claimed that their procedures for screening debts supported a bona fide error defense. The appellate court observed that a reasonable jury could find either way and denied plaintiff’s motion.

The Illinois court’s decision follows two earlier federal court cases that reached the same conclusion. See Ramirez v. Palisades Collection, LLC, No. 07-C-3840, slip op., 2008 WL 2512679 (N.D. Ill. June 23, 2008) and Parkis v. Arrow Fin. Servs., LLS, No. 07-C-410, slip op., 2008 WL 94798 (N.D. Ill. Jan. 8, 2008).

Relying on an inapplicable statute of limitations can bar a creditor from collecting and cause a creditor and collector to be subject to direct or vicarious liability under federal, state or local debt collection laws. Accordingly, great care in determining the appropriate statute is essential. Creditors and collectors need to exercise care in analyzing debts. As the Illinois appellate court noted, modern business methods present a variety of contracting methods such as telephone solicitation, electronic signatures, pre-approved offers and the like. State statutes do not always reflect the realities of the market place. A contract may be evidenced by one or more writings but not constitute a “written contract” for statute of limitations purposes. Even when deemed a “written contact” in an original creditors hands, a contact may lose that character in a subsequent holder’s hands, diminishing the debt’s value.

• Mike Tomkies and Chuck Gall

House Bill 209, a bill aimed at further restricting the payday lending industry, was introduced in the Ohio House of Representatives on June 3. This bill, introduced by Representative Matt Lundy (D-Elyria) and co-sponsored by Representatives Foley, Murray, Hagan, Phillips, Skindell, Stewart, Harris, Fende, Newcomb, Okey, Celeste and Harwood, is designed to close so-called “loopholes” that were allegedly not addressed by previous attempts to regulate payday lending.

This bill was introduced exactly one year after the Short Term Loan Act, another payday lending bill capping interest rates at 28 percent, was signed into law. Because the Short Term Loan Act allowed lenders to choose whether or not to operate under the Act, payday lenders seeking to stay in business declined to conduct business under the Act and began operating under the Small Loan Act and Mortgage Loan Act. The bill seeks to impose the interest and fee restrictions contained in the Short Term Loan Act on the lenders who opted to make loans under these other laws.

If signed into law, the new bill, which includes amendments to the Small Loan Act, Mortgage Loan Act, Check Cashing Act, Consumer Sales Practices Act and Civil Interest statute would do the following:

• Impose an interest rate cap of 28 percent, as calculated in compliance with the Truth in Lending Act, on Small Loan Act and Mortgage Loan Act loans of $1,000 dollars or less unless (i) the term of the loan is greater than three months or (ii) the loan is repayable in three or more monthly installments of substantially equal amounts.
• Eliminate check cashing fees on checks and money orders disbursed to fund loans by (i) prohibiting check cashing licensees from charging a fee for cashing a proceeds check or money order disbursed to fund a loan made by the check cashing licensee or an affiliate of the check cashing licensee and (ii) prohibiting Small Loan Act or Mortgage Loan Act lenders from (a) receiving a fee for cashing a proceeds check or money order disbursed to fund a loan made by the lender, (b) requiring a borrower to cash a proceeds check or money order disbursed to fund a loan made by the lender at the place of the business of the lender, an affiliate of the lender or any specified third party or (c) seeking or obtaining directly or indirectly compensation from any affiliate or third party that provides check cashing services to cash a proceeds check or money order disbursed to fund a loan made by the lender.
• Prohibit Small Loan Act and Mortgage Loan Act lenders from conducting the business of making loans within any office, room or place of business in which any other business is solicited or engaged in including, inter alia, a check cashing business or credit services organization, if the division finds, after hearing, that the other business is of such a nature as it tends to conceal evasion of Ohio law.
• Forbid Small Loan Act and Mortgage Loan Act lenders not located in Ohio from making loans to Ohio borrowers from an office not located in Ohio.
• Include provisions prohibiting the use of “unfair, deceptive or unconscionable means to collect or attempt to collect any claim.” Such provisions prohibit:
  1. The collection of or the attempt to collect any interest or other charge, fee, or expense incidental to the principal obligation unless such interest or incidental fee, charge or expense is expressly authorized by the agreement creating the obligation and by law.
  2. Any communication with a consumer whenever it is known that the consumer is represented by an attorney and the attorney’s name and address are known, or could be easily ascertained, unless the attorney fails to answer correspondence, return telephone calls or discuss the obligation in question, or unless the attorney consents to direct communication with the consumer.
  3. Placing a telephone call or otherwise communicating by telephone with a consumer or third party, at any place, including a place of employment, falsely stating that the call is urgent or an emergency.
  4. Using profane or obscene language or language that is intended to unreasonably abuse the listener or reader.
  5. Placing telephone calls without disclosure of the caller’s identity and with the intent to annoy, harass or threaten any person at the number called.
  6. Causing expense to any person in the form of long distance telephone tolls, text messaging fees or other charges incurred by a form of communication, by concealment of the true purpose of the communication.
  7. Causing a telephone to ring or engaging any person in telephone conversation repeatedly or continuously, or at unusual times, or at times known to be inconvenient, with the intent to annoy, abuse, oppress or threaten any person at the called number.

Provisions similar to (i), (ii), (iv), (v), (vi) and (vii) are contained in the federal Fair Debt Collection Practices Act.

• Subject loans of $1,000 or less made pursuant to the Small Loan Act or Mortgage Loan Act to the Consumer Sales Practices Act. This means that, pursuant to the Consumer Sales Practices Act, individuals will have the ability to assert private causes of action for violations of these Acts and the Attorney General will have the power to investigate and initiate civil or criminal actions for violations of these Acts.
• Repeal the provision under the interest statute allowing parties to agree to pay any rate of interest when the instrument is payable on demand or in one installment and is not secured by household furnishings or other goods used for personal, family or household purposes

Although this bill would appear to prohibit cashing, for a fee, checks or money orders issued as payment of proceeds of a loan by a licensed lender or its affiliate, and while it would also appear to impact out of state lenders who presently obtain licenses or certificates of registration under the Small Loan or Mortgage Loan Acts, the bill does not foreclose a number of other options available to former payday lenders to engage in business in Ohio. If you have any questions, or would like a copy of the bill, please do not hesitate to contact us.

• Elizabeth Anstaett

The Ohio Supreme Court held that a provision in a residential mortgage contract requiring a defaulting borrower to pay a lender’s reasonable attorneys’ fees as a condition of terminating pending foreclosure proceedings on a defaulted loan and reinstating the loan is not contrary to Ohio statutory or case law or against Ohio public policy. Wilborn v. Bank One Corp., Slip Opinion No. 2009-Ohio-306 (Ohio Feb. 3, 2009).

Under Ohio common law, contracts for the payment of attorneys’ fees upon the default of a debt obligation are void and unenforceable. The Ohio Supreme court explained that older cases holding that “it is the settled law of this state that stipulations incorporated in promissory notes for the payment of attorney fees, if the principal and interest be not paid at maturity, are contrary to public policy and void” have not been repudiated despite recognition of numerous situations in which contractual provisions for attorneys’ fees may be enforced.

The court found that reinstatement, however, differs from redemption in that a defaulting borrower is not entitled by law to have a mortgage loan reinstated. The court explained that the obligation to pay attorneys’ fees arises only upon the defaulting borrower’s voluntary exercise of the contractual right to reinstate the mortgage loan, a right gained in exchange for the lender’s surrender of the present right to foreclosure. Thus, the court found that reinstatement is not the enforcement of a debt obligation and the public policy concerns regarding the imposition of a penalty against a debtor upon default have no relevance.

Under Ohio common law, agreements to pay attorneys’ fees in a contract of adhesion, where the party with little or no bargaining power has no realistic choice as to terms are not enforceable. The court found that although mortgages may resemble adhesion contracts, the reinstatement provision, including the payment of attorneys’ fees incurred by the lender as a condition of reinstatement, in uniform mortgages were agreed to in a representative process of free and understanding negotiation between parties with equal bargaining power during the process used to create uniform mortgage forms.

Regarding Ohio Revised Code Section 1301.21, the court found that the express terms of Section 1301.21 states that it applies only to provisions for attorneys’ fees in commercial contracts. Consequently, the court declined to apply Section 1301.21 to residential mortgage contracts by implication or by unnecessary statutory construction. Additionally, the court found that Section 1301.21 applies only to the enforcement of a debt, so it has no relevance to reinstatement provisions.

The court distinguished the facts involving the named plaintiff, Wilborn, from all other plaintiffs. According to the court, Wilborn did not have a reinstatement provision in her mortgage. Instead, Wilborn paid off her entire principal and interest in a lump sum prior to judgment to terminate the foreclosure proceedings. The court explained that once Wilborn paid off the entire debt, she had a right to dismissal, but instead she was required to pay the lender’s attorneys’ fees incurred in the enforcement of the note and mortgage debt. Such a circumstance the court held has all the indicia of imposing attorneys’ fees in connection with the enforcement of a debt and is unenforceable under Ohio’s long-stand rule that attorneys’ fees may not be collected against the debtor in an action to enforce a debt.

The court was not presented with and did not consider the ability of Ohio banks to charge fees as agreed pursuant to the Ohio Banking Code. We believe that the Banking Code’s specific statutory authorization permitting a bank to charge, collect and receive fees and charges that are agreed upon by the bank and borrower overrides Ohio common law on attorneys’ fees and collection costs. If a bank and borrower agree to pay attorneys’ fees and collection costs in an agreement governed by the Banking Code, the provision should be enforced. An Ohio bank was a party to the case. Please let us know if you would like a copy of this decision.

• Elizabeth Anstaett and Darrell Dreher

DEBT COLLECTION ON HOLIDAYS

With the holidays fast approaching, debt collectors should keep in mind potential restrictions on making debt collection calls during this time. The federal Fair Debt Collection Practices Act (“FDCPA”) does not specifically prohibit collecting during the holidays. However, the FDCPA prohibits communicating with a consumer in connection with the collection of any debt “at any unusual time or place or a time or place known or which should be known to be inconvenient to the consumer.” 15 U.S.C. § 1692c(a)(1). A number of states also have similar provisions. These provisions could operate to prohibit collection calls on “known” holidays, particularly if formalized as legal holidays or if a debtor has previously informed the debt collector not to contact the debtor on these days. The extent of “known” holidays may vary from locale to locale, as different states, regions and cultures may observe different holidays by law or custom.

If you require assistance in evaluating your debt collection practices for compliance with laws restricting holiday collections, please do not hesitate to contact us.

• Mike Tomkies

FRB ACTS ON CREDIT CARD RULES

The Federal Reserve Board yesterday finalized rules amending Regulation Z (Truth in Lending) and Regulation AA (Unfair Acts or Practices) aimed at improving the effectiveness of disclosures and prohibiting unfair or deceptive acts or practices relating to credit cards. The rules are effective July 1, 2010. Below is a discussion of the Regulation Z and AA rules.

The Board also (i) finalized rules amending Regulation DD (Truth in Savings) to address depository institutions’ disclosure practices related to overdrafts and (ii) proposed rules amending Regulation E (Electronic Fund Transfers) to provide consumers certain protections relating to the assessment of overdraft fees. The Regulation DD and E rules will be the subject of future Alerts.

Regulation Z

The Board finalized rules initially proposed in June 2007 and May 2008 that included changes to format, timing and content requirements for the five main types of open-end credit disclosures governed by Regulation Z: (1) credit and charge card application and solicitation disclosures; (2) account-opening disclosures; (3) periodic statement disclosures; (4) change-in-terms notices; and (5) advertising provisions. The Board also adopted rules regarding certain payment practices and other protections. Following is a summary of major changes to the rules:

Applications and Solicitations:

• New format requirements for the summary table, including type size, boldface type and placement of information.
• Revised content requirements, including disclosure of the duration of penalty rates, a shorter variable rate disclosure, descriptions when a grace period is offered on purchases or when no grace period is offered and a reference to consumer education materials on the Board’s Web site.

Account-Opening Disclosures:

• New requirement to disclose certain key information in a summary table, which is substantially similar to the table required for credit card solicitations.
• Different approach to disclosing fees that identifies fees to be disclosed in the summary table and others to be disclosed in writing or orally.

Periodic Statement Disclosures:

• New requirement to itemize interest charges separately for different types of transactions, group interest charges and fees and provide separate totals of fees and interest for the month and year-to-date.
• Elimination of the “effective APR” disclosure.
• New disclosure (required by the Bankruptcy Act) of the effect of making only the minimum required payment on repayment of balances.

Changes in Terms:

• Increased advance notice period (45 days) for changing terms, including a rate increase due to the consumer’s delinquency or default.
• New requirement for tabular disclosure of key terms being changed to appear on the front of a periodic statement that accompanies a change-in-terms notice.

Advertising Provisions:

• New requirement that advertisements stating a periodic payment amount also must state, in equal prominence, the time period required to pay the balance and the total of payments if only periodic payments are made.
• Prohibition on referring to a rate as “fixed” unless (i) the advertisement specifies a time period for which the rate is fixed and the rate will not increase for any reason during that time or (ii) the rate will not increase for any reason while the plan is open.

Payment Practices:

• In setting reasonable cut-off times for mailed payments, deeming 5 p.m. to be reasonable.
• Requiring creditors that do not accept mailed payments on the due date (e.g., on weekend or holidays) to treat a mailed payment received the next business day as timely.

Other Protections:

• Clarifying that advances that are separately underwritten generally are not open-end credit, but closed-end credit.

Regulation AA

The rules, which are substantially similar to rules adopted yesterday by the Office of Thrift Supervision, are summarized in our Alert dated December 18, 2008.

Please contact us with any questions or if you would like assistance with assessing your credit card practices and/or your credit card documents.

• Judy Scheiderer and Margaret Stolar