Banking & Finance Law Report

FDCPA – Sixth Circuit Requires Real Damages

 

When Congress passed the Fair Debt Collection Practices Act it created a federal statutory right to damages for consumers who suffer abusive debt collection practices. One of those practices, the required disclosures in a communication with the consumer, was the subject of a recent decision by the Sixth Circuit Court of Appeals in Cincinnati.

The decision will give some comfort to consumer lenders and their lawyers in light of the judicial limitation it imposed on Congress when it creates federal statutory causes of action.  Here the decision was in favor of the purported debt collector, the lender’s lawyer.

The FDCPA is frequently the subject of litigation. The possibility of damages for a consumer has prompted federal litigation the way honey draws bees. Here the honey was a claim against the lender’s lawyer and his law firm.

The facts in this case were not in question. This summary is drawn from a very well-written opinion by Judge Jeffrey Sutton of the Court of Appeals available here.

In 2010, James and Patricia Haggy defaulted on a mobile home loan. When foreclosure proceedings were initiated, Mrs. Hagy called the law firm representing the foreclosing lender.  The foreclosure was settled when the Hagy’s conveyed a deed in lieu of foreclosure and the lender agreed not to sue the Hagy’s for any deficiency. Continue Reading

Practice Pointer for Creditor’s Rights Counsel: Draft Complaints With the New Warrant of Attorney Bench Card in Mind

The Ohio Judicial Conference has issued a bench card, a copy of which is attached, that gives Ohio’s Common Pleas Court judges a checklist they may use when presented with an order seeking judgment on a note containing a warrant of attorney. While the bench card is merely advisory, it represents a victory for those who want to limit the use of warrants of attorney to confess judgment to monetary defaults only, and appears to be an end-run around the legislative process.

The checklist contains the following six items (quoted verbatim):

  • Original Note produced and Complaint has copy of note attached as exhibit?
  • Complaint incudes statement regarding last known address of the defendant either in averment or within caption?
  • At least one maker resides in jurisdiction or Note executed in jurisdiction where Complaint is filed?
  • Note includes “warrant of attorney” with statutory language above or below signature?
  • The Note does not arise from a consumer transaction?
  • Default consists of nonpayment on note, rather than default of other provision unrelated to payment”.

There is debate on both sides of the debtor/ creditor bar about whether a warrant of attorney may be used on confess judgment for a non-monetary default, also known as a covenant default. By issuing this bench card, the Common Pleas Court judges in Ohio’s 88 counties have (albeit non-binding) guidance that warrants of attorney may only be used for a monetary default, not in a covenant default situation.

The advice to creditor’s counsel facing a covenant default is to (i) accelerate the debt; (ii) sue after passage of the cure period; and (iii) plead that the debt was accelerated and due in full.

“How did we get to this bench card?” you might ask. As reported last year in this blog (HB 67 Warrants of Attorney dated February 24, 2017), a bill limiting the use of warrants of attorney to situations involving “the settlement of a dispute” was introduced into the 132nd General Assembly on February 16, 2017 by Representative Ron Young (R- Leroy Township).  Vigorous debate ensured, and, in the interest of full discourse, the author objected to the bill.  A later amendment to H.B. 67 replaced the “settlement of a dispute” language with a limitation on the use of warrants of attorney to “monetary defaults”, a phrase that was not defined in H.B. 67.  The amended version of H.B. 67 also faced strenuous opposition.

The bench card was issued last fall without notice or warning, and in October, 2017, Rep. Young endorsed the bench card as set forth in the attached press release. The press release reflects the largely anecdotal stories that were offered by proponents of the bill regarding the horrors purportedly committed by commercial lenders, who were allegedly forcing borrowers to sign “away their business, their homes, their checking accounts, and their personal property, without notice and without the right to defend themselves even in cases where the lender was at fault.”

There are two problems with the proponents’ allegations: first, they were completely unsupported by authority.  If lenders were filing baseless lawsuits, there would be public record documents available.  The author requested such documentation, and received nothing.  There might also be Rule 11 and other sanctions motions brought against creditor’s rights counsel filing frivolous and baseless suits.

Second, the proponents of limiting the use of warrants of attorney ignore the remedy of a motion for relief from judgment under Ohio Civil Rule 60(B). As creditor’s rights lawyers will attest, motions for relief from judgment are freely granted when filed after a judgment by confession is rendered.

The bottom line is this: the Ohio Judicial Conference has issued its bench card, clearly to the joy of opponents of warrants of attorney.  Creditor’s rights counsel are advised to draft their complaints to make clear that there has been a monetary default, even if it arises from an acceleration based on a covenant default.

Association Health Plans—Proposed DOL Rules Create Potential Opportunity for Associations and Small Employers

Our colleagues at Porter Wright’s employee benefits blog recently described a proposed rule that may be of interest to community financial institutions: proposed rules of the Department of Labor that may make it easier to join with other similar organizations to purchase employee health insurance.  Saving expenses is the name of this game of course.  This is something to watch.  The post appears here.

Changes to Ohio Banking Law

Last year, the Ohio Legislature made a number of important changes to Ohio’s statutory banking code. These are the first comprehensive changes in more than twenty years.  Most of the changes were effective January 1, 2018.

The heavy lifting of the new Ohio banking bill is language that consolidates a number of existing financial institution charters into one single charter. Going forward, Ohio-chartered banks, savings and loans and savings banks will be operating under one common form of charter.

So, generally speaking, the changes made by the new banking code can be summarized with two words: consolidation and clarification.  The happy result is much needed modernization. Continue Reading

Tax Reform Will Affect Public Company Executive Compensation Arrangements and Related Proxy Statement Disclosures

While opinions on the Tax Cuts and Jobs Act (the “Act”) vary, one thing everyone can agree on is that it is a game changer in many areas of law and business. An example of that is how the Act affects executive compensation arrangements of publicly traded companies.  The Act has amended Internal Revenue Code Section 162(m) so that if a public company pays more than $1 million in compensation to a “covered employee” in 2018 or later, that company generally will not be able to deduct the amount over $1 million.  Amounts paid under agreements that were effective on or before November 2, 2017, however, may still be able to be deductible under a transition rule (assuming that the agreements are not materially modified).  To manage the loss of this deduction, public companies should consider taking the following actions with respect to their executive compensation plans.

  1. Reevaluate the design and administration of their plans.
  2. Implement measures to track covered employees because once an executive is a covered employee under Code Section 162(m), that person remains a covered employee forever (including after termination of service and even after he or she is deceased).
  3. Encourage covered employees to consider deferring larger amounts of compensation until termination of employment or later, when compensation may be less than $1 million.
  4. Review their proxy statement disclosures and make any appropriate updates to reflect the changes that the Act made to Code Section 162(m).

This post will discuss these issues in greater detail below. Continue Reading

Judicial Review of CAMELS Ratings – Banking Organizations Weigh In

Several trade associations for the banking industry have weighed in on a pending potential landmark case in the Northern District of Illinois regarding the possible judicial review of CAMELS (Capital, Asset Quality, Management, Earnings, Liquidity and Sensitivity) ratings of financial institutions. As noted by this blog earlier this year, the United States Court of Appeals for the Seventh Circuit, in Builders Bank v. FDIC, 846 F.3d 272 (7th Cir.2017), vacated a lower court ruling stating that CAMELS ratings by the FDIC were committed to agency discretion and thus beyond judicial review. The case has been remanded to the Northern District of Illinois, where the Clearing House Association, the American Bankers Association, and the Independent Community Bankers of America have filed a brief as amici curiae, in support of neither party but solely to assert that CAMELS ratings are not exempt from judicial review.

In their brief, the amici assert that the availability of judicial review of agency decisions serves important purposes, by “providing assurance that agencies do not exceed the limits of their statutory authority and treat parties fairly, consistently, and rationally,” particularly in the arena of CAMELS ratings, which “are a cornerstone to bank regulation” and have the potential to have “significant impact” on banks’ businesses and activities. Following the introductory section to the U.S. Code’s chapter on judicial review of administrative agency decisions (5 U.S.C. Section 701), the amici state that judicial review ought to be presumptively available absent (1) a statute precluding judicial review, or (2) the FDIC’s action being committed to its discretion by law. The amici note that the Federal Deposit Insurance Act does not preclude judicial review of FDIC examinations. They argue, further, that the Seventh Circuit allows for judicial review of agency decisions where the agency has published factors that guide its decision making process. The amici point to, among other factors, the Uniform Financial Institutions Rating System (“UFIRS”), which the FDIC references in its manual for risk management examiners, as providing such factors undergirding the CAMELS ratings. The amici also claim that commitment of certain CAMELS components to agency discretion (e.g., the Capital component, committed to agency discretion pursuant to 12 U.S.C. Section 3907(a)(2), as noted in this blog’s prior post on this matter) would not foreclose other components from judicial review, as noted by the Seventh Circuit in the case at hand.

Appealability of FDIC decisions continues to be a contentious issue for the banking community. On July 18, 2017, the FDIC adopted revised Guidelines for Appeals of Material Supervisory Determinations (the “Guidelines”), which provided guidelines for certain appeals of agency decisions, including CAMELS ratings, to the FDIC’s own Supervisory Appeals Review Committee (“SARC”). In their Notice of Guidelines, however, the FDIC stated that “because supervisory decisions are entrusted to agency discretion, SARC decisions are not appealable.” The American Bankers Association, in its comment to the prior proposed draft of the Guidelines, had requested that the Guidelines be amended to include an independent appellate review process for agency decisions. The forthcoming ruling in Builders Bank v. FDIC may open the door for them and the banking industry in general to such an independent appellate review.

Potential Changes for HVCRE Loans

In this blog, we have described some of the original concerns with the “high volatility commercial real estate” loan regulation as well as some suggestions for change. These rules apply to certain real estate loans for acquisition, development and construction.

Recently, there have been suggestions that changes are possible regarding “high volatility commercial real estate” loans or “HVCRE” loans.

Here is a quick reminder of the issues. Effective January 1, 2015, all banking organizations were required to allocate significantly more capital when making commercial real estate loans that were considered to be HVCRE. Under these rules, an HVCRE loan had a risk weight for capital purposes 50% greater than the risk weight of a non-HVCRE commercial loan. Questions quickly arose.

An HVCRE loan is a loan that finances the acquisition, development or construction of real property prior to permanent financing. The regulations apply to existing loans as well as new loans.

There are important exceptions to this classification including: loans on one to four residential properties, community development loans, agricultural loans and certain qualifying real estate loans.

For real estate loans to qualify for the exception, the loan to value ratio must be less than or equal to the applicable maximum loan to value ratio (typically 80%), the borrower must have contributed capital in the form of cash or readily marketable assets equal to at least 15% of the project’s value as completed and the borrower’s contribution must be made before the lender advances funds. Furthermore, the capital contributed by borrower must be required to remain in the project throughout the life of the project. The life of the project is defined to end when the loan is converted to permanent financing, the project is sold, or the loan is paid in full.

Once a loan is classified HVCRE it cannot be declassified prior to the end of “life” of the project.

Here are the developments which now suggest changes may be on the horizon.

First, there have been federal legislative proposals about HVCRE. HR2148 has been introduced in the House that would clarify some aspects of the HVCRE definition. The bill would exempt loans made prior to January 1, 2015, from the HVCRE status and would permit a loan to be declassified once a project is completed and cash flow is being generated sufficiently to support interest payments and operating expenses.

Second, as part of its ongoing review of regulatory requirements, the Federal Financial Institution Examination Council reported this year that one of its goals is to clarify each HVCRE treatment for acquisition, development, and construction loans.

When FFIEC reported to Congress that it was considering simplifying community bank capital rules, it listed HVCRE exposure for review. The agencies involved, the Board of Governors, the Office of the Comptroller of Currency, and the Federal Deposit Insurance Corporation, noted that they had received a number of comments from community banks suggesting that the definition of HVCRE classification is not consistent with the safe and sound lending practices that the capital risk weighting requirement is too high, and that the requirement that the 15% borrower equity contribution, whether initially contributed or are internally generated, remain in a project for the life of the loan is not consistent with common business practices.  The prohibition on removing capital has been interpreted in a manner that prevented withdrawal of capital when a construction loan was converting from temporary to permanent financing, for example.

7th Circuit Overrules FDCPA Bona Fide Mistake Case

In a divided en banc decision, the U.S. Circuit Court of Appeals for the Seventh Circuit has reversed (by vote of 7 to 4) a 2016 decision that a law firm when acting as a debt collector was shielded from liability under the Fair Debt Collection Practices Act when it relied on precedent that was subsequently overruled.  The prior decision was described in this blog here.

The issue is the extent of the bona fide error defense that is provided by the Fair Debt Collection Practices Act for debt collectors who make a mistake despite having procedures in place to avoid such mistakes. A 2010 U.S. Supreme Court decision holds that the defense does not protect mistakes of law.

A prior three-judge panel of the Seventh Circuit had concluded that relying on a controlling appellate court decision was not a mistake of law and that the law firm had made no legal error even though the decision was later overruled.

The new decision however concluded that the law firm had violated the statute since the firm made a mistake in interpreting applicable law. And since the error was a mistake in interpreting law, the bona fide error defense had no application under the controlling U.S. Supreme Court precedent even though the law firm had relied on a prior controlling Seventh Circuit decision which was overruled after the law firm relied on it.

The majority wrote that the U.S. Supreme Court did not intend that the bona fide defense would “protect some mistakes in the law…but not others.” It noted that there is “no workable line between protected and unprotected mistakes of law.”  Judicial opinions are usually retroactive in nature, the majority noted, and the appellate court had explicitly held in the recent decision in which it overruled its prior holding, that the new decision would have retroactive effect.  At footnote 2 in the new decision, the majority also noted that no other district court decision addressing the issue had not given retroactive effect to appellate court’s recent decision.  It said its current decision was necessary, among other things, to “maintain the uniformity of circuit law.”

The three judges who originally reviewed the case were among the four dissenters from the new opinion. The dissenters said they could not agree with a rule of law that “punished debt collectors for doing exactly what the controlling law explicitly authorizes them to do at the time they do it.” Ronald Oliva v. Blat, Hasenmiller, Leibsker & Moore LLC (7th Cir., No. 15-2516, July 24, 2017).  The dissent argued that the majority misunderstand the extent of the 2010 U.S. Supreme Court decision which dealt with the application of a non-controlling judicial interpretation.  In contrast, in the current matter, the law firm complied with controlling judicial precedent, the dissent argued.

Ohio Amends the Good Funds Law Effective on September 29, 2017

The Good Funds Law went into effect on April 6, 2017 amending Section 1349.21 of the Ohio Revised Code to require stricter controls for all residential real estate transactions involving the sale, purchase, or refinance of such real estate. The law was passed as an attempt to combat and thwart fraudulent activities associated with the closings of such residential real estate transactions.  While the Good Funds Law only applies to residential real estate, some title companies have elected to also apply the law to commercial real estate transactions.  The law applies to buyers, sellers, and lenders.

The basic purpose of the law is to eliminate the use of checks and instead to require, with limited exceptions, the transfer of funds to purchase the property at closing to the title company by electronic transfer. While the law initially required that any funds for more than $1,000.00 be electronically wired to the title company prior to the closing, the Ohio legislature has increased this amount to be effective on September 29, 2017 from $1,000.00 to $10,000.00.  Cash, personal checks, certified checks, official checks, or money orders are still acceptable for expenses up to $1,000.00 or $10,000.00 (after September 29, 2017).  This threshold cannot be circumvented by issuing multiple checks or utilizing a multitude of different forms of payment.  Additionally, while the Ohio legislature has elected to increase this threshold amount, some title companies, as the risk bearers of any such fraudulent checks, may establish a policy to accept these alternative forms of payment in an amount less than this statutory threshold.

For buyers, the Good Funds Law means that they can no longer bring a certified check for the purchase price (unless the dollar amount is less than the threshold above). Further, a lender must electronically wire the funds to the title company in sufficient time for the deposit to show up in the title company’s bank account prior to the scheduled closing.  For sellers, if they need the funds from the first closing to immediately attend a second closing to purchase another property, they may need to delay the second closing until the funds from the first closing have been wired and received by the next title company in sufficient time for the second closing.  Thus, going forward, the electronic transfer of funds to purchase property in Ohio will be a mandatory process for buyers, sellers, lenders, and title companies.

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