Waivers of Consumer Claims: Balancing Traditional Compliance Concerns With Special Assets Recovery

Issues of regulatory compliance and special assets/loan recovery have always overlapped.  For example, defenses arising from TILA disclosures (or lack thereof) and rights of rescission have been commonplace in foreclosure proceedings during the past several years.  However, with the passing of the Dodd-Frank Act and its implementing regulation, there is more overlap than ever. There are now servicing regulations which govern how a servicer must interact with a consumer in default.

Thus, when it comes to consumer regulations, there are two different compliance concerns:  (1) meeting the expectations of the servicer’s respective regulatory agencies (“traditional compliance”); and (2) being prepared for litigation with the consumer (“consumer litigation”). If a consumer feels that he or she has been wronged by the servicer’s failure to comply with a particular regulation, that individual consumer may be able to bring a lawsuit against the servicer and recover damages.  The consumer could also raise the issue as a defense in a foreclosure action or other action to recover on the loan.   Therefore, compliance is not only significant for a servicer from a traditional compliance perspective, but also from a loan recovery perspective.

How a servicer complies with consumer regulation from the traditional compliance perspective and from the consumer litigation perspective should, in theory, be the same.  Judges in consumer litigation apply the statutes, the implementing regulations, and cases interpreting those laws.  Judges are required to consider any official commentary or interpretation by the regulatory agencies when applying such law.  Thus, a servicer should not experience a different outcome in its regulatory exam than it does in a court of law.  Unfortunately, there are some inconsistencies forming in this area.

One of the areas of inconsistency relates to the practice of requiring a consumer to waive all defenses and claims against a servicer as a part of a loan workout.  On the one hand, in the consumer litigation context, it is a longstanding principle of law that such a waiver is fully enforceable.  As recently as October, 2013, a federal court applied this longstanding law to find that a servicer was not liable for a violation of Regulation B, because the consumer had signed a waiver of all of her claims against the servicer.[1]  On the other hand, in the CFPB’s Winter 2013 Highlights[2], the CFPB noted that it found the practice of requiring blanket waivers in all loan modifications to be unfair and deceptive.  The CFPB took issue with the way waivers were presented to all consumers as a part of a loan workout in a “take or leave it fashion.”  Meaning, the consumers’ individual circumstances were not evaluated when the servicer required the waiver, and the waivers were not negotiated as a part of a bona fide dispute.  The CFPB’s recommendation was for the servicer to immediately cease use of such blanket waivers and to notify all customers who may have signed the waiver that it was not enforceable.  This could lead to significant consequences with the consumer.  Moreover, the fact that the CFPB has issued a statement that it finds blanket waivers of liability to be a potential unfair and deceptive practice creates exposure to servicers as a UDAAP risk.

So the question then becomes, should a servicer require a waiver of defenses when doing a loan workout in special assets or not?  The practical considerations remain the same from the standpoint of special assets collection. Without a waiver, if there are legitimate existing claims (or even if there are not legitimate ones), lengthy and expensive litigation could ensue if the consumer defaults under the terms of the workout agreement.  On the other hand, the exposure to a servicer for a UDAAP violation is great.  So how do you reconcile the two competing concerns?  The likely reconciliation comes from the CFPB’s description of the “take it or leave” waiver.  The problem that the CFPB seemingly identified was that the consumers were not evaluated on individual circumstances.  The consumers may not have even been aware of potential claims that they had against the servicer.  The CFPB felt that it was unfair and deceptive to require a boilerplate waiver, likely found among the many other boilerplate terms in a modification agreement, without discussing the reason and need for the waiver with the consumer.  It could be reasonable to interpret the CFPB’s statement that it would allow a waiver in certain circumstances where a bona fide dispute is being negotiated with the consumer.  For instance, if there is ongoing litigation and a consumer has raised a Regulation B, TILA, or other regulatory defense, it might be reasonable for the servicer to negotiate with the consumer a loan modification subject to a waiver of those defenses.

The question remains as to whether blanket waivers should be included as boilerplate in all workout documents. In the consumer loan context, servicers should be aware of the CFPB guidance and evaluate internally the risk of UDAAP concerns with the risk of not obtaining a waiver from the consumer.

Footnotes:

[1] Ballard v. Bank of America, N.A., 734 F.3d 308 (4th Cir. 2013) (“Bank of America well may have violated ECOA by requiring Mrs. Ballard to sign as an unlimited guarantor without first determining that her husband was not creditworthy. We need not, however, definitively resolve that question because Mrs. Ballard’s claim fails for another reason—she waived it.”)

[2] http://www.consumerfinance.gov/reports/supervisory-highlights-winter-2013/

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Bankruptcy After DOMA

Most of us are aware that on June 26, 2013, the United States Supreme Court decided United States v. Windsor, a landmark case holding that Section 3 of the Defense of Marriage Act (DOMA) may not be constitutionally applied to same-sex married couples whose marriages are legally recognized under state law.  133 S. Ct. 2675 (2013).  But, what has not been as well publicized is how the Court’s decision in DOMA impacts a same-sex couple’s ability to file joint petitions in bankruptcy.

 

Although some bankruptcy courts, even before Windsor, had ruled DOMA unconstitutional, recognizing same-sex joint filings, others were reluctant to address the issue and in many cases, the United States Trustee’s program challenged joint filings based upon the definition of marriage provided in DOMA.  Now that DOMA has been struck down, however, it seems clear that all bankruptcy courts must apply the provisions of the United States Bankruptcy Code to same-sex spouses just as they would apply them to opposite-sex spouses.

 

In fact, even the Department of Justice recently provided guidance to United States Trustee Program personnel, advising them that the terms “spouse,” “marriage,” and “husband and wife” as contained within the United States Bankruptcy Code, should be interpreted to refer to individuals who were legally married to a person of the same sex in a state that recognizes such marriages, even if they are domiciled in a state that does not recognize the marriage. Since federal law gives an individual or a married couple a right to file bankruptcy, now that the definition of marriage contained in DOMA has been repealed, there should not be any barrier to married same-sex couples filing a joint bankruptcy petition.

 

Approaching the anniversary of the Windsor decision, what continues to remain unclear, however, is how the specific laws of states which discriminatorily exclude recognition of same-sex couples will apply to joint filings by married same-sex couples.  Bankruptcy is a fusion of federal and state law, with state law governing property rights and exemptions.  As such, in states like Florida, which do not recognize same-sex marriages, it remains possible that even with a same-sex couple’s joint bankruptcy filing being recognized, the couple may find themselves unable to avail themselves of the very protections that the Bankruptcy Code was intended to bestow.

 

In addition, the treatment Windsor has afforded lawfully married same-sex couples in the bankruptcy context has not yet been recognized to extend to individuals in a formal relationship, which is not denominated a “marriage” under the laws of the state, such as a domestic partnership or civil union.

 

Needless to say, while a major battle may have been won with Windsor, much ground is still to be tread in applying its principles, and ensuring equal rights under the law.

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Time is On Our Side

Time is On Our Side…Yes it is…

This month, the First DCA entered an opinion regarding the statute of limitations.  It would have seemed that there was nothing left to address with regard to the state of the statute of limitations law, as the law has been unchanged since 1994.  It is kind of like my dad in retirement, he has run out of things to fix around the house, so he is fixing everything all over again.  In 2006, the First DCA entered a controversial opinion in Ginsberg v. ChemMed Corp. 929 So. 2d 623 (Fla. 1st DCA 2006), which seemed to go against prior caselaw and state that: (1) if an individual is prescribed medication, (2) the employer is aware of the prescription, and (3) the individual uses the medication as prescribed, then the statute of limitations will not begin to run until the end of the prescription period.  I actually lost a trial on a case of my own based upon this opinion!  The Court has now readdressed the issue in Pomerantz v. Palm Beach County Sheriff’s Office & USIS, D13-2590 (Fla. 1st DCA, February 7, 2014).  Actually, much to the delight of industry, the First DCA has distinguished its prior opinion in Ginsberg, stating that case had very specific facts.  Rather, the First DCA has now clearly held again that the actual state of the law is that the statute of limitations begins running on the date the medication is prescribed, not the date that the medication is finished, even if taken as prescribed.  The distinguishing facts seem to be whether it is a recurring prescription, and whether the medication is prescribed to be taken as needed as opposed to a strict daily dosage.

So….I guess I should have asked for an 8 year continuance.

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