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Blockchain Technology Will Not Disrupt Financial Services Anytime Soon

September 24, 2018

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Twenty venture capitalists gathered in Silicon Valley last week to discuss the impact of blockchain technology, including digital currency, on financial services and venture capital. The 20 VCs represent an equal number of funds, which invest–or are looking for investment opportunities–all over the world, including the third world. They represented a diverse group of perspectives, with some having regulatory experience, some having experience with conventional payment mechanisms and some with innovative mechanisms such as PayPal. Even their disagreements were instructive of the uncertain future of blockchain technology and its various potential applications.

The consensus is that digital currency is entering a nuclear winter. A majority of Initial Coin Offerings made in 2017–perhaps as much as 75%–turned out to be fraudulent and have no value today. Not coincidentally, the vast majority of Initial Coin Offerings originated in Eastern European countries that are home to spam and bot farms…and where there is little, if any, regulatory oversight.

To the extent bitcoins may become a viable, commercial technology for B2B transactions, it is likely to occur in a technology hub in the U.S. or Europe. Those hubs have the talent, the infrastructure and the robust regulatory structures that can be adapted to ICOs and create the trust necessary to make digital currency a positive, viable alternative to government currencies. In fact, the centralization of technology talent in the U.S. is depriving the rest of the world of talent.

The attempts of island states, like Bermuda, Malta, Cyprus, the Isle of Mann, and even Singapore to draft regulations that facilitate the creation of bitcoin issuers on their soil is unlikely to have a significant impact. Nobody who is experienced and seriously intends to build a global digital technology company and change the financial services industry on a global scale will think one can create the necessary large organization on these islands. These islands do not have an ecosystem of sophisticated VCs and do not have a critical mass of talented engineers. The island states are going for broke because they have so little to lose. When and if the technology matures, U.S. companies will step in and crush competitors based in these islands.

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Lender’s “Boilerplate” Disavowal Dooms Rescission of a Common Loan Modification Agreement

August 23, 2018

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In a case with potentially broad implications, the Sixth Circuit becomes the first federal circuit court to hold that the Truth in Lending Act provides no right to rescind a loan modification agreement entered into with a successor creditor. TILA exempts from rescission “refinancing” transactions with “the same creditor secured by an interest in the same property” but not “refinancing” with a different creditor.

The case impacts those borrowers whose loans were assigned after origination (an everyday occurrence), and who seek rescission after receiving a common form of modification that lowered their interest rate, recalculated the principal due to include only the unpaid balance plus earned finance charges and premiums for continuation of insurance, and perhaps even extended their payment schedule.

Regulation Z provides that a “refinancing occurs when an existing obligation … is satisfied and replaced by a new obligation undertaken by the same consumer” and that a refinancing does not include a “reduction in the annual percentage rate with a corresponding change in the payment schedule.”

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Fair Debt Collection – In Writing, and We Mean It

August 8, 2018

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The Sixth Circuit Court of Appeals continues to contribute to the case law defining which violations of procedural statutes constitute an injury-in-fact under Spokeo, Inc. v. Robins, ––– U.S. ––––, 136 S.Ct. 1540, 1547, 194 L.Ed.2d 635 (2016).

In Macy v GC Services Limited Partnership, it holds that Plaintiffs alleged sufficient concrete harm to satisfy the injury-in-fact requirement for standing where the defendant debt collector’s letter omitted to inform the plaintiffs, credit card holders, that it was obligated to provide certain information only if Plaintiffs disputed their debts in writing. See 2018 WL 3614580 (6th Cir. July 30, 2018).

At issue was the Fair Debt Collection Practices Act’s requirements that a debt collector provide a consumer with a notice that contains:

(4) a statement that if the consumer notifies the debt collector in writing within [a] thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and (5) a statement that, upon the consumer’s written request within [a] thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.” 15 U.S.C. § 1692g(a) (emphases added).

The Defendant’s letter omitted to mention the writing requirement, instead simply stating, “if you do dispute all or any portion of this debt within 30 days of receiving this letter, we will obtain verification of the debt from our client and send it to you. Or, if within 30 days of receiving this letter you request the name and address of the original creditor, we will provide it to you in the event it differs from our client, Synchrony Bank.”

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Transfer of Servicing Letter under RESPA Triggers FDCPA Notice Requirements

September 15, 2015

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The Fair Debt Collection Practices Act (“FDCPA”) provides that within five days of any initial communication with a consumer “in connection with the collection of any debt,” a debt collector shall send the consumer a written notice.  The notice must contain, among other things, the amount of the debt, the name of the creditor to whom the debt is owed, and a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed valid by the debt collector.

The Real Estate Settlement Procedures Act obligates a new servicer of certain types of mortgage loans timely to notify the borrower of the change in servicer and to provide certain other information regarding the transfer, including the effective date of the servicing transfer.

A recent case from the Second Circuit Court of Appeals (which covers New York and New England) holds that an attempt to comply with the Real Estate Settlement Procedures Act constitutes an “the initial communication with a consumer in connection with the collection of any debt” that requires the consumer be given the Fair Debt Collection Practices Act notice.

The debt collector mailed the consumer a letter entitled “Transfer of Servicing Letter.” An attachment stated it was “an attempt to collect upon a debt” and purported to explain some of the provisions of the Fair Debt Collection Practices Act.

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Agreeing to Lower an Interest Rate is Fraudulent?

September 2, 2015

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When is a loan modification that reduces the borrower’s interest rate fraudulent and not “benevolent” under the UCC?  Maybe when the lender extends the loan repayment period or procures a guaranty from HUD, according to one federal district court.

A husband and wife took out a mortgage. After their divorce, the ex-wife agreed with the lender to modify the mortgage to lower the interest rate by 2%, allegedly without the knowledge or consent of her ex-husband. The lender considered the husband obligated to make the modified mortgage payments and reported him to credit reporting agencies when payments were missed.

The ex-husband brought claims against the bank for breach of contract, violation of the Fair Credit and Reporting Act and defamation. He asserted he was discharged from the mortgage due to the loan modification.

The lender moved to dismiss the case at the outset by arguing that as a matter of law the refinancing was not a material alteration of the loan agreement and therefore the credit report was accurate. The district court denied the motion, thus allowing all the claims to proceed to discovery and a future factual resolution, based in large part on its interpretation of UCC § 3-407.

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Debt Collector has Burden to Prove FDCPA Exception

August 6, 2015

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Under the Fair Debt Collections Practices Act, a debt collector is liable to a consumer for contacting third parties in pursuit of that consumer’s debt unless the communication falls under a statutory exception. One of those exceptions covers communication with a third party for acquiring location information about the consumer.  Even then, the Act prohibits more than one such contact unless the debt collector reasonably believes that the earlier response of the third party was erroneous or incomplete and that such person now has correct or complete location information.

The first federal court of appeals to address the issue has just ruled that if sued in a case alleging illegal third-party contact, the debt collector has the duty to plead and prove the exception. To take shelter in the exception, a debt collector must expressly state in its answer to the complaint (facts permitting) that it pursued repeat contacts with the third-party because it reasonably believed that her earlier response was erroneous or incomplete and that she now has correct or complete location information. To prevail on the defense, the debt collector will also have to produce evidence in discovery and provide testimony at trial that proves those facts. The debt collector will need someone to testify at trial to those facts that made it reasonable to believe that the third party’s earlier response was erroneous or incomplete and that the third party now has correct or complete location information.

This latter point may be very difficult to prove. How would the debt collector come into possession of facts that would lead it to believe that a third party now has correct or complete location information without a further call? It is probably a very rare occurrence.

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