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11th Circuit Upholds Deposit Agreement Arbitration Provision

The United States Court of Appeals for the 11th Circuit rendered an important decision on March 5, 2012, addressing the enforceability of binding arbitration provisions in consumer deposit agreements. The case began when Lawrence and Pamela Hough brought suit against Regions Bank for allegedly violating federal and state law by collecting overdraft charges under its deposit agreement. The deposit agreement contained an arbitration provision and Regions moved to compel arbitration. The federal district court hearing the case denied the motion to compel on the ground that the arbitration clause was substantively unconscionable because it contained a class action waiver. Regions appealed the decision to the 11th Circuit Court of Appeals and the appellate court vacated the ruling and sent it back to the trial court in light of a recent United States Supreme Court which held that the Federal Arbitration Act preempted a California’s judicial rule regarding the unconscionability of class arbitration waivers in consumer contracts. This time around the district court found other reasons to deny Regions’ motion to compel arbitration, holding that the arbitration clause was substantively unconscionable under Georgia law because it believed that a provision granting Regions the unilateral right to recover its expenses for arbitration allocated disproportionately to the Houghs the risks of error and loss inherent in dispute resolution.

The lower court decision was again appealed to the 11th Circuit. On appeal the Houghs argued that while the arbitration provision in the deposit agreement capped the Houghs’ costs for the arbitration proceeding at $125, another paragraph required the Houghs to reimburse Regions as a prevailing party for its costs of arbitration. The arbitration agreement permitted Regions, if it was “the prevailing party,” to obtain “reimburse[ment] for [its] costs and expenses (including reasonable attorney’s fees) … [in] arbitration” and to collect that amount by “charg[ing] [the Houghs’] account.” The district court concluded that the reimbursement provision was unconscionable because Regions had an exclusive right of setoff. The 11th Circuit disagreed, and noted that under Georgia law an arbitration provision is not unconscionable because it lacks mutuality of remedy. The district court also ruled that the arbitration clause had a degree of procedural unconscionability, but the 11th Circuit found that to be unconscionable under Georgia law, a contract must be so one-sided that “no sane man not acting under a delusion would make and that no honest man would participate in the transaction.” The court found that the arbitration clause in the Houghs’ agreement fell well short of that standard. Although the district court found it troubling that the clause was presented to the Houghs “on a take-it-or-leave-it basis with no opt-out provision,” the 11th Circuit noted that under Georgia law, an adhesion contract (i.e., one that is not truly negotiated between the parties such as a deposit agreement or a credit card agreement) is not per se unconscionable.

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CFPB Creates Ombudsman’s Office

The Consumer Financial Protection Bureau has created an ombudsman’s office to help resolve individual and systemic problems that banks, nonbanks and consumers have with the bureau. The announcement states that depository or non-depository entity that the CFPB supervises may use the Ombudsman’s Office when they have not had success with the existing CFPB processes, or to achieve an informal resolution. Further information may be found at http://www.consumerfinance.gov/ombudsman/#FAQ.

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CFPB Seeks Suggestions for Streamlining Inherited Regs

The CFPB is requesting suggestions for streamlining the regulations it has inherited from other agencies pursuant to the Dodd-Frank Act.

In particular, the bureau is asking the public to identify provisions of such regulations that it should make the highest priority for updating, modifying or eliminating because they are outdated, unduly burdensome or unnecessary, including:

  • Certain definitions in Reg E, Reg P, Reg Z
  • Annual privacy notices under Reg P
  • ATM fee disclosures under Reg E
  • Coverage and scope of Reg Z
  • Electronic disclosures required under Reg E and Reg Z

Publication of the CFPB’s notice in the Federal Register is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-05/pdf/2011-31030.pdf. Comments are due by March 5, 2012; commenters will have until April 3, 2012, to respond to other comments.

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CFPB Issues Guidance on Confidential Supervisory Info

The CFPB recently issued guidance on the treatment of confidential supervisory information.  CFPB Bulletin 12-01 states that once the bureau issues a request for information, supervised financial institutions (i.e., those with total assets of more than $10 billion) are required to provide all documents and other information responsive to the request.  The bulletin adds:

Supervised institutions may not selectively withhold responsive documents based on their judgment that such materials are not necessary to the Bureau’s execution of its responsibilities or that other materials would be sufficient to suit the Bureau’s needs. The supervisory process is based on the supervisor’s full and unfettered access to information, and the supervisor is entitled – indeed, duty bound–to ensure that it thoroughly understands the institution in question and has access to all information that, in its independent judgment, may bear on its supervisory responsibilities.

The Bulletin argues that providing requested information to the bureau will not result in a waiver of any privilege that may attach to such information, and thus it will not consider waiver concerns to be a valid basis for withholding information from the agency.  However, the agency will give “due consideration to … requests to limit the form and scope of any supervisory request for privileged information.”

Finally, the Bulletin reiterates that all information obtained in the supervisory process will be treated as confidential and privileged, other than in cases when the exchange of such information with other regulators that share supervisory jurisdiction over a supervised institution is prudent, as determined by the CFPB’s general counsel.

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CFPB Republishes Regs E, P and Z

The CFPB is republishing regulations for which it is assuming authority from other agencies pursuant to the Dodd-Frank Act and making technical and conforming changes to reflect the transfer of authority and other changes required by the act. Among others, the CFPB issued interim final rules with request for public comment for the Federal Reserve’s Regulation E (Electronic Fund Transfers, Regulation P (Privacy of Consumer Financial Information) and Regulation Z (Truth in Lending).

The preambles to the interim final rules state that the regulations do not impose any new substantive obligations on persons subject to the existing regulations as published by the Federal Reserve.

The interim final rules became effective Dec. 30, 2011. The Reg E interim final rule is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-27/pdf/2011-31725.pdf; comments are due by Feb. 27, 2012. Reg P is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-21/pdf/2011-31729.pdf; comments are due by Feb. 21, 2012. Reg Z is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-22/pdf/2011-31715.pdf; comments are due by Feb. 21, 2012.

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President Obama Appoints Cordray in Recess Appointment

President Obama recently announced his recess appointment of former Ohio Attorney General Richard Cordray to head the CFPB. This came despite the fact that the Senate held a series of “pro forma” sessions held over the congressional recess in an attempt to preclude a recess appointment. In response, the President dismissed the procedural requirements of a recess appointment, calling the pro forma sessions ‘gimmicks.’

Insiders have speculated some consequences of the recess appointment, including retaliation by Republicans in holding up the nominations of other agency heads. But more importantly, litigation is likely to stem from Cordray’s appointment, calling into question whether the specific requirements for a recess appointment were met. There is also the technical issue of whether the Dodd-Frank Act requirement of a “Senate-confirmed director” is met, which is key in establishing the CFPB’s authority over nonbanks. Despite Cordray’s appointment, it is unclear whether the bureau can legally exercise its full powers over nonbanks.

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The CFPB Publishes Its First Examination Manual

The CFPB published its Supervision and Examination Manual (the “Manual”) on October 13, 2011, designed to provide CFPB examiners with direction on how to determine if providers of consumer financial products are complying with consumer protection laws. The CFPB’s press release states that the Manual incorporates procedures already used by other federal regulators. The Manual does simply recite certain interagency procedures, such as for fair lending examinations. At the same time, the Manual addresses new Dodd-Frank concepts, such as unfair, deceptive and abusive acts or practices.

The CFPB will use the Manual initially to supervise the more than 100 large banks, thrifts, and credit unions that are subject to the CFPB’s examination authority pursuant to the Dodd-Frank Act (those with total assets over $10 billion, as well as their affiliates). The Bureau’s examiners will also ultimately use the Manual to supervise non-depository consumer financial service companies (e.g., mortgage lenders), with the stated goal of promoting “fair, transparent, and competitive consumer financial markets where consumers can have access to credit and other products and services, and where providers can compete for their business on a level playing field where everyone has to play by the rules.”

The CFPB Examination Framework and Philosophy

While only certain entities will be subject to CFPB examination, the Manual outlines an examination approach that is illustrative of the Bureau’s bend on matters over which it has rulemaking authority. This is particular true of its view of its authority over matters it considers unfair, deceptive or abusive acts or practices (UDAAP).

Like other bank regulators, the CFPB will prepare for examinations by gathering and reviewing a wide array of regulatory and public data about an institution:  state and/or prudential regulator reports of examination and correspondence, enforcement actions, state licensing and registration information, complaint data, call reports, HMDA LARs, HAMP data, fair lending analyses, SEC or other securities-related filings, the institution’s website and advertising, and, among other things, “newspaper articles, web postings, or blogs that raise examination related issues.” The CFPB will then contact the institution about the examination and prepare its customized Information Request.

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The CFPB Busily Restating Regulations

No, nothing to worry about yet, though it may be confusing for some time. One bureaucratic consequence of the Dodd-Frank Act moving the various consumer protection laws and regulations under the jurisdiction of the Consumer Financial Protection Bureau (CFPB) is that they now must reissue the relevant regulations.

Referred to by CFPB insiders as the “restatement project,” the CFPB is preparing to reissue over 3,000 pages of regulations through approximately fourteen Federal Register notices. The reissued regulations will be changed to reflect jurisdictional changes and some scope changes, but they are not expected to change substantively at this time (although we will be watching). We expect publication of these reissued regulations to begin within days.

The possible source of confusion will be a new numbering system. The regulations will still be in Title 12 of the Code of Federal Regulations, but moved to Chapter X. We understand that most of the numbers will be unchanged after the decimal point, but the other numbers could be very different. So, for example, 12 CFR § 226.1 of Regulation Z could become 12 CFR § 1000.1. In some cases, however, due to rules of the Office of the Federal Register, new numbers will be required. For example, Regulation Z sections 226.5a and 226.5b could become 12 CFR § 10XX.40 and 12 CFR § 10XX.60.

None of this is all that earth shaking except to lawyers with nothing else to worry about. All those years memorizing regulation numbers for naught.

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