CFPB Publishes Five-Year Strategic Plan

On Feb. 12, the Consumer Financial Protection Bureau (Bureau) published a revised version of its five-year Strategic Plan covering FY 2018 – 2022 (Plan). The Bureau is required to publish a five-year Strategic Plan in accordance with federal law. The Plan sets forth strategic expectations for the Bureau and differs significantly from the draft version issued in October 2017 under former Bureau Director Richard Cordray. From the length of the Plan and the tone of the mission statement to the re-branding of the agency as the “Bureau of Consumer Financial Protection,” the Plan lays the groundwork for a divergent course.

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FTC Reaches Settlement With Debt Collector; Imposes Financial Penalties and Other Remedies

On Dec. 5, 2017, the Federal Trade Commission reached a settlement with three defendants who it alleged partook in deceptive, abusive and unfair debt collection practices in violation of the Federal Trade Commission Act and the Fair Debt Collection Practices Act. Federal Trade Commission v. Hardco Holding Group LLC, 6:17-cv-01257 (M.D. Fla. Dec. 5, 2017).

In July, the FTC filed a complaint against defendants Hardco Holdings LLC, S&H Financial Group Inc., and Daryl Hall, alleging that they engaged in deceptive and abusive debt collection practices, including harassing consumers into paying debts not actually owed or that they had no authority to collect. The FTC alleges that, acting under various names to mislead consumers, including Alliance Law Group, the defendants contacted consumers and threatened them with imminent or pending legal action, including prison time, and claimed the police would come to their home and arrest them if they failed to repay their debt. In total, the complaint alleged two violations of the Federal Trade Commission Act and four violations of the Fair Debt Collection Practices Act. Id., Complaint at ¶ 28-44. Continue Reading

SEC Acts on Cryptocurrencies and ICOs

In the past few years, and particularly in the past few months, cryptocurrencies or digital currencies – most notably bitcoin and ether – have surged in popularity and dominated the financial press and to some degree even the mainstream media. The value of the most famous cryptocurrency, bitcoin, has reached historically high levels.

Given the increasing demand for cryptocurrencies, it is no surprise that market participants are responding and racing to satisfy that demand by producing more such currencies or so-called tokens representing the currencies. Additional currencies, or to be precise the tokens representing interests in such currencies, are produced and disseminated by a process colloquially known as an “initial coin offering” or “ICO,” not coincidentally a term which is similar to the better-known term “IPO.” As with all new technologies, regulators have been slow to catch up, but they now appear to have done so. Continue Reading

Cordray to Resign as CFPB Director

In an email to CFPB staff on Wednesday, Director Richard Cordray announced that he will resign by the end of November. Although it is rumored that Director Cordray will run for governor of Ohio, he did not specify his future plans in the email.

“[I]t has been a joy of my life to have the opportunity to serve our country as the first director of the Consumer Bureau by working alongside all of you here.  Together we have made a real and lasting difference that has improved people’s lives,” Director Cordray stated in his email to CFPB staff. He continued, “[T]here is always more work that lies ahead. That would be true at any point, of course, and one thing I have tried to reinforce this year is that the Consumer Bureau is far more than its director. I am confident that you will continue to move forward, nurture this institution we have built together, and maintain its essential value to the American public.” Continue Reading

Second Circuit: Secured Lender Not Entitled to a Make Whole Premium in “Cramdown” Restructuring, But May Be Entitled to Higher Interest Rate

On October 20, in Matter of M.P.M. Silicones, L.L.C. (“M.P.M. Silicones”), the United States Court of Appeals for the Second Circuit held that secured noteholders were not entitled to an approximately $200 million make-whole premium when their notes were exchanged for new notes as part of a Chapter 11 plan. __ F.3d __, 2017 WL 4772248 (2d Cir. Oct. 20, 2017). Under the relevant indenture, a make-whole premium was due only in the event of an optional redemption of the notes; once the bankruptcy filing accelerated the notes’ maturity, repayment was neither optional nor a redemption. The Second Circuit also held that restructured secured debt may be entitled to an “efficient market” rate rather than the typically lower “formula” or “prime-plus” rate used in Chapter 13 cases.

M.P.M. Silicones involved the bankruptcy of Momentive Performance Materials (“Momentive”) and its affiliates, which restructured in excess of $1 billion in senior secured notes (the “Notes”) with pre-bankruptcy interest rates between 8 percent and 10 percent. Momentive’s plan of reorganization provided for replacing the Notes with new notes (the “Restructured Notes”) that would repay in full, over time, the principal and accrued interest of the Notes at rates between 4 percent and 5 percent. The senior secured noteholders (the “Noteholders”) objected to the plan and, as a class, rejected the plan. The Noteholders contended that the principal of the Restructured Notes should include not only the principal and accrued interest of the Notes, but also a “make-whole” premium of roughly $200 million, reflecting the lost future interest on the Notes. The Noteholders also contended that the interest rate on the Restructured Notes should be based upon the rate an efficient market would produce for a loan equivalent to the Restructured Notes, not the prime-plus rate used in the plan; this would produce approximately $30 million in additional interest payments to the Noteholders. At the plan confirmation hearing, the Noteholders’ objections were overruled, and the plan was confirmed over their dissenting votes (a “cramdown”). In re M.P.M. Silicones, LLC, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014). The Noteholders appealed the decision of the bankruptcy court to the district court, which affirmed; they then appealed to the Second Circuit, which affirmed in part and reversed in part. Continue Reading

SEC Advisory Committee To Discuss Implications of Blockchain for Securities Markets – No Action Imminent

Blockchain technology has made the agenda for the October 12, 2017 meeting of the SEC’s Investment Advisory Committee, the SEC announced on September 22, 2017. The Committee will be hosting a two-hour panel discussion among industry insiders concerning “Blockchain and Other Distributed Ledger Technology and Implications for Securities Markets.” Although a more detailed agenda has not been made available, the focus of the panel discussion appears to be on the use of blockchain and DLT in the securities processing and clearance systems. The extent to which it may discuss ICOs is not yet known.

Contrary to certain media reports, this session is for information gathering purposes only. Meeting like this provide an opportunity for the Committee to learn more about these important technologies and their applications in the securities markets and to pass that knowledge on to SEC Commissioners and staff who are responsible for developing, administering and enforcing the Federal securities laws. This Committee does not have any regulatory or enforcement authority; it exists to gather facts and to advise the SEC on a range of regulatory matters.

We will continue to cover the latest developments in this space.

CFPB alleges disparate treatment in Amex’s US territories’ credit and collection practices

The Consumer Financial Protection Bureau (CFPB) has issued a Consent Order addressing alleged disparate treatment by banks in overseas territories of the United States.  The Consent Order illuminates the CFPB’s approach to disparate treatment claims and provides a caution for financial institutions in their collection practices.

On Aug. 23, 2017, the CFPB issued a Consent Order regarding the charge and credit card practices of American Express Centurion Bank and American Express Bank, FSB (together, Amex or the banks), two American Express banking subsidiaries. Under the Order, the CFPB and the banks agreed to a compliance plan and audit, in addition to the banks’ voluntary provision of $95 million in remediation. At issue were the banks’ practices in overseas territories of the United States, including Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa and the Northern Mariana Islands. Continue Reading

Second Circuit Dismisses FACTA Class Action Under Spokeo

The Second Circuit’s Sept. 19, 2017 decision in Katz v. The Donna Karan Company, LLC, et al., Dkt. No. 15-464, has potentially provided a new road map to defeating class actions alleging statutory damages for bare procedural violations. The case arose under the Fair and Accurate Credit Transactions Act (FACTA). Passed in 2003, FACTA prohibits merchants from showing certain personally identifying information, including more than five digits of the customer’s payment card number, on a printed receipt. Here, the plaintiff purchased items from the defendants’ retail stores and received receipts allegedly displaying the first six digits of his card number. He sued, individually and on behalf of a national class, claiming this alleged act “raised a material risk of the harm of identity theft and thus constitutes a concrete injury sufficient to establish Article III standing” under Spokeo.

In a case decided earlier this year, Crupar-Weinmann v. Paris Baguette Am. Inc., 861 F.3d 76 (2d Cir. 2017), the Second Circuit held that the standard for whether a plaintiff has standing to pursue a claim for a bare procedural violation of FACTA is whether the violation increased “the risk of material harm of identity theft” to the plaintiff. Id. at 81. In that case, the court held that printing a plaintiff’s credit card expiration date on her receipt did not increase her risk. Continue Reading

Co-Investment: How Private Equity Firms Can Protect Themselves and Still Make Their Investors Happy

Co-investment is a major topic in the private equity industry these days. General partners of private equity funds are faced with more and more demand from investors for co-investment opportunities or, at a minimum, the option to co-invest in the future. The prevalence of these arrangements has drawn the attention of the Securities and Exchange Commission, which is concerned about the implications for an investment manager’s fiduciary duty to its original fund and other investors. Fortunately, the SEC has provided guidance to private equity managers on how they can enter into these transactions while still fulfilling their fiduciary duties.

The main goal of a private equity firm is to find good investment opportunities for their investors’ pooled funds. If the transaction is profitable, all the limited partner (LP) investors benefit to the extent of their contributions, and the fund manager receives a fee tied to the fund’s performance. Sometimes an opportunity comes along that is so appealing to a particular investor that the investor asks to partner with the fund on the investment. Thus, rather than sharing in the opportunity pro rata with the other LPs, the co-investor will have an even greater personal stake in the investment and a potentially greater return.

The potential problem with co-investments is that investment managers have a fiduciary duty to all fund LPs. This includes a duty of loyalty (ensuring the adviser will not co-opt any opportunities that the fund may enjoy) and a duty of disclosure (demanding transparency to all investors of co-investment agreements). If the fund chooses to co-invest with a LP rather than take an opportunity entirely for itself, there is a risk that the manager is giving preference to one of its LPs over the others. If this possibility is not disclosed in the offering documents, the fund may have violated its duty to be transparent to all its investors.

With co-investment arrangements becoming increasingly common among private equity investors, the SEC has turned its attention to the potential conflicts these transactions create. Echoing similar comments made by the SEC back in 2015, Chris Mulligan in the chief counsel’s office at the Office of Compliance Inspections and Examinations recently explained what concerns the SEC about these relationships. First, there are concerns that the fund is choosing to benefit one LP at the expense of the others. Funds frequently offer co-investment at a reduced fee to the co-investor, meaning that the co-investing LP is getting the same investment at a lower rate than is charged to her fellow LPs. The second concern is one of disclosure. It is important to the SEC that all LPs are aware—before they make an investment with the fund—what standard the fund will employ in considering future co-investment opportunities.

Many private equity firms feel that, to stay competitive, they must continue to offer their investors the option of co-investment. Firms must therefore evaluate how best to pursue these transactions consistent with the fund’s fiduciary duties, thereby avoiding trouble with the SEC and the fund’s investors. As with many private equity issues, the first rule is transparency. If funds are clear with their LPs, they have a much greater chance of exploring co-investment opportunities without running afoul of their fiduciary duties. The best approach is to include a general co-investment policy into the fund’s private placement memoranda and limited partnership agreements, and then stick to that policy. The policy should cover how co-investments will be offered, how they will be structured (for instance, how broken deal fees will be divided), and whether all LPs will have the right to request co-investment. Then the fund must follow that policy, and do so consistently. As Mr. Mulligan explained, if co-investment is not addressed in these governing documents, the fund better have a really good reason for pursuing a co-investment rather than taking the opportunity for all of its investors.

CFPB Unveils Disclosure Forms in Response to Overutilization of Overdraft Fees

On Aug. 4, the Consumer Financial Protection Bureau (CFPB) released the results of its study into frequent overdrafters and four overdraft disclosure model forms as part of its Know Before You Owe initiative. The CFPB designed these one-page prototypes to help consumers understand the costs associated with opting into overdraft coverage and in an effort to improve the model form that financial institutions currently use. As of 2010, consumers must “opt in” to coverage so that when the consumer attempts to use his/her debit card or retrieve money from an ATM in an amount that exceeds his/her account balance, the bank allows the transaction and the consumer pays a fee after the fact. If the consumer has elected not to opt in, such a transaction will be declined and no fee will be incurred. Continue Reading