Banking 2011: Congress, The Courts and Consumers
All three have created hurdles in the past, but not quite like these.
In 2011, more than in many years, lenders and borrowers have been impacted by Congress, a key Supreme Court decision and bank customers’ attempts to retaliate against collection, foreclosure and defaults. Is this anything new? You bet it is.
Congress
In the fallout of the financial failures of 2008, Congress reacted predictably—with a spate of new legislation, and a new cop on the beat. In the Dodd-Frank Act, Congress created the Consumer Financial Protection Bureau, an independent bureau with authority to regulate the offering and provision of consumer products or services by financial companies.
The CFPB is charged with ensuring that consumers have the information they need to choose financial products and services that best suit their needs. Additionally, the bureau will require full disclosure of the true price of these financial products and services. The goal is provide comprehensive and understandable information to allow consumers to compare prices and features of consumer financial products and services.
For the largest banks (assets of more than $100 million), the CFPB takes over creation and enforcement of consumer financial-protection laws from existing federal regulators such as the FDIC, Office of Comptroller of the Currency and others. Not all institutions will be regulated by the new bureau; depository institutions with assets below $100 million, retain current primary regulators.
Further, the act also has some components of “federalism.” The states will play an important role in enforcing financial consumer protection laws. The existing authority of each state’s attorney general to enforce the general prohibitions against unfair, deceptive and abusive acts and practices against financial companies will be supplemented by the authority to enforce CFPB regulations. The new cop and its force of regulators will change the regulatory arena for financial institutions.
The Supreme Court
Earlier this year, the United States Supreme Court decided AT&T Mobility, LLC v. Concepcion, a case that is changing class-action litigation and the way financial institutions contract with consumers. The court enforced consumer-contract mandatory arbitration clauses and provisions where customers waive their right to bring or participate in class-action lawsuits. One week later, this decision was amplified in Affiliated Computer Services v. Fensterstock, again confirming the enforceability of arbitratio n clauses in consumer contracts.
Previously, many courts had held that class-action waivers and arbitration provisions in consumer contracts were unconscionable in consumer contracts when disputes were likely to involve relatively small amounts of money. The Supreme Court’s holdings open the door for businesses to re-examine inclusion in consumer contracts arbitration clauses and class-action waivers. For banks and financial institutions, this could include deposit agreements, credit- and debit-card agreements, and loan documents.
Follow-on litigation will shape the impact of AT&T Mobility. Plaintiffs contend the holding is limited. The Supreme Court’s decisions, however, suggest a broad reading, and support for the enforceability of class-action waiver arbitration clauses. For banks—and any other businesses potentially subject to a class action—inclusion of a class-action waiver arbitration provision likely has minimal risk.
Consumers
Locally and nationally, lender and borrower litigation is proceeding at significant case volumes. Foreclosure litigation on commercial and residential real estate is at an all-time high. Florida courts have been choked by the backlog in judicial foreclosure cases. Publicity about dispossessed homeowners and businesses has created an environment where long-abandoned legal theories asserted by borrowers are again in vogue.
Loan customers and consumers are attempting to turn the tables on lenders with aggressive borrower counterclaims in both individual plaintiff and class-action cases. Many claims allege breach of the covenant of good faith and fair dealing theories under state common law.
In a new twist, the borrower asserts that the lender was sufficiently involved in the borrower’s business affairs that it is a joint venture with the lender and lender cannot equitably enforce all of its contractual rights. Further, borrowers have revived the 1980s and 1990s lender liability theories.
Finally, mortgage borrowers have found new comfort and potential remedies in the ubiquitous Dodd-Frank Act. Title XIV of the act obligates lenders to conduct more stringent underwriting. Some consumers, using the clear rear-view mirror of Dodd-Frank, argue that lenders had under the act and under common law the equivalent of a “suitability” obligation to assure that the borrower could repay the loan, and that failure to meet that obligation frees the borrower from the obligation to repay.
Rick Bien is the former chair of the litigation department for Lathrop & Gage.
P | 816.460.5520
E | rbien@LathropGage.com
Brian Fries is the chair of Lathrop & Gage's litigation division.
P | 816.460.5326
E | bfries@LathropGage.com
Tom Stahl is the chair of Lathrop & Gage's corporate department.
P | 816.460.5821
E | tstahl@LathropGage.com
Return to Ingram's October 2011