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Missouri Attorney General Files Suit Against Charter Communications Alleging No-Call Violations

On October 19, Missouri Attorney General Chris Koster filed a federal lawsuit in the United States District Court for the Eastern District of Missouri against Charter Communications, Inc., alleging violations of federal and state telemarketing and “do-not-call” laws.  Koster claims that his office received 350 complaints from consumers “about harassing practices by Charter’s telemarketers … [in] an attempt to sell Charter’s cable, internet, and phone services.”

In addition to the National Do Not Call Registry, Missouri has its own No-Call list of 4.5 million phone numbers, comprised of both cell phones and landlines.  Additionally, Missouri’s telemarketing law supplements federal law by prohibiting telemarketers from contacting consumers “repeatedly or continuously in a manner a reasonable consumer would deem to be annoying, abusive, or harassing.”

Koster’s complaint generally alleges that Charter Communications and its vendors “placed at least thousands of telemarketing calls to Missouri consumers, even after the consumers asked that Charter stop calling.”  The complaint specifically alleges that individual consumers received dozens of calls in less than a year and up to five calls per day.  Despite requests for the calls to cease, Charter allegedly informed consumers that it would take forty-five days to place consumers on its internal do-not-call list.

The complaint seeks substantial damages, including up to $16,000 for each violation of the federal Telemarketing Sales Rule (TSR), at least $500 for each violation of the federal Telephone Consumer Protection Act (TCPA), up to $5,000 for each violation of the state No-Call statute, and an unspecified civil penalty for each violation of the state telemarketing statute.  Given the substantial damages potential, it is imperative for companies to institute robust compliance procedures to avoid and/or defend against such litigation.

Koster’s complaint is a reminder that in addition to federal do-not-call requirements of the TCPA and the TSR, many states have their own specific requirements.

Troutman Sanders LLP has unique industry-leading expertise with state and federal telemarketing laws, with experience gained trying such cases to verdict and advising Fortune 50 companies regarding their compliance strategies.  We will continue to monitor litigation in this area, especially interpretation and application of unique state telemarketing laws, in order to identify and advise on potential risks.

CFPB Director’s Remarks at MBA Annual Convention: Progress, Updated HMDA Reporting, and Warning to Parties Engaged in Marketing Services Agreements

Consumer Financial Protection Bureau Director Richard Cordray addressed the Mortgage Bankers Association at its Annual Convention on October 19.  In his remarks, Cordray:

• Summarized the progress the CFPB has made in addressing the serious problems confronting consumers in the mortgage market and steps taken by the Bureau to restore the American Dream of homeownership;
• Characterized the updated reporting requirements of the Home Mortgage Disclosure Act (HMDA) as a “sunlight” statute intended to provide the public and lawmakers with transparency about how lenders are meeting the needs of communities; and
• Warned that parties participating in marketing service agreements (MSAs) need to be wary and in compliance with rules and regulations or they will face the CFPB in an enforcement action.

Cordray outlined the tasks the CFPB had accomplished from its initiation as a new agency to address the problems in the mortgage market.  Soon after its formation, the CFPB put new rules in place to protect prospective homebuyers and support responsible lenders.  These regulations included the “Ability to Repay Rule,” which is sometimes referred to as the “Qualified Mortgage” rule.  Critics predicted the rules would cause origination costs to double and lamented that the regulations would lead to the demise of community banks and credit unions.  However, according to Cordray, two years later these concerns have not come to pass.  Instead, the CFPB believes mortgage lending has increased and that the industry saw only minor consolidation.  Cordray reiterated that the restoration of the mortgage and housing market is essential to restoring the American Dream.  A home is the most important financial decision most families will ever make.  But more importantly, Cordray noted, “a house that becomes a home is much more than four walls and a roof.  Instead it is a special place to raise a family and create lasting memories, a place to hold up as a source of pride and accomplishment.”

According to Cordray, the CFPB has been flexible in working with the MBA to meet the needs of lenders and make adjustments to rules where necessary.  He noted that the Bureau approved recent amendments to mortgage origination rules to broaden the definitions of “small creditor” and “rural area” because it had been persuaded that the lines it had drawn were too rigid.  Over the course of the coming year, the CFPB will be launching a “look-back process” for certain rules,  providing another vehicle for lender feedback.

The CFPB has also implemented the “Know Before You Owe” mortgage disclosure rule.  According to Cordray, the CFPB recognized the system and operational changes necessary to adjust to the new requirements and allowed for a long implementation period.  Cordray acknowledged the struggles lenders were having with vendors and noted that “examiners will be squarely focused on whether you have been making good-faith efforts to come into compliance with the rule.”  He further addressed arguments of critics of the rule, articulating again the CFPB’s position that it is necessary for consumers to review closing costs and to compare them to estimates before they get to the closing table to ensure they are getting the deal they were promised.  The Home Loan Toolkit was also introduced by the CFPB to guide consumers through the process of buying and shopping for a mortgage.  Similarly, the CFPB’s “Owning a Home” online tool provides consumers an interactive internet resource to help consumers make sound decisions about their home purchase.

The next “homework assignment” for the CFPB mandated by Congress is updating the reporting requirements of the Home Mortgage Disclosure Act.  Cordray noted that the CFPB recently finalized the HMDA rule.  He characterized the new HMDA as a “sunlight” statute intended to educate the public and lawmakers about how lenders are serving housing needs, and that provides an understanding of what is happening in local markets.  The new rule will require more robust data such as the requirement that lenders disclose home equity lines of credit, the age of borrowers, and rates and fees charged by lenders.  Additionally, the new rule adds other data elements to enable the Bureau to better understand trends, such as the dynamics of manufactured housing.  Cordray acknowledged that the HMDA modification will mean yet another implementation process for mortgage lenders.  With that in mind, the CFPB has set the date for compliance with most provisions for January 2018, with initial reports including the new data due in early 2019. 

In addition to improving available data, the CFPB is also focused on building a better collection system to streamline and modify the reporting requirements.  Cordray stated that the four ways the CFPB will achieve this goal are: (1) the final rule aligns definitions with the MISMO standards, the prevailing mortgage data standards in the industry; (2) the CFPB is working with the Federal Financial Institutions Examination Council and HUD to modernize the data submission process to collect information more efficiently; (3) the new rule exempts institutions originating fewer than 25 closed-end mortgage loans or 100 open-end lines of credit from HMDA data reporting requirements; and (4) the CFPB has issued plain-language implementation materials and will soon release a compliance guide for small entities.

Reiterating the CFPB’s purpose as a supervisor and regulator, Cordray closed his remarks with a warning, making clear that the Bureau’s charge includes oversight of the parties to MSAs.  He noted the risks stemming from MSAs and the opportunity for parties to pay or accept illegal compensation for referrals of settlement service business.  He noted the Bureau’s “grave concern about the use of MSAs in ways that evade the requirements of RESPA,” which is reflected in the bulletin released on October 8, which provided guidance to the mortgage industry with an overview of the federal prohibition on mortgage kickbacks and referral fees, examples from the Bureau’s enforcement experience, and the risks faced by lenders entering into these agreements.  He warned that any party participating in MSAs, including lenders, brokers, title companies, and real estate professionals, should ensure compliance with applicable laws and regulations or be prepared to see increased enforcement actions from the CFPB.  “We want the industry to follow the rules – because that is good for consumers, honest businesses, and the economy as a whole.”

In closing, Cordray thanked the MBA for its contributions toward making the mortgage market more fair and transparent for all Americans.  “Together we are building a more solid foundation so that you can thrive and so that families across the country can make the American Dream their reality.”

CFPB Requesting More Information Regarding Its Debt Collection Rulemaking

The Consumer Financial Protection Bureau sent a questionnaire with almost 60 questions to randomly selected debt collectors and service providers as part of its potential rulemaking regarding debt collection, a process that began almost two years ago.   

The CFPB received 23,000 comments in response to its Advance Notice of Proposed Rulemaking (ANPR) for debt collectors, which included 162 questions.  According to the CFPB, this new “survey is being conducted in order to build the [CFPB’s] knowledge of the operational costs of collecting debt that is in default” and the answers provided to the questions are intended to “help the CFPB better understand the burden of potential regulations affecting the debt collection industry.” 

This questionnaire was sent with a cover letter from John McNamara, the Debt Collections Program Manager in the CFPB’s Division of Research Markets & Regulations.  In it, the CFPB explains it “will be gathering information from a variety of debt collection firms, creditors, and service providers” that will “inform the Bureaus’ analysis of the benefits and costs of potential new rules relative to debt collection.”   

The questionnaire asks about basic activities and operational costs of collecting debt, including, for example, questions about vendors used for activities such as dialers or print mailings, maintaining data about consumer accounts, and furnishing information to credit bureaus.  The CFPB also stated that it plans to conduct “follow-up phone interviews” with some of the companies that respond to the survey “to help us understand their operations in more detail.”

FCC Levies Record $2.96 Million Fine Against Florida Company for Autodialed Calls

On August 11, the Federal Communications Commission handed down a $2.96 million fine against Travel Club Marketing Inc., related entities, and owner Olen Miller (collectively “Travel Club”), the largest fine in FCC history related to autodialed calls.  The fine stems from allegations that the companies violated the Telephone Consumer Protection Act in their telemarketing efforts, including sales of vacations and timeshares.  Travel Club was accused of making at least 185 “prerecorded advertising calls” to more than 142 cellular and residential telephone numbers, many of which were listed on the National Do Not Call Registry.

The fine culminates a formal regulatory process that began on October 31, 2011, when the FCC issued a Notice of Apparent Liability (NAL) to Travel Club proposing the $2.96 million forfeiture for “willful and repeated violation” of the TCPA.  When Travel Club finally responded, the FCC noted the failure “to provide any information or make any arguments whatsoever to challenge the NAL’s findings” and that Travel Club “continued to make unlawful robocalls during the time that the NAL underlying this Forfeiture Order has been pending, the fact of which militates against a cancellation or reduction of the proposed forfeiture penalty.”

Under FCC rules applicable when the calls were made, such telemarketing calls were allowed only with “either prior express consent or an established business relationship” with call recipients, which Travel Club did not possess.  The FCC has since further tightened these restrictions, ending the “established business relationship” exemption in 2012.  The previous record fine was $2.9 million, ordered by the FCC in May 2014, in relation to autodialed calls made during the 2012 United States presidential campaign.

Although the fine represents a new high for an administrative enforcement action by the FCC, an ongoing enforcement action by the FTC and several states against Dish Network under the TCPA, the FTC’s Telemarketing Sales Rule, and parallel state laws is seeking, theoretically at least, billions of dollars in penalties arising out of allegedly illegal telemarketing calls.  Our take on the Dish Network action can be found here. 

Troutman Sanders LLP has unique industry-leading expertise with the TCPA, with experience gained trying TCPA cases to verdict and advising Fortune 50 companies regarding compliance strategy.  We will continue to monitor regulatory and judicial interpretation of the TCPA in order to identify and advise on potential risks.

Should grads be allowed to declare bankruptcy on student loans?

With presidential candidates like Hillary Clinton calling for an end to "the crushing burden of student debt," some higher education experts have begun to question federal policy that makes it nearly impossible to discharge student loans in bankruptcy.

Current law puts student loans in a very small class of debts that cannot be discharged, a class that includes unpaid child support and criminal fines.

Starting in 1976, Congress began clamping down on bankruptcy for federally-backed student loans as a response to a spike in student loan bankruptcy. And then in 2005, Congress extended that rule to student loans issued by private lenders.

Bankruptcy is treated differently from other debts because policy makers fear students will game the system, says Rajeev Darolia, a public policy professor at the University of Missouri.

“Legislators fear that opportunists could run up large debts they never mean to repay,” Darolia said, “and then declare bankruptcy just as they finish college, when they still have few assets but strong career prospects.” In economics, this is called “moral hazard,” which means that rules create incentives for people to abuse the system.

But after looking at bankruptcy filings before and after a 2005 change in federal law that further tightened bankruptcy law on student loans, Darolia found no evidence that students were gaming the system.

Student loans should be made dischargeable in bankruptcy, many experts are suggesting, because most students who struggle with student loans, far from gaming the system, are actually victims of a system that encourages them to acquire debt for programs they are unlikely to finish or, if they do finish, do not offer realistic career options.

Noting that formal policy changes will be hard to make, some have suggested that these debts already are dischargeable because existing hardship exceptions are more flexible than most people realize.

Among the latter group is Jason Iuliano, a doctoral candidate in political science at Princeton and a Harvard Law School graduate, whose research, published in the American Bankruptcy Law Journal in 2012 found that nearly 40 percent of those who try to discharge their student loans succeed.

"Those who succeed are worse off financially than the average filer," Iuliano said, and people who barely qualify for bankruptcy probably won't qualify for loan discharge. But the process is not all that complicated, and many succeed even without an attorney.

Finally, there are those who worry that taxpayers will be left holding the bag if the policy changes. One way around this, according to Alex J. Pollack, a fellow at the American Enterprise Institute, is to make the schools who take in the tuition checks carry a share of the risk of failure, giving them an incentive to foster better outcomes.

Hardship exceptions

The notion that student loans cannot be discharged has become so ingrained that few bankruptcy attorneys or their clients even attempt to discharge them, Iuliano said.

Iuliano disagrees with some experts in the field, he said, even those who say that student loan bankruptcy should be mainstreamed. His argument is that the existing hardship exception is broad enough to amount to a policy shift if people use it more often.

According to research coauthored by Iuliano, only 1 percent of bankruptcy filers who have student loans attempt to get them discharged. But of those who try, 25 percent obtain a complete discharge while 14 percent get a partial discharge.

To decide whether to discharge a student loan bankruptcy, Iuliano said, most courts will use the three prongs of the "Brunner Test." First, can the filer maintain a minimal level of standard of living if forced to repay the loans? Second, is that situation likely to persist? And third, has the filer made a "good faith effort" to repay?

The last point means that if a student had a good job prior to filing bankruptcy but was already in default on her student loans, they might not get their loans discharged even if they are unemployed now.

Bankruptcy filers will have to file an "adversarial" complaint, Iuliano said, but this sounds much scarier than it actually is. Many successful filers do it without the assistance of an attorney, and the courts do not expect a high degree of formality.

"We see people succeeding in court with handwritten filings with smiley faces on the margins," Iuliano said.

Skin in the game

Pollack would like to see bankruptcy for student loans fully legalized. But he would balance the resulting risks to the taxpayer by giving colleges and universities real "skin in the game."

If Pollak had his way, any time a student costs the taxpayer by failing to repay a loan, whether through actual default or by shifting to an income-based repayment program, the school would cover 20 percent of the actual taxpayer cost.

"Taxpayers would still be eating 80 percent of the loss," Pollack said, but he hopes it would create some incentive for schools to be more careful about which programs they offer which students and how they nurture those students into their careers.

That, he argues, would distribute the risk among the borrower, the taxpayer and the school more fairly, giving the school an incentive to do more to guide students into high-value programs and concern themselves with transitions into the workforce.

Pollack focuses not on defaults but on the actual costs to taxpayers, even if the student is technically not defaulting but not repaying the loan on time.

"The current trend at the Department of Education is to find all kinds of reasons why people don't have to pay, including income-based repayment," Pollack said. "If that becomes a bigger part of the student loans, the default rate could come down while costs to the taxpayer still rise."

Colleges and universities should share the risk, Pollack argues, because they are the most direct beneficiaries of loans. "They are the promoters and arrangers of the loans, and the cash goes directly to the college," Pollack said. And as things stand, he said, that's where their obligation ends.

"I hope the 20 percent risk share would cause schools to think more about who can succeed with these loans," Pollack said. "How can they guide students so they become productive, guide them toward better majors, help keep them in school so they graduate."

Possible side effects

Iuliano said he hasn't considered Pollack's proposal, and would need time to consider possible implications. But he said it struck him as potentially useful, and he agreed that the "current structure doesn't place much burden on the school itself."

Side effects also concern Rajeev Darolia at the University of Missouri. "Requiring colleges to share risk could change the attitudes of the community colleges that now have open access to shift their access based on risks of defaulting on loans," Darolia said.

Darolia argues that any policy that focuses purely on default rates and punishes school accordingly would end up picking on the schools that serve those most at risk. "Harvard doesn't have a problem with loan defaults," he noted.

But he does think that if access concerns were taken seriously, risk sharing for colleges could be paired with allowing student loan bankruptcy, as long as the incentives were structured properly.

"Maybe we would not see so much access restrictions at the entry point," he said, "but we might see more a concerted effort for student support, to make sure they choose good programs and make sure they actually graduate."