NCHER Legal Affairs Committee Winter Meeting January 24, 2014 4/14/2017 5:06 AM NCHER Legal Affairs Committee Winter Meeting January 24, 2014 FDCPA 2. CFPB Constitutionality 3. Tuition Clawback in Bankruptcy Cases Joe Esposito Hunton & Williams LLP Washington, DC 2

1. Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 4/14/2017 5:06 AM 1. Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 Easterling v. Collecto, 692 F.3d 229 (2d Cir. 2012) Second Circuit held that debt collector violated FDCPA’s prohibition against false, deceptive and misleading representations, when inaccurately represented to borrower that her student loan could not be discharged in bankruptcy 2

4/14/2017 5:06 AM Plaintiff had student loan guaranteed by Department of Education, which contracted with Collecto to collect overdue student loans Plaintiff filed for bankruptcy under Chapter 7, but did not institute an undue hardship adversary proceeding to discharge her student loan 2

District Court granted summary judgment to Collecto 4/14/2017 5:06 AM Collecto mailed a letter to plaintiff, stating her loan debt was not eligible for bankruptcy discharge Plaintiff sued Collecto for violating FDCPA proscription against false, misleading, or deceptive debt collection practices District Court granted summary judgment to Collecto 2

On appeal, Second Circuit reversed 4/14/2017 5:06 AM On appeal, Second Circuit reversed HELD: Collecto misled borrower by representing that debt was not dischargeable in bankruptcy Although debtor would face “significant hurdles” in attempting to discharge the loan, “the least sophisticated consumer would interpret Collecto’s letter as representing, incorrectly, that bankruptcy discharge . . . was wholly unavailable.” 692 F.3d at 320 2

4/14/2017 5:06 AM Another case applying the “least sophisticated consumer” standard to debt collector statements Vu v. Diversified Collection Servs., Inc., 293 F.R.D. 343 (E.D.N.Y. 2013) Student loan borrower filed class action against debt collector alleging that collector’s notice letter violated FDCPA because letter directed borrower to contact debt collector by phone, not by mail, and because it said account would be held for ten days 2

4/14/2017 5:06 AM The Court in Vu applied the “least sophisticated consumer” standard to judge whether statements in the letter were contradictory and/or false, deceptive or misleading The standard is objective, and requires the court to view the statement through the eyes of a consumer who has “a rudimentary amount of information about the world and a willingness to read a collection notice with some care.” 2

4/14/2017 5:06 AM Court found the language in the collection notice violated FDCPA as a matter of law in two respects: (1) the request for telephonic communication conflicted with the required validation language on the reverse side of the notice, with correctly stated consumer must dispute debt in writing; and (2) ten-day deadline overshadowed validation language, which allows 30 days to dispute a debt. 2

4/14/2017 5:06 AM Court in Vu granted summary judgment in favor of plaintiff, and also certified a class based on the notices sent out by debt collector 2

4/14/2017 5:06 AM Donohue v. Regional Adjustment Bureau, Inc., 2013 WL 1285469 (E.D. Pa. Mar. 28, 2013) Student loan borrower alleged that ERS, a debt collector, violated FDCPA because its actions/omissions were deceptive in three respects 2

Plaintiff’s Allegations: 4/14/2017 5:06 AM Plaintiff’s Allegations: ERS dictated repayment terms that plaintiff alleged were unaffordable, so ERS falsely represented that student debt was not subject to requirement that repayment terms be affordable. ERS failed to engage in rehabilitation with the plaintiff, failed to consider her financial circumstances, and did not discuss rehabilitation until borrower threatened an attorney. ERS told borrower if she did not make a down payment and agree to monthly payments directly from her account, ERS would garnish her wages. 2

4/14/2017 5:06 AM HELD: Motion to dismiss denied as to FDCPA claims based on ERS’s deceptive conduct. Communication is deceptive if can be reasonably read to have two or more different meanings, one of which is inaccurate, viewed from perspective of least sophisticated consumer. 2

4/14/2017 5:06 AM Deceptive communication includes threat to take an action that cannot legally be taken, such as threatening garnishment before meeting certain prerequisites. ERS’s offers of settlement and threats of garnishment may have led plaintiff to incorrectly believe these were only options available to her. Sufficient facts for claim that ERS did not follow requirement that debt collector take borrower’s entire financial circumstances into consideration in context of rehabilitation plan. 2

Brown v. Enterprise Recovery Sys. , Inc. , 2013 WL 4506582 (Tex. App Brown v. Enterprise Recovery Sys., Inc., 2013 WL 4506582 (Tex.App.-Fort Worth, Aug. 22, 2013) Student loan borrower alleged that ERS employee threatened to place a tax lien on the borrower, despite fact that ERS could not take such action itself, thereby violating Section 1692e(5) of the FDCPA

4/14/2017 5:06 AM Undisputed that (i) ERS’s client, USAF, had authority to ask IRS to offset tax refund; and (ii) ERS did not have that authority. Plaintiffs alleged ERS did not threaten USAF would take the refund offset, and argued USAF’s authority irrelevant because FDCPA is strict liability, and it was ERS which threatened offset. 2

At trial, court granted ERS motion for directed verdict Texas Court of Appeals affirmed directed verdict for ERS on grounds that ERS only threatened to take action that its principal legally could take

2. CFPB Held Constitutional 4/14/2017 5:06 AM 2. CFPB Held Constitutional CFPB v. Morgan Drexen, Inc., No. 8:13-CV- 01267-JLS (C.D. Cal. 1/10/14) Federal district court rejected challenge to CFPB’s constitutionality May be first decision to rule on merits of constitutional challenge to CFPB 2

Morgan Drexen argued that various aspects of CFPB violated separation of powers, including A. President may remove Director only for cause Rejecting this argument, court concluded this was governed by Humphrey’s Executor v. U.S., 295 U.S. 602 (1935),

B. CFPB is led by single director, not multi- member Commission Court rejected this, too, stating that judiciary does not have authority to second guess Congress’ policy determination that single director is best choice to head agency. “Congress has not granted to the CFPB or its Director authority to manufacture charges without authorization from a statute or precedent.”

C. CFPB funded from Federal Reserve earnings, not congressional appropriation Rejected again – court relied on case law to the effect that the Appropriations Clause of the Constitution does not prevent or limit Congress from creating self-financing program, without first appropriating funds as in typical appropriations.

D. CFPB’s interpretations of federal consumer financial laws to be afforded deference as if CFPB were only agency charged with interpreting those statutes Strike 4 – court noted that Dodd-Frank provides that where authority of CFPB and another agency to prescribe rules under federal consumer financial laws overlap, CFPB has exclusive authority to prescribe rules. 12 U.S.C. § 5512(b)(4)(A)

And Dodd-Frank says CFPB interpretation will be as if it is only agency authorized to apply, enforce, or interpret such law Court rejected challenge because there is no interagency responsibility (unlike in Rapaport v. U.S. Dept. of Treasury, 59 F.3d 212 (D.C. Cir. 1995), because of CFPB’s rulemaking authority is exclusive Congress clearly intended to grant CFPB exclusive authority to interpret federal consumer financial laws, so under Chevron, CFPB is entitled to deference

3. Tuition Clawback in Bankruptcy Cases Using fraudulent transfer provisions of Bankruptcy Code, bankruptcy trustees around the country are going after colleges and even private elementary and secondary schools for tuition payments made by parents who subsequently file for bankruptcy Can this happen to the student loan industry?

Leading case on issue of pre-petition educational payments being recovered as fraudulent transfers – Gold v. Marquette Univ (In re Leonard), 454 B.R. 444 (Bankr. E.D. Mich 2011) Court held that more than $20,000 in college tuition payments that parents made on behalf of their 18-year-old son would (if proven made with property of debtors) constitute avoidable fraudulent transfers because parents themselves received no economic value in exchange for the payments.

Marquette argued that debtors received reasonably equivalent value for tuition by receiving (i) peace of mind knowing son was obtaining good education, and (ii) expectation that their son would become financially independent because of such education [the Anti-Boomerang Defense]

Court noted that debtors had no legal obligation to provide adult child with college education Determined debtors did not receive any value in exchange for tuition payments because benefit to debtors was not concrete and quantifiable

Similarly, in Banner v. Lindsay (In re Lindsay), No Similarly, in Banner v. Lindsay (In re Lindsay), No. 06-36352 (GCM), Adv. No. 08-9091, 2010 WL 1780065 (Bankr. S.D.N.Y. May 4, 2010), court held tuition payments were avoidable under New York Debtor and Creditor Law §273-a, because debtor did not receive fair consideration. Interestingly, New York law imposes obligation on parent, if financially able, to provide education through age 21, N.Y. Fam. Ct. Act §413; N.Y. Dom. Rel. Law §240 1-b.

But two cases from Western District of Pennsylvania have gone the other way Sikirica v. Cohen (In re Cohen), No. 05-38135- JAD, 2012 WL 5360956 (Bankr. W.D. Pa. Oct. 31, 2012), rev’d on other grounds, 487 B.R. 615 (W.D. 2013) Rejected Chapter 7 trustee’s attempt to recover payments made by debtors for tuition for children’s undergraduate education

In re Cohen Acknowledged that Pennsylvania law did not require parent to pay for child’s post-secondary education Nonetheless, held such tuition payments are “reasonable and necessary” for maintenance of debtor’s family “for purposes of the fraudulent transfer of statute only.” Cohen, 2012 WL 5360956, at *10.

Similarly, Shearer v. Oberdick (In re Oberdick), 490 B. R. 687 (Bankr Similarly, Shearer v. Oberdick (In re Oberdick), 490 B.R. 687 (Bankr. W.D. Pa. 2013) held that debtor’s payment for undergraduate tuition for children were not avoidable under Pennsylvania Uniform Fraudulent Transfer Act Court found tuition constituted expenditure for necessities

Questions Can tuition clawback affect student lenders? Are these cases too small to litigate? What can be done if tuition clawback hits the student loan industry? 49075599v2