Consumer Financial Services Alert - September 3, 2013 September 03, 2013
In This Issue

CFPB Issues Report on Problems in Mortgage Servicing

The CFPB released its annual Supervisory Highlights report covering supervision work completed between November 2012 and June 2013. While covering a range of topics including auto finance and ECOA, the report focused primarily on issues related to mortgage servicing. The report’s findings include problems related to servicing transfers and payment processing. For example, CFPB examiners found problems with the transfer of loss mitigation documentation (e.g., trial loan modification payment plans), problems communicating with customers regarding the transfer, and a general absence of protocols. The report also focused on mistakes made in loss mitigation—in particular, inconsistent communications with borrowers; inconsistent underwriting; lengthy application review periods; incomplete loan files; and poor procedures for requesting additional documentation from borrowers. Recognizing that nonbanks, some of whom who had never experienced regulatory supervision by state or federal authorities, faced particular problems with compliance management, the CFPB recommended implementation of a compliance management system with four key elements: (1) oversight by the board of directors and management; (2) a formal, written compliance program including policies, procedures, training, monitoring, and corrective action; (3) a consumer complaint management program; and (4) independent compliance audits.

CFPB Files Complaint Alleging Violation of Telemarketing Sales Rule

The CFPB filed a complaint in the United States District Court for the Central District of California against a debt-relief service company alleged to have violated the FTC’s Telemarketing Sales Rule and engaged in deceptive and unfair practices in violation of the Dodd-Frank Act. The TSR generally prohibits deception in telemarketing and prohibits debt-relief companies from charging advance fees. According to the CFPB, in violation of the TSR, the debt-relief company collected upfront fees for debt relief services, gave false statements about the fees and misled consumers. In particular, the CFPB alleged that the debt-relief service company misled consumers by claiming that customers would not pay any upfront fees, when in fact consumers paid thousands of dollars in upfront fees. The CFPB also alleged that the company claimed that consumers would be “debt free” within months of enrolling in the program, when in fact, “in numerous instances, consumers do not become debt free in months.” The CFPB is seeking to permanently enjoin the company from continuing its operations (e.g., marketing, promoting, or selling any debt-relief product or service) and is asking the court to award restitution and civil money penalties and order disgorgement or compensation for unjust enrichment.

Consumer Advisory Board to Meet to Discuss Strategies for Improving Access to Credit, Information and Financial Resources

The Consumer Advisory Board will host a meeting on September 18-19, 2013 to discuss strategies for improving consumer access to credit, information and financial resources. Agenda topics include trends and themes in the field and the year in review.

CFPB Publishes a Report and Launches Toolkit on Student Loan Debt for Public Servants

The CFPB has released a report analyzing existing benefits and options for public service organizations. The report sets forth information on benefits and loan repayment programs for public sector employees. The report also provides recommendations for policymakers including whether loan repayment benefits for public service can be simplified and whether current policy discourages employer engagement in addressing high levels of student indebtedness (e.g., tax treatment of student loan repayment programs).

In conjunction with the release of its report, the CFPB announced that it was launching a toolkit designed to help public servants address student loan debt. The toolkit “offers practical advice” to public sector employers and employees including an action guide for borrowers that advises them how to qualify for benefits, a sample letter for public employers to send to its employees about being a qualified employer for loan forgiveness purposes, and frequently asked questions. The CFPB also launched a public service pledge on student debt to help public service employers help employees address student loans. Two entities, including Richmond Public Schools in Virginia, have signed on to the pledge.

CFPB Adds Staff to Leadership

The CFPB announced the following additions to its senior leadership: Cheryl Parker Rose will serve as the Assistant Director for the Office of Intergovernmental Affairs; Christopher Carroll will serve as Assistant Director and Chief Economist for the Office of Research; Kathleen Ryan will serve as the Deputy Assistant Director in the Office of Regulations; and Elizabeth Ellis will step down as the Senior Advisor to the CFPB’s Chief of Staff and will serve as the Deputy Assistant Director for the Office of Financial Institutions and Business Liaisons.

CFPB To Hold Field Hearing on Banking on Campus

The CFPB will hold a field hearing on banking on campus in Washington, D.C. on September 30, 2013. At the field hearing, the CFPB will present its findings from its Notice and Request for Information on financial products marketed to college students (see February 5, 2013 Alert).

Federal Regulators Issue Proposal to Revise Qualified Residential Mortgage Rule

Collectively, the FDIC, the OCC, FRB, SEC, FHFA, and HUD issued a second proposal Notice of Proposed Rulemaking to implement the risk retention requirements of the Dodd-Frank Act.  Section 941 of the Dodd-Frank Act amended the Securities Exchange Act of 1934 by adding a new section. This new section requires federal agencies to issue rules that would generally require that a securitizer of asset-backed securities retain an economic interest in not less than 5% of the credit risk of the assets collateralizing such ABS—risk retention requirement. In April 2011, the agencies issued a Notice of Proposed Rulemaking, but in response to numerous comments received, the agencies collectively developed the revised proposal, which includes significant modifications, including modifying the risk retention options, prohibition on selling and hedging, and the exemptions for qualified residential mortgages.

The revised proposal includes various exemptions from the risk retention requirement. Most notably, a sponsor is exempt from the risk retention requirements if, among other conditions, all of the assets that collateralize the asset-backed securities are qualified residential mortgages. In response to the negative comments on the original proposal’s QRM definition, the revised proposal abandons that definition and instead defines “QRM” to equate to the definition of  “qualified mortgage” in TILA and Regulation Z issued by the CFPB in January 2013 (see January 10, 2013 Alert). The agencies chose to define “QRM” as a “qualified mortgage” after considering an alternative approach referred to in the release accompanying the proposed rule as “QM-plus.” As described in the release, the QM-plus approach begins by defining “QRM” based on the same factors adopted by the CFPB in the “qualified mortgage” definition, but also adds four additional factors. More specifically, classification as a QRM would only be available if, in addition to satisfying the factors identified by the CFPB: 

  • the loan secures a 1-4 family real property that constitutes the principal dwelling of the borrower;
  • the loan must be a first-lien mortgage. Of note, junior liens are permitted for QRMs used for refinancing purposes, but must be included in the loan-to-value calculations described below;
  • the originator must determine that the borrower meets certain credit history criteria, including not currently being 30 or more days past due on any debt obligation and not having been a debtor in a bankruptcy proceeding within the preceding 36 months; and
  • the loan-to-value ratio at closing must not exceed 70%.

Comments on the revised proposal are due October 30, 2013.

Eighth Circuit Reaffirms that Notice Alone is Insufficient to Effectuate TILA Rescission

The United States Court of Appeals for the Eighth Circuit affirmed a lower court’s opinion rejecting plaintiffs’ attempt to rescind a loan agreement after the loan had already been foreclosed, ruling that the foreclosure extinguished borrowers’ right to file suit to rescind under TILA. Plaintiffs, a husband and wife who defaulted on their loan, warned their lender that they intended to exercise their right to rescind before the foreclosure occurred, but did not actually file suit until the property was sold at a sheriff’s auction. Plaintiffs filed suit against their lender seeking to rescind their loan and alleging various state law violations. The lender moved for and was granted summary judgment. Plaintiff appealed.

Reaffirming its earlier decision in Keiran v. Home Capital Inc., et al, 720 F.3d 721 (8th Cir. 2013) (see July 23, 2013 Alert), the Eighth Circuit reasoned that while giving notice was “a necessary predicate act to the ultimate exercise of the right” of rescission, the notice was “not sufficient, in itself, to complete the exercise of that right.”  Rather, a lawsuit must be filed within the 3-year period of repose mandated by TILA. Accordingly, plaintiffs lost their right to rescind when the property was sold.

This ruling is a further rejection of the CFPB’s interpretation of rescission rights under TILA. In amici briefs filed with the Tenth Circuit (see April 3, 2012 Alert) and three other circuits including the Third, Fourth and Eighth circuits, the CFPB argued that the rescission period under TILA only defines the time to notify the lender and not the time to sue the lender. The concurrence, while recognizing that prior Eighth Circuit precedent compelled the result, opined that providing notice alone within 3 years of loan consummation should be sufficient to preserve the right to rescind under TILA—a position espoused by the CFPB espoused in its amici briefs.

Third Circuit Holds TCPA Allows Revocation of “Prior Express Consent”

The United States Court of Appeals for the Third Circuit reversed dismissal of an action under the Telephone Consumer Protection Act by plaintiff alleging that defendant, a lender, violated the TCPA by calling her cellular phone through the use of an automated telephone dialer system after she revoked consent to be called. After defaulting on a line of credit granted by defendant, defendant began collection calls to plaintiff using an automated telephone dialer system on the phone number provided in plaintiff’s credit application. Although plaintiff requested that defendant cease calling her, defendant continued its collection efforts. Plaintiff filed suit alleging that defendant had an obligation under the TCPA to cease all autodialed called to her cellular phone once she had withdrawn her prior express consent to be contacted. Defendant filed a motion to dismiss arguing that plaintiff could not revoke her prior express consent. The lower court dismissed the action and plaintiff appealed.

In reversing the lower court’s decision, the Third Circuit rejected defendant’s argument that in the absence of express statutory authorization for revocation of prior express consent, such consent could never be revoked. In rejecting this argument, the Third Circuit noted that the common law concept of consent shows that it is revocable, the TCPA’s silence on revocation of consent should be “construed in favor of consumers,” and the Federal Communication Commission’s ruling in In the Matter of Rules and Regulations Implementing the Telephone Consumer Protection Act of 1991, SoundBite Communications, Inc., 27 FCC Rcd. 15391 (Nov. 26, 2012) provided further evidence that consumers could revoke their prior express consent. In the Soundbite decision, the FCC issued a declaratory ruling that a text message confirming an opt-out request was permissible under the TCPA. The Third Circuit held that the FCC’s conclusion in Soundbite was “clear”—consumers may revoke their prior express consent to be contacted using autodialing systems.

The Third Circuit also rejected defendant’s argument that even if the TCPA allows a consumer to revoke his or her prior express consent, the consumer must deliver instructions to the contrary at the time he or she fills out the application for credit—a temporal limitation on the right to revoke prior express consent. The Third Circuit noted that the TCPA’s legislative history seems to indicate that the statute was intended to protect consumer’s rights, not restrict them. Without express statutory language that places a temporal limitation on the right to revoke prior express consent, the Third Circuit read such silence in favor of the consumer “because it is a remedial statute.” Ultimately, the Court concluded that the TCPA allows a consumer to revoke his or her “prior express consent” to be contacted using an automated telephone dialing system on her cellular phone and there is no temporal limitation on such revocation right.

Lenders Pushback on New York’s Efforts to Curb Payday Lending

Members of tribal nations filed a complaint in the United States District Court for the Southern District of New York against the New York State Department of Financial Services in response to the its attempt to shut down online lending businesses owned by the tribal nations. Plaintiffs argue that the DFS’ cease and desist demands along with letters sent to third parties the tribal businesses contract with, including banks, describing their business as illegal payday lenders, violate the tribal nations’ sovereignty in violation of federal law. The complaint seeks an injunction to prohibit DFS from regulating the tribal businesses as well a declaratory judgment stating that the tribal businesses are sovereign nations, which DFS may not regulate.