Consumer Financial Services Alert - March 11, 2008

A California appeals court has affirmed summary judgment for Wells Fargo in an action challenging the practice of calculating interest charges on mortgage loans based on a uniform, 30.4-day monthly unit rather than the actual number of days in the month. Plaintiff alleged the practice violated California’s Unfair Competition Law. The court found the lender’s actions did not threaten competition because nearly every mortgage lender uses the same 30.4-day calculation method. The court also found that uniform monthly calculations allow for efficient sales in the secondary mortgage market, which benefits consumers and competition and outweighs the insubstantial injury, if any, on plaintiff. Further, the court concluded that, because the lender “realized no net monetary benefit by using the uniform month,” the 30.4-day method did not violate the UCL. Click here for a copy of Puentes v. Wells Fargo Home Mortgage, Inc., No. D049800, (Cal. 4^th App. Dist. Feb. 28, 2008).

The GAO issued a report recommending that the federal banking agencies assess the extent to which customers receive deposit account disclosures on fees and account terms prior to opening an account and incorporate into their oversight, as needed, steps to assure that disclosures are made available.

In its report, the GAO notes that average fees for insufficient funds, overdrafts, returns of deposited items, and stop payment orders have risen by 10% or more since 2000, while others, such as monthly account maintenance fees, have declined. During this period, the portion of bank income derived from noninterest sources—including fees on deposit accounts—varied but increased overall from 24% to 27%. According to the GAO, the federal banking agencies received relatively fewer consumer complaints about deposit account fees and disclosures—less than 5% of all complaints from 2002 to 2006—than about other bank products. During the same period, the agencies cited 1,674 violations of fee-related disclosure laws—about 335 annually among the 17,000 banks they oversee.

GAO staff members visited close to 200 branches of 154 banks. The report concludes that these visits suggest that, despite Truth in Savings Act disclosure requirements, consumers may find it difficult to obtain information about deposit account fees. GAO staff posing as customers were unable to obtain detailed fee information and account terms at over one-fifth of visited branches and also could not find this information on many banks’ websites.

Click here for a copy of the report.

The FDIC published a new guide that provides information and guidance on how to calculate FDIC insurance coverage for deposits held by revocable and irrevocable trusts. Click here for a copy of the guide.

A Massachusetts federal court granted summary judgment to First Horizon in the McKenna Truth in Lending rescission case. Following the First Circuit’s reversal of certification of a declaratory rescission class last year, as reported in the April 10, 2007 Alert, the trial court concluded on the merits that First Horizon’s “hybrid” rescission form (which combined rescission information from the FRB model forms for same lender and new lender refinancings), was not confusing and, therefore, did not violate TILA and its Massachusetts counterpart. Acknowledging its differences with the Seventh Circuit, the court concluded that a hyper‑technical reading of TILA was inappropriate, and that First Horizon’s notice was objectively not confusing; while not perfect, the notice clearly and conspicuously disclosed the effects of rescission. Goodwin Procter partners Tom Hefferon and Gwyn Williams represented First Horizon. Click here for a copy of McKenna v. First Horizon Home Loans Corp., C.A. No. 04-10370-PBS (D. Mass. Mar. 3, 2008).

The OTS issued an opinion letter stating that state predatory lending laws preempted by the Home Owners’ Loan Act and OTS regulations are preempted without additional OTS action. The letter, issued to Standard & Poor’s, notes that several opinion letters have been issued discussing the preemption of specific state predatory lending laws (Georgia, New Jersey, New Mexico and New York). The OTS indicates that to the extent other states have similar predatory lending laws, the same preemption finding would apply. The OTS points out that these letters were issued in response to specific requests from federal savings banks and because the OTS has already issued several state predatory lending law preemption opinions, it has not issued additional, largely duplicative opinions addressing substantially similar laws of other states. Click here for a copy of the opinion.

The Fourth Circuit ruled that a mortgage broker is not a “creditor” under § 1602(f) of the Truth in Lending Act simply because it had previously acted as creditor in unrelated transactions. If the mortgage broker had been a creditor, then certain title and closing charges would have made the loan a high-cost mortgage, requiring additional disclosures under TILA’s Home Ownership and Equity Protection Act provisions. The Fourth Circuit held that TILA defines a creditor as “a person who both (1) regularly extends . . . consumer credit . . . and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness.” The Court concluded that the provision of § 1602(f) regarding a person who originates two high-cost mortgages in a 12 month period merely qualifies the meaning of “regularly extends” and is not a stand-alone alternative definition of “creditor” as plaintiff had argued. Because the broker was not a creditor, no HOEPA disclosures were required. Click here for a copy of Cetto v. LaSalle Bank Nat’l Ass’n, No. 06-1720 (4th Cir. Feb. 29, 2008).

Approximately 1,035,000 homeowners received mortgage loan workouts between July 1, 2007 and January 31, 2008, including 758,000 repayment plans and 278,000 loan modifications, according to a HOPE NOW study. Approximately 60% of these workouts involved subprime loans. The study shows that subprime modifications increased to nearly 50% of all workouts in January, up from 35% of total workouts in the fourth quarter of 2007 and 19% in the third quarter. HOPE NOW is a voluntary alliance of mortgage loan counselors, mortgage lenders and servicers, and other mortgage market participants that has developed a mortgage loan workout initiative. Click here for a copy of the study.

Each of the federal banking agencies issued a statement encouraging the banks they supervise that service subprime mortgage loans to follow HOPE NOW’s loan modification standards when reporting their loss mitigation activities. Click on an agency to get a copy of its statement: FRB, FDIC, OCC, and OTS.

The OCC sent a letter to large national banks that service mortgage loans, requiring them to provide comprehensive loan data on a monthly basis. Click here for a copy of the letter and here for the OCC’s press release.

The New York Attorney General, the Office of Federal Housing Enterprise Oversight, Fannie Mae, and Freddie Mac entered into cooperation agreements that require Fannie Mae and Freddie Mac to buy loans only from lenders that meet new standards designed to ensure independent and reliable appraisals. The agreements establish the “New Home Valuation Protection Code” which, among other things: (1) prohibits second appraisals unless there is a reasonable basis to believe the initial appraisal was flawed; (2) prohibits mortgage brokers from selecting appraisers; (3) prohibits lenders from using an appraisal prepared by an appraiser employed by the lender, an affiliate of the lender or an entity in which the lender has an ownership interest; and (4) prohibits lenders from using appraisal management companies that they, or an affiliate, own or control. Beginning January 1, 2009, the Code will be applied to lenders selling mortgage loans to Fannie Mae and Freddie Mac. The agreements also create the “Independent Valuation Protection Institute,” an independent organization that will implement and monitor the Code, establish a complaint hotline for consumers to call with appraisal fraud concerns, and serve as a contact for appraisers who believe that their independence has been compromised. The new standards follow an investigation of Freddie Mac’s appraisal practices by the New York AG. Click here for a copy of the Code and here for more information.

The Office of Federal Housing Enterprise Oversight released the maximum conforming loan limits that will be in effect through year-end as a result of The Economic Stimulus Act of 2008. That legislation permits Fannie Mae and Freddie Mac to raise their conforming loan limits in certain high-cost areas. The new jumbo limits are a function of median home prices as estimated by HUD  The maximum temporary jumbo conforming loan limit is as high as $729,750 for one-unit homes. Two, three and four-unit homes have higher limits. Click here for the OFHEO’s press release and here for a listing of counties and Metropolitan Statistical Areas that are affected by the new loan limits.

Massachusetts Attorney General Martha Coakley filed a lawsuit against a Massachusetts-based mortgage broker, alleging that the broker fraudulently procured mortgage loans by submitting to lenders asset and income information for loan applicants that was fabricated or inflated. The AG is seeking injunctive relief to prohibit the broker from acting as a mortgage broker, civil penalties, and reimbursement of the AG’s costs. This enforcement matter was referred to the AG by the Massachusetts Division of Banks after an examination found brokering misconduct in numerous mortgage loans arranged by the broker. Click here for the AG’s press release.

The SEC issued proposed amendments to Regulation S-P to address identity theft of securities industry customers. The proposal contains five amendments, which (1) create more specific standards under the safeguards rule of Regulation S-P, including physical, technical and administrative safeguards, and written policies, (2) introduce a breach notice requirement; (3) broaden the type of information and persons covered by the SEC safeguards and information disposal rules; (4) create record-keeping requirements for policies and procedures to comply with the proposed regulation, as well as documentation of compliance; and (5) create a new exception allowing a broker who is changing firms to take limited personal information to the new firm in order to maintain relationships with clients. Click here for a copy of the proposal.