Consumer Financial Services Alert - July 1, 2008

In a consolidated appeal, the Eighth Circuit affirmed district court judgments in favor of Countrywide Home Loans, Inc. and Capital One Auto Finance, Inc. in putative class actions asserting violations of the prescreening requirements of the Fair Credit Reporting Act. The appellants contended that FCRA requires that a creditor’s prescreened mailing contain material terms of the product offered so that it would qualify as a common law offer, but the Eighth Circuit rejected the argument as inconsistent with the plain language of FCRA. The Eighth Circuit instead held that FCRA is satisfied so long as a creditor honors its firm offer of credit. In so doing, the Court aligned itself with recent decisions from the First and Seventh Circuits, as well as federal district courts, that have reached a similar conclusion.

Goodwin Procter partner Tom Hefferon represented Countrywide. Click here for a copy of Poehl v. Countrywide Home Loans, Inc., No. 07-2988; Ludditt-Poehl v. Capital One Auto Finance, Inc., No. 07-3249 (8th Cir. June 19, 2008).

A federal judge in Alabama dismissed a suit against a lender claiming the three day right of rescission under the Truth in Lending Act should be extended to three-plus years because the notice of right to cancel did not include the actual signing date and the final date on which rescission rights expire. The lender’s notice included a statement that plaintiffs had a right to rescind the loan within three business days of the latest of the closing date, the TILA disclosure date, or the notice of right to cancel date, but left blank what the actual last date was. The court held that failure to provide the actual date rescission rights expire may be a hyper-technical violation of TILA, but that the form “provided the requisite clear and conspicuous notice” of rescission rights and that the technical violation is not sufficient in the Eleventh Circuit to extend the normal three day rescission period to three years. Click here for a copy of McMillian v. AMC Mortgage Services, Inc., No. 07-0773 (S.D. Ala. Jun. 10, 2008).

The FDIC issued guidance to remind FDIC-supervised banks that if, for risk management purposes, they decide to reduce credit limits or suspend advances on HELOCs, certain legal requirements designed to protect consumers must be followed. The guidance includes best practices for working with borrowers, where possible, to minimize hardships that may result from such reductions or suspensions. Click here for the guidance.

The IRS issued health savings account Q&As for employers and employees concerning eligible individuals, high deductible health plans, contributions, distributions, prohibited transactions, establishing an HSA and administration. Click here for the Q&As.

The FDIC issued an interim final rule amending its regulations to permit state nonmember banks to participate or assist in financial education programs conducted on school premises where, in connection with the program, deposits are received, checks are paid, or money is lent, without the need to submit a branch application to, and receive prior approval from, the FDIC. However, any state nonmember bank that desires to engage in such financial education programs must satisfy certain conditions. The effective date of the interim rule was June 23, 2008 and comments must be received by July 23, 2008. Click here for the rule.

The FRB updated its Consumer Compliance Handbook. The update contains a new chapter covering Section 5 of the Federal Trade Commission Act and the joint statement on unfair or deceptive acts and practices by state-chartered banks issued by the FRB and the FDIC. It also corrects a statement in the chapter on Regulation CC regarding general exception notices. Click here for a link to the handbook.

The OCC updated its Activities Permissible for a National Bank publication which covers permissible national bank activities covering the areas of general activities, compliance, fiduciary activities, insurance and annuity activities, preemption, securities activities, technology and electronic activities, and investment activities.  The OCC also published its Significant Legal, Licensing, and Community Development Precedents, a document containing 2007 precedents regarding branching, consulting and financial advice, corporate governance, finder activities, leasing, lending, other general activities, compliance, fiduciary activities, preemption, derivatives, technology and electronic activities, electronic commerce, investments, enforcement actions and regulations.  These precedents have been incorporated into the most recent issue of Activities Permissible for a National Bank.  Click here for the activities publication and here for the 2007 precedents.

The OCC released its 14th annual Survey of Credit Underwriting Practices and reported that commercial and retail underwriting standards tightened after four consecutive years of eased underwriting standards. The survey includes examiner observations and assessments of credit underwriting standards at the 62 largest national banks and covers the 12-month period ending March 31, 2008. Click here for the survey.

The federal banking agencies issued the host state loan-to-deposit ratios that they will use to determine compliance with Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which prohibits a bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production. Click here for the ratios.

Two payday loan lead generators have agreed to settle FTC charges that their Internet advertising stated payday loan costs and repayment periods without disclosing APR information as federal law requires. The settlements require the generators to disclose APR information in similar payday loan advertisements in the future and to comply in all other respects with the Truth in Lending Act and Regulation Z. According to the FTC’s complaints, the generators stated loan costs on their websites – a $20 fee for a $100 loan, for example – but failed to disclose the APR. For a typical 14-day pay period, consumers who obtained payday loans advertised by one of the generators would pay an APR from 260% to 521% or higher, and 782% for loans advertised by the other. Click here for the FTC press release that includes links to the complaints and settlement agreements.

The FTC authorized its staff to file comments with HUD concerning proposed amendments to regulations implementing the Real Estate Settlement Procedures Act. In its comments, the FTC staff states that some of the proposed amendments could help consumers better understand and compare loan terms and closing costs. However, the FTC staff believes that some of the changes may have the unintended consequence of further complicating the already complex mortgage process. The FTC staff believes consumers would benefit most if the federal government undertook a comprehensive effort to reform federal mortgage loan disclosures. FTC staff also recommends that HUD reconsider its proposed expansion of the definition of “required use” of services that affiliated businesses provide, believing that the expanded definition could prevent consumers from benefiting from lower prices that can result from bundling related services. Click here for the FTC’s press release and here for the FTC’s comments.

HOPE NOW, the industry alliance of mortgage lenders, servicers, investors, and counselors, announced that its servicer members have agreed to a uniform set of guidelines that are designed to expedite the process of preventing foreclosures. The guidelines establish a common set of principles on the possible foreclosure prevention alternatives, including loan modifications, repayment plans, partial claims, and temporarily suspending monthly payments. The guidelines also include procedures to keep homeowners informed about the status of their request to their servicer for help. Click here for the guidelines.