Consumer Financial Service Alert - November 18, 2008

HUD issued a final rule amending Regulation X, the implementing regulation of the Real Estate Settlement Procedures Act. Among other things, the rule:

• establishes new Good Faith Estimate and HUD-1/HUD-1A settlement statement forms;
• limits the charge that may be imposed on consumers for delivery of the GFE;
• requires yield spread premiums to be included in the “origination charge” disclosed on the GFE, and treats lender payments to mortgage brokers as a credit towards settlement charges;
• expands the definition of “mortgage broker” to include exclusive agents of a lender who provide origination services and serve as an intermediary between the lender and the borrower;
• amends the definition of “required use” to include incentives for using a particular service provider (e.g., builder discounts for using an affiliated lender);
• clarifies escrow account requirements and mortgage servicing transfer provisions; and
• provides that all RESPA disclosures may be provided to consumers in electronic form, as long as the consumer consents to receive the disclosures electronically and the other requirements of the Electronic Signatures in Global and National Commerce Act are satisfied.

Compliance with the new GFE and settlement statement is not required until January 1, 2010. However, certain provisions, including the required use provision, are in effect beginning January 16, 2009. Click here for the rule, here for the new GFE, here for the new HUD-1 and here for the new HUD-1A.

The Massachusetts Office of Consumer Affairs and Business Regulation announced that it has delayed the effective date of the state’s new information security rules. Most provisions of the rules will now go into effect on May 1, 2009. The mandatory compliance date for provisions requiring written certification of compliance from third-party service providers and for the encryption of portable electronic devices other than laptops has been extended to January 1, 2010. The rules, which were discussed in the October 7, 2008 Alert, had been scheduled to go into effect on January 1, 2009. Click here for the announcement.

The Third Circuit ruled that a defendant to a Truth in Lending Act claim need not specifically raise an affirmative defense that its disclosures fell within TILA’s error tolerances. The Court held that TILA’s error tolerance provision creates a general defense, which is not waived if it is not specifically plead, as distinguished from an affirmative defense which might be. The Court concluded that the defendant sufficiently asserted the tolerances defense when it generally denied making any disclosure errors.  Click here for Sterten v. Option One Mortgage Corp, No. 07-2237 (3rd Cir. Sept. 22, 2008).

The FDIC replaced General Counsel’s Opinion No. 8, which addresses the issue of whether the funds underlying stored value cards qualify as “deposits” as defined in the Federal Deposit Insurance Act. Under the new opinion, the funds will be “deposits” to the extent that they have been placed at an insured depository institution, and, if deposits, the funds will be subject to assessments and insured up to insurance limit. Click here for the new opinion.

The federal banking agencies jointly issued for comment proposed Interagency Appraisal and Evaluation Guidelines. The proposal would replace the 1994 Interagency Appraisal and Evaluation Guidelines.

The proposal provides:

• Additional detail on the agencies’ expectations for an independent appraisal and evaluation function.
• Greater explanation of the agencies minimum appraisal standards, including clarification of requirements for appraisals of residential tract developments.
• Revisions to the Uniform Standards of Professional Appraisal Practice, which are incorporated by reference in the agencies' appraisal regulations.
• Risk-focused appraisal and evaluation reviews separate and apart from an institution's compliance function.
• New appendices -- Appendix A provides further clarification on real estate transactions that are exempt from the agencies' appraisal regulations; Appendix B addresses acceptable evaluation alternatives and use of automated valuation models; and Appendix C contains a new glossary of terms.

The proposal would apply to all real estate lending functions, including commercial and residential lending departments, capital market groups, and asset securitization and sales units.

Comments are due 60 days after publication in the Federal Register, which is expected shortly. Click here for the proposal.

The FDIC issued guidance that describes potential risks associated with relationships with entities that process payments for telemarketers and other merchant clients. Highlights of the guidance include:

• Account relationships with entities that process payments for telemarketers and other merchant clients could expose financial institutions to increased strategic, credit, compliance, transaction, and reputation risks.
• Such account relationships require careful due diligence and monitoring, as well as prudent and effective underwriting.
• Payment processors pose greater money laundering and fraud risk if they do not have an effective means of verifying their merchant clients' identities and business practices.
• A financial institution should assess its risk tolerance for this type of activity as part of its risk management program and develop policies and procedures that address due diligence, underwriting, and ongoing monitoring of high-risk payment processor relationships for suspicious activity.
• Financial institutions should be alert to consumer complaints that suggest a payment processor's merchant clients are inappropriately obtaining personal account information.
• Financial institutions should act promptly when they believe fraudulent or improper activities have occurred related to a payment processor.

Click here for the guidance.

The federal banking agencies jointly issued a statement highlighting the importance of lending to creditworthy borrowers, strengthening capital positions, engaging in appropriate loss mitigation strategies, and reassessing the incentive implications of compensation policies. Click here for the statement.

The OCC denied an industry request to test a new workout program for credit card debtors. The Financial Services Roundtable and the Consumer Federation of America requested that the OCC allow banks to provide workout programs for borrowers permitting repayment of less than the full amount while deferring the loss recognition and income reporting. The OCC explained that (1) the proposal was imprudent because the program defers timely recognition of loss and (2) the OCC maintains a policy against banks attempting long-term recoveries while assets deemed uncollectible have not been accounted for as charge offs and reported as losses. Click here for the OCC’s response.

A trial court judge in Massachusetts who earlier this year declared certain types of loans “presumptively unfair,” and enjoined foreclosures prior to review by the Massachusetts Attorney General, has issued a similar injunction against another subprime lender. 

In a wide-ranging opinion, the court denied most grounds defendants raised in several motions to dismiss.  With respect to the preliminary injunction, the Attorney General sought to expand the criteria established in the court’s earlier Fremont decision (Click here for the February 28, 2008 Alert discussing the original Fremont opinion and here for the May 6, 2008 Alert discussing the appeals court's affirmance) in determining whether a loan is “presumptively unfair,” and offered three different model injunctions from which the court could fashion an order.  After finding that the Commonwealth failed to prove any pervasively deceptive practices on the part of the lenders, failed to demonstrate that the lenders ignored or acquiesced in alleged broker misconduct, and failed to demonstrate that the lenders’ commission structure forced any borrower into a more expensive loan, the court nevertheless revised the Fremont criteria, and found loans containing all of the following features to be reviewable by the Attorney General before a foreclosure may proceed:

• an adjustable rate loan with an introductory period of three years or less; and
• a debt-to-income ratio in excess of 50% using the fully indexed rate (or 45% if borrower has a student loan payment with a six-month or greater deferral); and
• an introductory rate at least 2% lower than the fully indexed rate unless the debt-to-income ratio is 55% or higher; and
• the loan-to-value ratio is 97% or the loan carries a “substantial” prepayment penalty or a prepayment penalty extending beyond the introductory period.

If the Attorney General objects, defendants have 15 days to reach a resolution satisfactory to the borrower and Attorney General.  If there is no resolution, foreclosure may proceed only with leave of court.  Click here for a copy of Commonwealth v. H&R Block, Inc., et al., No. 08-2474-BLS1 (Mass. Super. Ct. Nov. 10, 2008).

The FDIC issued a proposal to promote affordable mortgage loan modifications. In order to promote modifications, the FDIC will pay servicers $1,000 for the cost of modifying each loan and share up to 50% of the losses incurred on loans that subsequently “re-default.” The program requires (1) eligible loans be secured by owner-occupied property, (2) the borrower make at least six payments on the modified loan before loss sharing is available, (3) modified loans must result in a 31% borrower debt-to-income ratio, (4) participating servicers must conduct a systematic review of their portfolio to identify loans suitable for modification, (5) government loss sharing will be decreased as the loan-to-value ratio rises, and (6) no loss sharing will be available if the loan-to-value ratio exceeds 150%, if the new monthly payment under the modified loan is not at least 10% less, or if eight years has passed since the modification. Click here for the proposal.