Consumer Financial Services Alert - December 16, 2008

The FRB proposed for public comment changes to Regulation Z that would revise the disclosure requirements for mortgage loans. The proposed rule would implement the Mortgage Disclosure Improvement Act, which was enacted in July 2008 as an amendment to the Truth in Lending Act.

The Mortgage Disclosure Improvement Act seeks to ensure that consumers receive cost disclosures earlier in the mortgage process. The Act requires creditors to give good faith estimates of mortgage loan costs within three business days after receiving a consumer's application for a mortgage loan and before any fees are collected from the consumer, other than a reasonable fee for obtaining the consumer's credit history. These early disclosure requirements are consistent with the FRB’s July 2008 final rule which applied to loans secured by a consumer's principal dwelling. The Act broadens this requirement by also requiring early disclosures for loans secured by dwellings other than the consumer’s principal dwelling, such as a second home.

In addition, the proposed rule would implement the Act's requirements that:

• creditors wait seven business days after they provide the early disclosures before closing the loan; and
• creditors provide new disclosures with a revised APR, and wait an additional three days before closing the loan, if a change occurs that makes the APR in the early disclosures inaccurate beyond a specified tolerance.

The proposed rule would permit a consumer to expedite the closing to address a personal financial emergency, such as a foreclosure. The public comment period ends January 23, 2009. The proposed rule would become effective on July 30, 2009. Click here for the proposal.

The OCC announced that it has reached an agreement with Wachovia Bank, N.A., directing the bank to issue checks to consumers that may have been harmed by payment processors for telemarketers that had account relationships with Wachovia. The harm involved telemarketers that obtained consumers’ bank account information over the phone by offering a range of “questionable” products and services. With the account information obtained from the call, the telemarketer directed the payment processor to create a remotely created check. The payment processor then deposited the remotely created check into the processor’s account at Wachovia, and funds were then withdrawn from consumers’ accounts to make payment on the check and deposited into the processor’s account. A large percentage of these remotely created checks were returned to Wachovia by consumers, or their financial institutions, who said the checks were never authorized or that they had never received the products or services offered by the telemarketers. The agreement calls for Wachovia to issue checks totaling over $150 million to more than 740,000 consumers. Click here for the OCC press release.

The FDIC published a special edition of Consumer News, which explains the temporary increase of FDIC insurance to $250,000. Click here for the publication.

The FDIC’s Spanish language website has added information about deposit insurance. Click here for the FDIC’s Spanish language website.

The Massachusetts Supreme Judicial Court unanimously affirmed the preliminary injunction granted to the Commonwealth of Massachusetts against Fremont Investment & Loan. The injunction requires Fremont to give the Attorney General notice, and an opportunity to object before foreclosure, and requires Fremont to “explore alternatives to foreclosure in the first instance.” The Court held that while Fremont was correct that the subject mortgages were not controlled by the Massachusetts Predatory Home Loan Practices Act, and that the loans issued by Fremont complied with all applicable state and federal regulations, the trial judge could deem them “presumptively unfair” under the Massachusetts Consumer Protection Act. The Court agreed with the lower court’s reasoning that when a borrower’s ability to repay a loan at its full rate (and not its lower, introductory rate) is based not on his income or assets, but on the equity of the property itself, such a loan is likely to be unfair, as its success is predicated on the continuing increase in property value and the borrower’s ability to refinance. The Court further noted that regulatory agencies such as the FDIC and OCC had discouraged lending practices such as those employed by Fremont prior to the issuance of the first loan at issue in the case, and thus application of an unfairness standard was not retroactive or otherwise barred by the Massachusetts Consumer Protection Act. The Court rejected the notion that the preliminary injunction would create an uncertain business climate unattractive to future lenders, and found that the public interest would be served by the injunction, insofar as it does not act as a complete bar to Fremont’s rights of foreclosure, but rather institutes a system that is intended to better protect borrowers. As noted in the February 28, 2008 Alert, loans with all of the following criteria are considered to be “presumptively unfair” under the Fremont series of decisions:

1. an adjustable rate with an introductory period of three years or less;
2. an introductory rate of more than 3% below the “fully indexed rate;”
3. a debt-to-income ratio of more than 50% when calculated using the “fully indexed rate” payments; and
4. either a loan-to-value ratio of 100% or a prepayment penalty that is in effect beyond the introductory rate period or exceeds 2% of the total prepayment.

Click here for Commonwealth v. Fremont Investment & Loan, No. SJC-10258, Dec. 9, 2008. Click here for a copy of the November 18, 2008 Alert which discusses the same trial court judge’s recent decision in Commonwealth v. Option One, further changing the above criteria and creating further uncertainty for Massachusetts lenders. Feel free to contact our Boston partner and Alert co-editor Jim McGarry (617-570-1332) if you would like to discuss the ramifications of these decisions.

At its open meeting this Thursday, December 18th at 2:30 p.m., it is expected that the FRB will release its final rule on credit card and overdraft services, but there have been reports that the overdraft portion may be reissued for additional comments. The proposal was covered in the May 6, 2008 Alert. Click here for the meeting announcement and here for the May 6^th Alert.