Consumer Financial Services Alert - May 19, 2009

Today, the U.S. Senate passed the Credit Card Accountability, Responsibility, and Disclosure Act, a credit card bill that would prohibit universal default practices, as well as require issuers who increase a customer’s interest rate to periodically review and decrease the rate under certain circumstances, prohibit double-cycle billing, require penalty fees to be reasonable and in proportion to the omission or violation, mandate that payments in excess of the monthly minimum to be applied to the highest-rate balances first, restrict issuers from increasing rates on customers in the first year after an account is opened, and require promotional rates to last at least six months.

A federal judge in Ohio recently dismissed a “public nuisance” action brought by the City of Cleveland against various financial institutions which participated in the securitization of subprime loans. The City asserted that because the underlying subprime loans were allegedly irresponsibly made to Cleveland residents, certain financial institutions were responsible for the foreclosures affecting Cleveland and the associated costs and revenue loss to the City because they either made the loans or created a demand for subprime loans through securitizations. The court found the nuisance claim baseless for four separate reasons: (1) the claim was preempted by Ohio law which vested the state with sole authority to regulate lending and credit activities; (2) the economic loss doctrine mandates dismissal of public nuisance claims seeking only economic damages; (3) there was no public nuisance created by subprime lending, as it was subject to an extensive regulatory scheme; and (4) the City’s allegations failed to demonstrate any direct relationship between the defendants’ conduct and alleged injury. Click here for City of Cleveland v. Ameriquest Mortgage Securities, Inc. et al., No. 1:08-00139 (N.D. Ohio May 15, 2009).

The Massachusetts Attorney General reached a settlement with Goldman Sachs & Company to resolve potential claims stemming from the AG’s investigation of the role of investment banks in the origination and securitization of subprime loans in Massachusetts. Under the settlement, Goldman has agreed to provide a $50 million loan restructuring program to Massachusetts subprime borrowers. The loan restructuring program is designed to enable subprime borrowers to replace problem loans with new, more affordable loans that take into account the current value of their properties. Goldman also agreed to pay $10 million to Massachusetts and will continue to cooperate with the AG’s ongoing investigation of subprime lending and securitization practices.

Under the loan restructuring program, Goldman will significantly reduce principal balances to allow borrowers to refinance or sell their homes. For borrowers with loans held by Goldman entities, Goldman has agreed to reduce the principal of first mortgages by up to 35% and second mortgages by 50% or more. Borrowers whose first mortgage is significantly delinquent will be required to make a reasonable monthly loan payment while seeking refinancing or until they sell their home. If after six months, a borrower is still unable to find financing or sell their home, Goldman will reduce the principal owed on the existing loan to assist the borrower. For loans not currently held by Goldman, but which are serviced by Goldman’s affiliated servicing company, Litton Loan Servicing LP, Goldman has agreed to assist qualified borrowers with finding refinancing options and other alternatives to foreclosure.

The AG began its investigation into the securitization of subprime loans in December 2007 and has focused on a variety of industry practices involved in the issuance and securitization of subprime loans to Massachusetts consumers. The AG is investigating whether securitizers may have:

• facilitated the origination of "unfair" loans under Massachusetts law;
• failed to ascertain whether loans purchased from originators complied with the originators' stated underwriting guidelines;
• failed to take sufficient steps to avoid placing problem loans in securitization pools;
• been aware of allegedly unfair or problem loans;
• failed to correct inaccurate information in securitization trustee reports concerning repurchases of loans; and
• failed to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan diligence and the pre-securitization process, as well as information concerning their practices in making repurchase claims relating to loans both in and out of securitizations.

The settlement with Goldman and the AG’s investigation into securitizers are the latest developments in the AG’s ongoing enforcement actions in response to the subprime lending crisis. The AG recently sued Fremont Investment & Loan, as well as Option One and its parent H&R Block, alleging unfair, deceptive and predatory lending practices, and obtained preliminary injunctions against those companies. The AG also promulgated new Massachusetts consumer protection regulations, effective in January 2008, governing mortgage lenders and brokers.

Click here for the settlement agreement and here for the AG’s press release and other settlement-related materials.

On an ex parte motion by Fannie Mae, the South Carolina Supreme Court recently issued a temporary restraining order halting thousands of pending foreclosure sales in that state. The order prevents the sale of any one-to-four-unit, owner-occupied property arising out of a loan guaranteed or owned by Fannie Mae, Freddie Mac, or any servicer participating in the Home Affordable Modification Program. In issuing the order, the Court reasoned that the injunction was necessary to protect the interests of borrowers who may be eligible for a modification under the Home Affordable Modification Program. For loans subject to the Program, foreclosures will be stayed and foreclosures dismissed if the loans are modified. Click here for In Re Federal National Mortgage Association Loans Subject to Foreclosure Sale, No. 2009-05-04-01 (S.C. May 4, 2009).

HUD announced that the revised definition of "required use" contained in its November 17, 2008 final rule amending the Real Estate Settlement Procedures Act will be withdrawn. The definition of "required use" in place prior to the revisions made by the November 17, 2008 final rule will remain in effect. HUD has stated that it intends to start a new rulemaking process to revise the "required use" definition. Click here for HUD's withdrawal notice.

The FRB issued a final rule that revises the disclosure requirements for mortgage loans under Regulation Z. These revisions implement the Mortgage Disclosure Improvement Act, which was enacted as part of the Housing and Economic Recovery Act of 2008.

The Mortgage Disclosure Improvement Act requires that consumers receive cost disclosures earlier in the mortgage process. Under the Act, creditors must give good faith estimates of mortgage loan costs (i.e., “early disclosures”) 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 requirements are consistent with the FRB’s July 2008 rulemaking, 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, this final rule implements 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 annual percentage rate, and wait an additional three business days before closing the loan, if a change occurs that makes the APR in the early disclosures inaccurate beyond a specified tolerance.

The final rule permits a consumer to expedite the closing to address a personal financial emergency, such as a foreclosure.

The final rule applies to dwelling-secured consumer loans for which a creditor receives an application on or after July 30, 2009. Click here for the final rule.

Treasury and HUD announced a further expansion of the Making Home Affordable Program. In addition to incentivizing servicers to modify mortgages, the Program now offers incentives to services and borrowers for pursuing short sales and deeds-in-lieu of foreclosure in instances where a borrower cannot qualify for modification. In addition to this short-sale initiative, Treasury and HUD announced a new Home Price Decline Protection initiative aimed at providing creditors with additional incentives to modify loans in areas where home price declines are most severe. Under this new initiative, incentive payments are calculated by directly linking the payment amount to both the rate of home price declines in a local housing market and the average cost of a home in that market. Click here for a fact sheet on both new initiatives and here for an overall progress report produced by HUD and Treasury on the Making Home Affordable Program.

The FRB, FDIC, OCC, OTS, NCUA and FTC issued a final rule that makes technical corrections to their affiliate marketing, identity theft red flags and address discrepancy rules under the Fair and Accurate Credit Transactions Act. In the final rule, the agencies make two corrections to the affiliate marketing rule: (1) amend Model Form C-5, which allows consumers to voluntarily opt-out of marketing by businesses and their affiliates, by inserting language in brackets that allow businesses to disclose the duration of any opt-out period; and (2) add an additional provision to the instructions to the affiliate marketing rule addressing acceptable changes to the model forms, clarifying that a disclosure may be added to the forms that explains the treatment of opt-outs by joint consumers (e.g., where the notice pertains to a joint account and the opt-out will apply to both persons on the account). In addition to amending the affiliate marketing rule, the agencies also made several technical corrections to the identity theft red flags and address discrepancies final rules. Among other amendments, the corrections clarify that address discrepancy notices need only be provided by nationwide consumer reporting agencies that are described in § 603(p) of the Fair Credit Reporting Act. Click here for the final rule.

The U.S. House of Representatives passed H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act, which is aimed at curbing abusive lending practices. The bill was covered in the May 5th Alert. Click here for a summary of the bill and here for a House press release on the bill.