Consumer Financial Services Alert - July 28, 2009

The FRB issued proposed rules to amend the home-secured provisions of Regulation Z. The proposal calls for significant changes in the timing, format and content of disclosures for closed-end mortgage loans and home equity lines of credit. The proposal contains new limits on originator compensation that would effectively ban yield spread premiums. The proposal would also require lenders to include fees in the annual percentage rate calculation that are currently excluded, resulting in more loans being considered high cost or higher priced under the Truth in Lending Act. Below is a summary of the major provisions of the proposal.

Closed-End Mortgage Loans

• At application, lenders would provide a new, one-page FRB publication on questions borrowers should ask about potentially risky loan features.
• The following revisions to the TILA disclosures provided within three days of application would be made: (1) the calculation of the finance change and APR would be changed to capture most fees and costs paid by the borrower; (2) a new graph would be provided to borrowers showing how a borrower’s APR compares to the APRs of borrowers with excellent credit and to the APRs of borrower’s with impaired credit; (3) for adjustable rate mortgages, lenders would be required to show borrowers how their interest rate and monthly payments might change; (4) disclosures of total settlement charges would be made, similar to the same disclosures made on the Good Faith Estimate under the Real Estate Settlement Procedures Act; (4) borrowers would be given a summary of key loan features, such as loan term, amount and type; and (5) format changes would be made, including changes on type size, use of boldface for certain terms, placement of information, and highlighting certain information in a tabular format.
• In addition to the early cost disclosures provided at application, lenders would be required to provide final TILA disclosures that borrowers must receive at least three days before the loan closing.
• For ARMs, lenders would have to notify borrowers 60 days in advance of a change in their monthly payment (currently notice may be given 25 days in advance).
• For payment option mortgage loans, lenders would have to provide monthly statements with information on the costs and effects of negatively-amortizing payments.
• For forced-placed property insurance, lenders would have to provide notice to borrowers on the cost and coverage of such insurance at least 45 days before imposing a charge for the insurance.

HELOCs

• The lengthy, multi-page, generic disclosure currently provided at application would be replaced with a new, one-page disclosure summarizing basic information and risks about HELOCs.
• The disclosures of generic rates and terms provided within three days after receiving an application, would be replaced with a transaction-specific disclosure including information about rates and fees, payments and risks in a tabular form and presenting payment examples based on both the current and maximum interest rates.
• At account opening, lenders would provide final disclosures in the same format as the disclosures provided within three days after application to facilitate comparison with the earlier disclosures.
• Throughout the life of the account, lenders would provide enhanced periodic statements, showing the total amount of interest and fees charged for the statement period and year-to-date.
• To the extent the terms of an account may be changed, lenders would have to notify borrowers 45 days in advance of making a change (currently notice may be given 15 days in advance).
• Lenders would be prohibited from terminating an account for delinquency until a payment is more than 30 days late.
• Additional requirements would be imposed on lenders regarding the reinstatement of suspended or reduced HELOCs, including requiring (1) additional information in notices of suspension or reduction about the ongoing right to request reinstatement and the lender’s obligation to investigate a request, and (2) requiring lenders to complete an investigation of a request within 30 days of receiving a request for reinstatement, and to give a notice of the investigation results to borrowers whose lines will not be reinstated. The proposal would establish a new safe harbor for suspending or reducing a line based on a “significant” decline in property value. For HELOCs with a combined loan-to-value ratio at origination of 90% or higher, a 5% decline in property value would be considered “significant.” The proposal also provides additional guidance regarding the information on which a lender may rely to take action based on a material change in the borrower’s financial circumstances, such as the type of credit report information that would be appropriate to consider.

All Mortgage Loan Transactions

• Payments to a mortgage broker or a lender’s loan officer based on the loan’s interest rate or other terms would be prohibited.
• Mortgage brokers and loan officers would be prohibited from “steering” borrowers to a lender offering less favorable terms in order to increase the broker’s or loan officer’s compensation.

Comments on the proposal are due 120 days after publication of the proposal in the Federal Register. Click here for the press release, containing links to related materials, and here for the proposal.

The FRB issued an interim final rule which amends Regulation Z to implement certain provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009. Among other things, the rule requires creditors to: (1) provide written notice to consumers 45 days before the creditor increases an APR on a credit card account or makes a significant change to the terms of a credit card account; (2) inform consumers in the same notice of their right to cancel the credit card account before the increase or change goes into effect; and (3) mail or deliver periodic statements for credit cards and other open-end consumer credit accounts at least 21 days before payment is due. The interim final rule is the first stage in the FRB’s implementation of the Credit Card Act. In May 2009, the Credit Card Act amended the Truth in Lending Act and other statutes to address credit card practices. The Credit Card Act’s amendments to TILA go into effect in three stages. The interim final rule is effective on August 20, 2009 as it implements the provisions of the Credit Card Act that go into effect on August 20th. The remaining provisions of the Credit Card Act go into effect on February 22 or August 22, 2010 and will be implemented by the FRB at a later date. Comments on the interim final rule must be received by September 21, 2009. Click here for the interim final rule.

A federal court in Texas partially granted summary judgment in a lawsuit alleging that a title insurer charged rates beyond those set by the Texas Department of Insurance and split the excess with local title agents. The court held that the alleged practice did not violate the Real Estate Settlement Procedures Act, provided that actual services were performed for the premium. As it was undisputed that both the title insurer and agents actually performed services, no RESPA claim could lie. The court allowed plaintiffs’ state law claims for money had and received and breach of implied contract to continue, however. Click here for Hancock v. Chicago Title Ins., Co., No. 3:07-CV-144-D (N.D. Tex. July 9, 2009).

The U.S. District Court for the Northern District of Ohio denied class certification of two putative classes of Ohio borrowers alleging that a mortgage lender assessed prepayment penalties, or serviced loans with prepayment penalty clauses, which exceeded the statutory limit under Ohio law. The Court held, among other things, that the predominance of individual issues precluded a damages class action because multiple defenses – including federal preemption of state law, lack of standing, and the voluntary payment doctrine – would require individualized evidence to assess at trial, and because similar individualized inquiries would be needed to ascertain potential damages. The Court also denied certification for declaratory relief because plaintiffs’ request was, in fact, a predicate for damages claims, which could not be tried on a class-wide basis with common evidence. Finally, the Court also granted summary judgment for the lender because the putative class representatives lacked standing to sue. Goodwin Procter partners Tom Hefferon and Joe Yenouskas represented Countrywide. Click here for Gawry v. Countrywide Home Loans, Inc., 2009 WL 1954717 (N. D. Ohio July 6, 2009).

The Financial Crimes Enforcement Network issued an advance notice of proposed rulemaking to solicit public comment on the possible application of anti-money laundering program and suspicious activity report regulations to non-bank residential mortgage lenders and originators. FinCEN specifically seeks comment on (1) whether to follow an “incremental approach” to the issuance of such regulations that would initially affect only those “persons” engaged in non-bank residential mortgage lending or origination; (2) how the regulations should define these persons; (3) how AML programs for these persons should be structured, (4) whether these persons should be covered by other Bank Secrecy Act requirements in addition to the AML program requirement (e.g., SAR reporting); and (5) what exemptions, if any, should apply to any AML program or SAR reporting requirements. Comments are due by August 20, 2009. Click here for the proposal.

The FDIC Advisory Committee on Economic Inclusion will meet on Thursday, July 30th, to discuss prize-linked savings concepts, as well as how to improve underserved and low- and moderate-income consumers’ access to banking services. More specifically, the Committee will look at how game-based incentives to encourage saving (so-called “prize-linked savings,” such as sweepstakes and rewards) can promote long-term saving, particularly among lower-income consumers. The Committee will explore a number of innovations, including how to leverage state lottery participation to promote long-term saving. The meeting will be open to the general public and will be held from 8:45 a.m. to about 12:30 p.m. in the FDIC Board Room, located on the sixth floor of the FDIC headquarters building at 550 17th Street, N.W., Washington, DC. The meeting can be viewed live via Webcast at http://www.vodium.com/goto/fdic/advisorycommittee.asp. Click here for the meeting agenda and background materials.

The federal banking agencies issued final revisions to the Interagency Questions and Answers Regarding Flood Insurance. The agencies are also soliciting comments on proposed revisions to the Q&As. The final and proposed revisions cover a wide-range of flood insurance issues, including (1) when flood insurance is required; (2) the appropriate amount of flood insurance; (3) exemptions; (4) flood insurance requirements for nonresidential buildings and condominiums; (5) flood insurance requirements for home equity loans, home equity lines of credit and construction loans; (6) escrow requirements; (7) force placement; (8) private insurance policies; and (9) flood zone discrepancies. The revised Q&As are effective September 21, 2009 and comments on the proposals must be received by the same date. Click here for the final and proposed Q&As.

As part of a settlement agreement with the Minnesota Attorney General, the National Arbitration Forum announced that as of July 24, 2009, it will cease to administer consumer arbitration disputes. The largest U.S. administrator of consumer arbitrations, NAF denied the AG’s allegations that its relationships with credit card companies resulted in harm to consumers. The NAF blamed its mounting legal costs and the legislative uncertainty surrounding the future of consumer arbitrations for its decision. News reports suggest that the American Arbitration Association is also considering ceasing consumer arbitrations pending the establishment of new guidelines. Click here for the AG’s press release and the Consent Judgment, and click here for NAF’s press release.