Consumer Financial Services Alert - July 10, 2012

The CFPB also issued a proposed rule that would amend Regulation Z to implement changes to the Homeowner and Equity Protection Act made by the Dodd-Frank Act.  Loans subject to HOEPA have heightened disclosure requirements and restrictions on loan terms.  The Dodd-Frank Act expanded HOEPA to apply to additional types of mortgage transactions (e.g., purchase money mortgage loans and HELOCs).  The Dodd-Frank Act also added a prepayment penalty trigger and expanded other borrower protections on HOEPA loans.  Generally, the proposal is in line with the Dodd-Frank expansion of the types of loans covered by HOEPA, but excludes reverse mortgages. 

The CFPB adopted a final rule on the confidential treatment of privileged information, which strengthens the January 2012 guidance bulletin on the issue (see February 21, 2012 Alert).  According to the CFPB’s press release, the rule offers additional assurances to supervised entities that submitting privileged information to the CFPB will not waive the privilege.  The rule also clarifies that the CFPB’s transfer of privileged information to federal regulators or state agencies does not waive the privilege.  The rule applies to attorney work product and other privileged information. 

The CFPB issued a press release highlighting key findings and concerns from its study on reverse mortgages.  The CFPB noted that while only a small number of eligible borrowers currently participate in the reverse mortgage market, market growth is likely as aging baby boomers continue to become eligible for reverse mortgages.  As a result of the study, the CFPB noted some areas of concern, mainly that consumers do not understand the product, (e.g., that consumers are responsible for property taxes and insurance), and that consumers are not using the product as originally intended (i.e., opting for a lump sum payment instead of using it as a stream of income or line of credit), which may leave them with insufficient resources later on.  This latter concern is compounded by the additional finding that many consumers are obtaining reverse mortgages earlier in life.  To address its concerns regarding the confusion about reverse mortgages, the CFPB has developed a fact sheet and consumer guide with information about reverse mortgages, as well as posted reverse mortgage Q&A’s to the Ask CFPB database.

In the study, the CFPB also outlined ways that it can address the issues raised in the report.  Specifically, the CFPB noted that it can issue regulations specifically addressing reverse mortgages, improve approaches in engaging consumers about reverse mortgages, monitor the reverse mortgage market for compliance with existing laws and for unfair, deceptive, or abusive practices, accept and work to resolve consumer complaints, and work with HUD to resolve issues noted in the report.  The CFPB issued a notice and request for information seeking feedback from the public to assist the CFPB in better understanding and evaluating potential consumer protection issues raised by reverse mortgages.  Specifically, the CFPB is seeking answers to a series of questions in the following areas: (1) factors influencing consumer decisions; (2) consumer use of reverse mortgage proceeds; (3) the longer-term outcomes of reverse mortgages; and (4) the difference in market dynamics and business practices among the broker, correspondent and retail channels.

The FTC announced that it has successfully litigated another loan modification scam case.  (see June 26, 2012 Alert) The U.S. District Court for the Middle District of Florida entered permanent injunctions and monetary damages against defendants alleged to have violated the Federal Trade Commission Act and Telemarketing Sales Rule.  According to the FTC, defendants’ wrongful conduct included collecting large upfront fees; misleading consumers to believe that they had already qualified and received loan modifications, when they had not; overstating both the efficacy of the service and the involvement of the attorney; and deceptively claiming that the defendants were affiliated with the U.S. government.  The Court entered a $2.6 million judgment against defendants and banned them for 10 years from telemarketing financial products or services, and from selling mortgage modification, foreclosure rescue, and debt-relief products and services. Notably, the Court also ordered defendants to destroy any consumer information they collected within 30 days after the order takes effect.

Citing an increase in Other Real Estate Owned Assets, the FRB recently issued Questions and Answers clarifying its existing OREO policies.  The Q&As focus on six topics: (1) Transferring an Asset to OREO; (2) Reporting Treatment and Classification; (3) Appraisal Concepts; (4) Ongoing Property Management; (5) Operational and Legal Issues; and (6) Sale and Transfer of OREO.

The GAO issued a report on foreclosure mitigation, finding that while nearly 1 million loans have been modified under the Home Affordable Modification Program between 2009 and 2011, and an additional 3 million loans modified under servicer-specific loan modification programs, the number of loans in foreclosure or facing likely foreclosure remains high.  The report recommends that agencies collect and analyze additional data to determine the effectiveness of their modification programs, including HAMP, as well as the likelihood of success of other mitigation efforts.  For example, the GAO report notes that its data suggests principal forgiveness may be an effective foreclosure mitigation tool; however, because the FHFA has not reached a decision regarding whether the enterprises will engage in HAMP principal forgiveness modifications, the effectiveness of this tool is unknown.  The GAO urged the FHFA to expeditiously reach a decision before the December 2013 deadline to enter into a permanent HAMP-modified loan.

The United States Court of Appeals for the Sixth Circuit has issued an opinion interpreting the federal Fair Debt Collection Practices Act to reach the conduct of a law firm that sent a notice of foreclosure to a defaulted borrower prior to execution of an assignment that actually transferred the borrower’s note and mortgage to its client, the foreclosing bank.  The Court reversed a ruling by the district court, dismissing the borrower’s FDCPA claim, holding that because the “clearly false” identification of a creditor’s name may constitute a “false representation…to collect or attempt or attempt to collect any debt” for purposes of stating a claim under the FDCPA, defendant-law firm conceivably violated the law when it named the foreclosing lender as the holder of the note and mortgage before execution of an assignment conveying such interest.

The Sixth Circuit took care to state that its opinion does not reach the merits of the borrower’s claim, but instead is limited to the minimum requirements for pleading a facially adequate claim under the FDCPA for purposes of a Rule 12 motion to dismiss analysis. Lenders and loan servicers should take note of the opinion, however, because it again underscores the importance of complying with state law procedural requirements to ensure a settled foreclosure process, in this case the need to confirm that the foreclosing entity can document its legal interest in the property prior to initiating foreclosure. 

After granting certiorari and holding oral arguments, the United States Supreme Court refused to issue an opinion in a Ninth Circuit appeal case concerning whether a purchaser of settlement services has standing under the Real Estate Settlement Procedures Act to pursue an action in federal court without demonstrating that an alleged RESPA violation resulted in an overcharge.  The Ninth Circuit held that the RESPA violation in and of itself gave rise to an injury in fact, which satisfied the standing requirements of the Constitution.  The Supreme Court issued a single line slip opinion that stated “[t]he writ of certiorari is dismissed as improvidently granted.”   

The United States District Court for the District of Massachusetts, Springfield Division, rejected a challenge to two ordinances enacted by the city of Springfield, Massachusetts that require mediation prior to foreclosing on residential properties and require foreclosing lenders to maintain vacant properties, including posting a $10,000 bond to reimburse the city for any maintenance work that it may have to perform to keep the property in compliance with the local housing code while it remains in foreclosure. 

The Court found plaintiffs state and federal law challenges to the mediation ordinance unpersuasive, holding that no “sharp conflict” existed between Massachusetts foreclosure law and the mediation ordinances because the Massachusetts state foreclosure statute does not prohibit local municipalities from regulating the conduct of foreclosures. The Court rejected plaintiffs’ contract clause challenge on the grounds that  the city’s imposition of a mediation requirement did not unconstitutionally interfere with the terms of mortgage contracts between borrowers and lenders, noting that plaintiffs should have expected “the possibility of changes similar to those contained in the ordinances when entering into the mortgage contracts.”

The Court also dismissed the plaintiffs’ argument that the property maintenance ordinance violated Massachusetts law, finding that the posting of a bond was not an unlawful tax, but a legally permissible regulatory fee.  The Court also noted that widespread foreclosures are “an issue of serious public concern to municipalities,” holding that the city’s ordinance represented an appropriately measured effort that imposes “reasonable conditions” upon foreclosure practices.  If upheld or applied elsewhere, the Court’s ruling could open the door for other localities to impose additional requirements and limitations on the conduct of foreclosures. 

Attorney General Kamala D. Harris announced that the California legislature passed the California Homeowner Bill of Rights, which provides consumer protections for homeowners and reforms to the mortgage and foreclosure process.  If signed into law by the Governor of California, the new legislation would become effective on January 1, 2013 and would apply to banks and other lenders.  The new legislation codifies many of the core protections from the nationwide settlement with five of the largest U.S. banks.  Key elements of the legislation are (1) restricting dual-track foreclosures, where lenders pursue foreclosure proceedings on a homeowner while also engaging in loan modification discussions with the homeowner; (2) requiring lenders to provide homeowners with a single point of contact at the lender who has knowledge of the homeowners loan and direct access to decision makers; (3) imposing civil penalties on robo-signing, where lenders repeatedly file foreclosure documents without verifying their accuracy; and (4) permitting homeowners to require lenders to document their right to foreclose. 

The National Association of Insurance Commissioners announced it will hold a public hearing on force-placed insurance at its annual meeting in August 2012 to discuss the use of force-placed insurance and the effect of the practice on consumers.  State regulators have turned their attention to force-placed insurance recently.  For example, after an initial review, the New York Department of Financial Services announced it planned to continue investigating force-placed insurance carriers in New York and planned to hold hearings on whether the rates for force-placed insurance were excessive (see April 17, 2012 Alert).