Consumer Financial Services Alert - August 7, 2012

The CFPB released both its Semi-Annual Report to Congress and its Annual Report to the Congressional committees on Appropriations.  Both reports discussed the CFPB’s activities, such as, hosting field hearings and launching “Tell Your Story” on the CFPB’s website, allowing consumers to share their experiences with obtaining financial products. The reports noted that consumers have consistently voiced concerns about challenges in: (1) refinancing loans even with high credit scores; (2) qualifying for effective mortgage loan modifications; (3) refinancing, consolidating, or paying private student loans; (4) comprehending credit scoring; and (5) understanding overdraft protection.  The report indicates that the majority of complaints received by the CFPB are related to mortgages and credit cards.

The CFPB has filed an enforcement action in the Central District of California seeking injunctive relief and damages against a provider of “mortgage assistance relief services.”  The CFPB alleges defendants, apparently operated by a single individual using a variety of commercial entities, violated the Consumer Financial Protection Act through deceptive marketing of mortgage relief services to distressed homeowners.  The CFPB alleges defendants operated a two-part business structure—charging $2,500 to $4,000 to conduct a “forensic audit” designed to uncover illegal conduct in the origination and servicing of a homeowner’s loan, while offering to provide the actual modification assistance “pro bono” once the forensic audit was complete.  According to the CFPB, the two-part structure was designed to avoid the mandates of the CFPA, which prohibits advance fees in exchange for mortgage relief services.  This action illustrates the broad scope of the CFPB’s mandate.  While the Bureau’s actions against large financial institutions have garnered significant media attention, it has also targeted other smaller providers of financial services, such as mortgage relief assistance providers, who are alleged to engage in deceptive conduct that harms consumers.

The CFPB’s Office of Financial Education is seeking comment on effective financial education approaches to improve consumers’ financial decision-making capabilities, with a focus on what behavioral approaches may facilitate and impede decision-making.  The deadline for submitting comments is October 31, 2012.

The CFPB announced that it has updated its final remittance transfer rule, in an effort to lessen the burden on small providers, such as community banks and credit unions.  The updated rule modifies the final rule issued in February of this year, which asked for public comment on a safe harbor and disclosure requirements.  The updated rule provides a safe harbor for institutions that provided 100 or fewer remittance transfers in the previous calendar year and provides 100 or fewer in the current year, effectively finding that such institutions do not provide remittance transfer in the “normal course of business.”  Institutions that provide more than 100 remittance transfers will have six months to comply with subpart B of the rule, which sets forth the requirements of remittance transfers.  The final rule also modifies the February 2012 rule’s date of transfer and disclosure requirements.

In response to the CFPB’s advance notice of rulemaking requesting public comment on general purpose reloadable cards (see May 29, 2012 Alert), the FTC staff submitted a comment in support of the request for information and the need to protect card users.  In its press release, the FTC noted that consumers may not be aware that reloadable cards are not afforded the same federal law protection as similar products, such as credit and debit cards.  The FTC staff’s comment focused on four types of protections that have been applied to other payment cards:  (1) extending liability limits for fraudulent or unauthorized use; (2) clear and prominent disclosure of fees and expiration dates; (3) dispute and error resolution procedures; and (4) recurrent payments.  The FTC noted that expanding these protections to reloadable cards may result in increased costs to consumers and card providers and sellers, and recommended that the CFPB seek public comment on specific requirements for each of the discussed protections.

The FTC announced that it has become the first enforcement authority of the Asia-Pacific Economic Cooperation Cross-Border Privacy Rules System, following the United States’ approval as the first formal participant. The Cooperation is a voluntary organization whose rules, which aim to better protect consumer information traveling between the United States and its members, are enforceable.  The system will be implemented by businesses doing business in member economies.  Twenty-two countries are members including the United States, China, Russia, Taiwan, Australia, Canada, and Korea.

The OCC and the Department of Justice announced they have entered settlements with a bank and its bank holding company arising from violations of the Servicemembers Civil Relief Act.  Pursuant to the consent orders against the bank and its bank holding company, the OCC found that the bank obtained default judgments without filing accurate affidavits of military service, improperly denied requests for interest rate reductions, provided insufficient benefits when interest rates were reduced and improperly foreclosed on mortgages, and repossessed motor vehicles of protected servicemembers without necessary waivers or court orders.  The OCC also found that the bank failed to oversee its third party vendors.

Under the consent orders, the bank must develop a written compliance program to ensure compliance with SCRA, develop policies and procedures for outsourcing functions to third parties, and develop a written internal SCRA audit program.  In addition, the bank must engage an independent consultant to conduct a comprehensive account review of actions (e.g. foreclosures, repossessions, and default judgments) taken against servicemembers eligible for SCRA protection, as well as a review of loan and credit card accounts for which service members requested SCRA benefits.  The account review will cover a six-year period.  The bank will also be required to develop a remediation plan to make restitution to protected service members.  The remediation plan will include restitution to borrowers whose mortgage loans were foreclosed upon in violation of SCRA consisting of a $125,000 cash payment and payment of lost equity of the foreclosed property and interest accrued on lost equity.

The FTC filed a contempt order against defendants, online check writing marketers, for violating the terms of a final order issued against them.  In 2006, the FTC filed a complaint against defendants alleging violations of the Federal Trade Commission Act and sought a permanent injunction preventing defendants from creating or delivering any check for a consumer without taking measures to protect the consumer.  A final order was issued in January 2009 requiring the defendants to: (1) perform account and identify verification; (2) disclose certain information on each check directly or indirectly created or delivered; and (3) adequately provide for and respond to consumer complaints.

The FTC alleges that defendants failed to institute the measures required by the final order, pointing to, for example, “microprint” disclosures on defendants’ blank product checks that were insufficient and “illegible to the naked eye.”  The FTC ordered sanctions against the defendants in the amount of $10,000 per day until compliance is shown for violating the identity and account verification procedures, and $5,000 per day until compliance is shown for violating the contact information disclosure requirements of the final order.  The FTC also ordered a $100,000 fine for consumer restitution.

The Federal Housing Finance Agency announced that it will not adopt HAMP with the principal reduction alternative as a loss mitigation tool for Fannie Mae and Freddie Mac.  In a report detailing its reasons for rejecting principal forgiveness, the FHFA concluded that existing loss mitigation efforts, including HARP and HAMP without principal forgiveness, provide sufficient opportunities for underwater borrowers.  The FHFA also concluded that if it were to adopt principal forgiveness for Fannie Mae and Freddie Mac, the impact of strategic defaulters and the operational costs of implementation would outweigh benefits.  The FHFA was also concerned with the long-term impact on mortgage credit availability if Fannie Mae and Freddie Mac allowed principal reduction.

Treasury Secretary Timothy Geithner criticized the FHFA’s decision, noting that an FHFA analysis showed that Fannie Mae and Freddie Mac participation in offering principal forgiveness would assist a half million homeowners, result in savings of $3.6 billion and save taxpayers $1 billion.

The FRB announced the release of a final rule on interchange fees to implement Section 1075 of the Dodd-Frank Act.  Section 1075 amended the Electronic Funds Transfer Act to require that the amount of any interchange electronic debit transaction fee be reasonable and proportional to the cost incurred by the issuer.  The rule permits debit card issuers to charge up to $0.01per transaction to offset the costs of fraud prevention measures.  However, the fee is only permissible if the issuer develops and implements policies and procedures to reduce the occurrence and costs of fraudulent debit card transactions.  Under the rule, to receive the adjustment, issuers must review their fraud-prevention policies and procedures at least annually and notify the payment networks each year of their eligibility to receive the adjustment.  The rule is effective October 1, 2012.

In response to a mandate requiring the GAO to identify duplicative government programs and activities, the GAO produced a report addressing:  (1) the cost of federal financial literacy activities; (2) the extent and consequences of their overlap and fragmentation; (3) the federal government’s coordination of these activities; and (4) what is known about their effectiveness.  Although the GAO did not identify any duplicative programs, it did find overlap in areas such as housing counseling and financial education for youths.  The report discloses that the federal government spent about $68 million on financial literacy activities in fiscal year 2010 and emphasizes the role of the CFPB, which was created in 2010, both in contributing to the overlap and in presenting an opportunity for consolidation.  GAO recommends that the CFPB take steps to clearly delineate other agencies’ respective roles and responsibilities; and that the Financial Literacy and Education Commission identify options for consolidating federal financial literacy efforts and revise the national strategy to address the allocation of federal financial literacy resources across programs and agencies.

The OCC and FRB announced that the deadline for borrowers submitting requests for Independent Foreclosure Review has been extended to December 31, 2012.  The new deadline provides additional time for borrowers to request a review if they believe they suffered financial injury as a result of errors in foreclosure actions on their homes in 2009 or 2010 by one of the servicers covered by enforcement actions issued in April 2011.  The agencies will work with the servicers to expand their outreach and marketing efforts regarding the Independent Foreclosure Review through the end of the year.

The United States Court of Appeals for the Tenth Circuit ruled that a borrower need not affirmatively plead the ability to repay the loan as a condition of seeking rescission under the Truth in Lending Act.  Reversing a district court ruling that dismissed plaintiffs’ TILA rescission claim, the Tenth Circuit held that the district court had exceeded the rescission framework set out under TILA by creating a pleading rule that would require all consumers who seek to compel rescission to plead their ability to repay the loan.  Of note, the Tenth Circuit commented that while the TILA rescission process “functions well” where a borrower elects to rescind within the initial three day period, it “does not work well” in cases where the creditor has disbursed funds and perfected its lien following the three day period.  Arguably a borrower-friendly ruling in its reversal of an order dismissing plaintiffs’ TILA claims, the Tenth Circuit’s opinion does offer a measure of comfort to creditors.  While holding that a consumer need not plead the ability to repay the loan, the Tenth Circuit stated in no uncertain terms that a district court may “use its equitable powers to protect a creditor’s interests during the rescission process,” and specifically held that a borrower may not satisfy his tender obligations under the TILA framework by simply conveying the property to the creditor—a critical point where the property has depreciated in value since the inception of the loan.  On these two points, the Tenth Circuit ruled strongly in favor of creditors, affirming that TILA rescission remains an equitable process intended to restore the “status quo ante” that cannot be used to create a windfall for borrowers at the expense of creditors.

The Massachusetts Senate has passed a scaled-down version of a bill passed by the House of Representatives that imposes additional conditions and requirements on the conduct of foreclosure in Massachusetts.  Echoing the Supreme Judicial Court’s concerns about inaccurate or incomplete documentation purporting to establish the lawful owner of a mortgage, the legislation will require foreclosing lenders to verify that they have all such documentation in place prior to initiating foreclosure.  While the act will create a task force to study the effectiveness of mediation in cases of contested foreclosures, it stops short of requiring lenders to participate in mediation or other alternative dispute resolution processes before foreclosing on a defaulted borrower.  A number of cities in Massachusetts, including Springfield, have recently enacted local ordinances requiring lenders to engage in mediation in advance of foreclosure (see July 10, 2012 Alert), but the status of such ordinances is now in doubt following this action by the Massachusetts legislature, thereby raising the possibility that further litigation will eventually place the issue before the Supreme Judicial Court.

Illinois amended its High Risk Home Loan Act to conform the definition of “high risk home loan” to the Dodd-Frank Act’s definition and impose limits on the fees and penalties for high risk mortgage loans and require enhanced disclosures.  The amended law prohibits prepayment penalties, and imposes new limits on late fees, the structure of balloon payments, and penalties.  The law is effective January 1, 2013.

Illinois passed the Tax Refund Anticipation Loan Reform Act which limits interest rates on refund anticipation loans and requires loan facilitators to make certain disclosures among other things. The Act requires loan facilitators to display a schedule showing the fees for the refund anticipation loans and fee schedule examples of the interest rates on the loans in at least five different amounts. Loan facilitators are also required to “prominently display” on each fee schedule a “Notice Concerning Refund Anticipation Loans.”  The Act also prohibits refund anticipation loans with an interest rate greater than 36% per year.  Banks are generally excluded from the provisions of the Act.  The law is effective January 1, 2013.