Consumer Financial Services Alert - October 16, 2012

The CFPB, in alignment with its continuing focus on debt collection, will hold a Debt Collection Field Hearing in Seattle, Washington on October 24, 2012. The CFPB previously released a report to Congress on its efforts to enforce the Fair Debt Collection Practices Act (see April 17, 2012 Alert) and filed a joint amicus brief with the FTC and DOJ urging the Supreme Court to overturn a circuit court opinion interpreting the cost-shifting provision in the FDCPA to impose attorneys’ fees on a debtor (see August 21, 2012 Alert). The CFPB has not yet issued a final rule defining “larger participants” of the debt collection market (see February 21, 2012 Alert), but the CFPB will likely issue a rule soon given that prior to the field hearing on the consumer reporting market, the CFPB released its final rule defining “larger participants” of the consumer reporting market (see July 24, 2012 Alert).

The CFPB released its Small Business Compliance Guide to complying with the new remittance transfer rule set to take effect on February 7, 2013 (see August 7, 2012 Alert). The CFPB is required by law to issue a small entity compliance guide to help small businesses comply with the new remittance transfer rules. The CFPB also held a webinar on October 16, 2012 to provide more information on the remittance transfer rule.

The Office of the Inspector General for the FRB released its evaluation of the CFPB’s Consumer Response Unit.  The evaluation found that the Consumer Response Unit is generally compliant with Dodd-Frank, but recommended that the CFPB take action in five areas that the OIG found lacking: (1) implement more “robust internal controls” for manual data entry; (2) identify and remediate the cause of data discrepancies; (3) disseminate an agency-wide privacy policy; (4) implement a comprehensive quality assurance program; and (5) consolidate quality assurance reviews to better identify the complaints reviewed. The CFPB subsequently released its quarterly Consumer Response Report, providing a snapshot of complaints received through September 30, 2012. This report updates previous reports issued by the CFPB in March and June 2012 (see June 26, 2012 Alert). Notably, 37% of all complaints received by the CFPB were referrals from other regulators or agencies. 

The CFPB solicited comments on proposed information collections designed to provide the CFPB with qualitative data on the compliance activities, financial burdens and other economic costs associated with its regulations.  These information collections will ask financial services providers about their compliance systems and processes and how regulations and regulatory changes impact different aspects of their business operations.  According to the CFPB, these information collections would “aid the Bureau in determining what rules prove to be unduly burdensome on [providers of financial services] and to identify the costs of such burdens.”  The CFPB is soliciting comments addressing whether the proposed information collections are necessary and, if so, what information should be collected to give the CFPB an accurate picture of the compliance costs it imposes on the industry, as well as how to reduce the burden of the information collections on respondents.  The deadline to comment is November 9, 2012. 

The CFPB’s Student Loan Ombudsman released its annual report on private student loans and a factsheet about the report. The report identifies complaints made by private student loan borrowers (e.g., loan origination or servicing).  The CFPB Ombudsman noted that many of the complaints parallel to those heard about mortgage loan servicers, such as “servicing surprises” (e.g., bankruptcy-triggered defaults, application of payments, and limited access to account information); repayment frustrations (e.g., the tactics used by private student loan debt collectors, disability issues and accuracy of credit reports); and few repayment options. The report also detailed other challenges private student loan borrowers face, including protections under the Servicemembers Civil Relief Act, for-profit college-affiliated loans, and overall confusion between private and federal student loans.

The report recommended that Congress identify opportunities to facilitate student loan modification and refinance options for borrowers.  The report also made two recommendations to the CFPB and the Secretaries of the Treasury and Education: (1) validate the existence of any systematic issues in the student loan servicing market and determine whether any additional guidelines are needed, and (2) work with non-profit organizations to increase awareness of income-based repayment and other repayment options. 

The FTC announced the agenda for its upcoming Robocall Summit, which will focus on robocalling technology and solutions for solving the problem of illegal robocalls. The summit, which is free and open to the public, will include a discussion of the state of robocall technology, and ways to curtail robocalling, among other things. The summit will be held on October 18, 2012, at the FTC’s satellite conference center in Washington, D.C. 

The FTC submitted a comment in response to the CFPB’s notice of proposed rulemaking requesting comments to its proposal to combine certain disclosures consumers receive in connection with applying for and closing on a home mortgage loan under TILA and RESPA (see July 10, 2012 Alert). The FTC’s comment commended the CFPB’s efforts and stated that the disclosures likely will improve the information that consumers receive. The comment suggests that the CFPB conduct controlled quantitative testing before finalizing the rule to ensure that key mortgage terms are not misinterpreted or misunderstood. In its press release announcing the comment, the FTC noted that in its own 2007 study, it found that mortgage terms and costs were not adequately conveyed to consumers. 

The FTC announced that it entered into a settlement with a consumer reporting agency charged with improperly selling prescreened lists of consumers who were late on mortgage payments, in violation of the FTC Act and the Fair Credit Reporting Act. Specifically, the FTC alleged that the CRA: (1) sold the prescreened lists to a company that did not have a legally “permissible purpose” to obtain the prescreened lists; (2) did not have appropriate controls in place to determine whether a permissible purpose existed; and (3) failed to properly investigate once it learned that the company was violating the CRA’s internal policies on prescreening.  The FTC also brought charges against the company, alleging, among other things, that the company resold the lists to third parties who did not have a permissible purpose, and also failed to notify the CRA of the end users of the lists.

The settlement provides that the CRA will pay $393,000 and is prohibited from: (1) furnishing prescreened lists to anyone that it does not have reason to believe has a permissible purpose to receive the lists; (2) failing to maintain reasonable procedures to limit the furnishing of prescreened lists to anyone except those with a permissible purpose; and (3) selling prescreened lists in connection with offers for debt and/or mortgage assistance relief products or services, when advanced fees are charged. A final judgment against the company also prohibits conduct, such as using or obtaining consumer reports without a permissible purpose, and requires the company to pay $1.2 million. The FTC published an analysis of the consent agreement and will publish a description of the proposed settlement in the Federal Register shortly for public comment. Comments must be submitted by November 9, 2012.

In prepared remarks for a conference on distressed residential real estate, Elizabeth A. Duke, of the Federal Reserve Board of Governors, noted that housing market conditions are improving, and reiterated the FRB’s belief that solving the lingering problem of long-term vacancies will require “a full spectrum of policy actions.” The FRB has calculated that long-term vacant properties have a negative impact on housing prices and can push down values of adjacent homes, a pattern that perpetuates negative trends in the broader housing market.  In her remarks, Ms. Duke advocated a multi-faceted approach, suggesting that the FRB will not push for a “one-size-fits-all” solution, but instead will advocate for localized solutions that address the multitude of causes and effects of long-term vacancies.  For example, in former “housing boom” neighborhoods, where private investors have shown increased interest, the preferred solution might focus on ways of ensuring that a sufficient number of properties remain owned by local landlords.  While in so-called “low demand” locations, any solution will necessarily involve a means of financing the demolition of no-value, uninhabitable homes that blight communities.

A New Jersey state appellate court held that a borrower could not challenge the standing of a bank in a foreclosure proceeding in a last ditch effort to re-litigate the case. The borrower filed an application to vacate the default judgment entered against him, arguing that because the mortgage on the property was not assigned to the bank until after the bank filed the foreclosure complaint, the bank lacked standing. The borrower sought to vacate the judgment based on a recent New Jersey state court opinion, Deutsche Bank National Trust Co. v. Mitchell, 27 A.3d 1229 (N.J. Ct. App. 2011), which held that either possession of the note or an assignment of the mortgage that preceded the complaint conferred original standing. The lower court refused to vacate the judgment; the appellate court affirmed. 

In reaching its decision, the Court rejected plaintiff’s argument that Mitchell applied.  The Court noted that unlike in Mitchell, where the “defendant actively engaged in the litigation” and challenged the bank’s standing to file the foreclosure complaint “long before the end of the litigation,” here, the borrower “did not raise the standing issue or contest the foreclosure in any way, until two years after default judgment was entered and three and one half years after the complaint was filed.” Further, the Court held that the borrower did not “definitively” demonstrate a lack of standing, holding that the bank could have held possession of the note at the time it filed the complaint.  The Court’s ruling shows a general apprehension to allow borrowers to sit on their rights during foreclosure proceedings, and should serve as a reminder that courts may hold borrowers accountable for their inaction during foreclosure proceedings.

The Kansas Court of Appeals has rejected a challenge to a lender’s designation of MERS as nominee on a mortgage. Plaintiffs/appellants, a husband and wife who defaulted on their home mortgage loan, challenged the standing of the bank to foreclose on the property based on a so-called “splitting of the note and mortgage” that allegedly resulted from a series of assignments of the note between MERS members while MERS itself remained the mortgagee of record “as nominee for the lender and its successors and assigns.” Citing recent Kansas Supreme Court precedent affirming the operation of MERS as nominee for a series of successor lenders, the Court, applying basic principles of contract interpretation, held that the language of the mortgage itself, which designated MERS “as nominee for the lender and its successors and assigns,” was sufficient to create an agency relationship between MERS and the foreclosing bank as a “downstream assignee” of plaintiffs’ note, such that the bank could be deemed to hold both the note and mortgage for purposes of establishing its standing to foreclose under Kansas law. “Split note” theories are commonly advanced by defaulted borrower plaintiffs in an effort to invalidate the enforceability of their loan obligations. Numerous state and federal courts around the country have rejected such claims on a host of grounds (see e.g., August 21, 2012 Alert), and this case presents yet another example that contributes to this weight of authority. 

The United States District Court for the Central District of California dismissed a putative class action alleging, among other claims, violations of the National Bank Act and violation of the Nevada Deceptive Trade Practices Act, stemming from the retroactive application of the default APR.  Plaintiff obtained a credit card from defendant, a bank, and after plaintiff failed to make his minimum monthly payment for two consecutive months, in the third month, defendant raised his interest rate to the default APR, and applied it to the previous month’s billing cycle. 

The Court rejected plaintiff’s claim that defendant violated the NBA by charging an interest rate higher than that permitted under Nevada law on the ground that Nevada has no usury law or maximum allowable rate.  According to the Court, because “the [d]efault APR did not, and indeed, could not, exceed the rate allowable under state law,” plaintiff could not state a claim for violation of the NBA. The Court also dismissed plaintiff’s state statutory claim for failure to identify a misrepresentation or concealment of material fact because the credit card agreement “explicitly stated that a [d]efault APR could be imposed retroactively to the beginning of a billing cycle.”