Consumer Financial Services Alert-November 13, 2012

The CFPB recently announced proposed changes to the regulations requiring credit card issuers to evaluate a consumer's ability to make payments based on his or her independent income or assets prior to opening an account. The changes are in response to findings that a significant number of otherwise creditworthy individuals may have been denied access to credit cards because their income is dependent upon their spouse or partner. The proposed changes remove references to “independent” ability to pay and permit accessible income to be included in the evaluation of a consumer’s ability to pay, provided that the consumer has a reasonable expectation of access to the funds. Furthermore, this change would be available to all credit card applicants 21 years of age and older, whether they are married or unmarried. CFPB Director Richard Cordray stated that the proposed rule “strikes the right balance between honoring the letter and purpose of the law without compromising consumer empowerment."

The CFPB released its final rule defining “larger participants” of the debt collection market. Under section 1024 of the Dodd-Frank Act, the CFPB has the authority to supervise nonbank “larger participant[s] in markets for other consumer financial products or services.” The final rule covers third-party debt collectors, debt buyers, and collection attorneys with annual receipts of $10 million or more. The definition of “annual receipts” is adapted from the definition used by the Small Business Administration and is measured by the amount of time the debt collector has been in business. Of import, the rule aggregates the annual receipts of affiliated companies to determine whether the annual receipts meet the threshold. Ultimately, the CFPB will have supervisory authority over 175 debt collectors, representing 63% of the debt collection market.

In announcing the final rule at the debt collection field hearing, CFPB Director Richard Cordray stated that “reasonable market oversight is critical to fostering competition in consumer financial markets.” Mr. Cordray noted that the CFPB will be focused on the systemic issues in the debt collection market, in particular, the accuracy of the data debt collectors use in pursuing consumers, the extent to which the accuracy of the information “deteriorates as it is passed down the line,” and how debt collectors process consumer disputes. Mr. Cordray also stressed the importance of “robust compliance programs,” noting that it will not be enough for debt collectors to simply point to policies and procedures as a means of justifying their collection practices, but rather debt collectors must consistently follow their policies and procedures and ensure that they have a sound monitoring system in place. The rule is effective January 3, 2013.

The CFPB also released the Examination Manual it will use to supervise debt collectors. The Examination Manual covers seven examination modules focused on compliance with the Federal Fair Debt Collection Practices Act, the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act and the Equal Credit Opportunity Act, as well as reviewing supervised entities’ policies and procedures related to payment processing and litigation-based collection, such as determining when collection actions are time-barred. Pursuant to the CFPB’s fact sheet, examiners will also focus on disclosure, the accuracy of information, complaint and dispute resolution processes and customer service.

The CFPB released a report highlighting concerns with the servicing of servicemembers’ student loans. The report, “The Next Front? Student Loan Servicing and the Cost to Our Men and Women in Uniform,” identifies a number of specific practices and broader concerns about the conduct of the student loan servicing industry, as it relates to and affects servicemembers.  The report addresses common servicing errors that have already led to class action litigation on behalf of servicemember student loan borrowers, such as automatically placing loans into forbearance when a servicemember invokes his or her right under the Servicemembers Civil Relief Act or failing to apply the 6% interest rate cap while a servicemember is on active duty. The report also highlights borrowers’ and loan servicers’ widespread lack of knowledge of and familiarity with the range of benefits available to servicemembers. Student loan servicing practices have drawn increased scrutiny of late from government agencies, such as the CFPB, and also from private litigants who have characterized servicing practices as deceptive. In conjunction with the report, the CFPB released a servicemember student loan servicing guide.

The CFPB is now accepting consumer complaints on credit reporting, as part of its supervision of consumer reporting agencies, which began on September 30, 2012 (see July 24, 2012 Alert). In making the announcement, the CFPB stated that consumers should first file a complaint with the credit reporting company at issue to preserve their rights under federal consumer protection laws. However, where a credit reporting company either does not respond or provides an unsatisfactory response, individual consumers will be able to file complaints with the CFPB on issues such as credit monitoring and identity protection services, obtaining copies of credit scores or reports, and/or the agency’s investigation of disputes. The CFPB expects consumer reporting agencies to respond to consumer complaints within 15 days with information on the steps the agency plans to take or has already taken. The CFPB also issued a consumer advisory on credit reporting.

The CFPB issued a notice of proposed rulemaking to amend 12 C.F.R. § 1070.60 on exempt records to include investigative information gathered by way of its Consumer Response System. If implemented, the amended rule would bar disclosure of information relating to specific consumer complaints, such as the identity of the complainant, the basis of the allegations and the identity of the respondent. According to the CFPB, this exemption would prevent interference with law enforcement investigations and also prevent its investigative processes from being compromised. Comments on this proposed amendment must be received by November 19, 2012. 

The CFPB denied a debt settlement company’s petition to set aside a civil investigative demand. In denying the petition, the CFPB cited the untimeliness of the petition, pursuant to the CFPB’s rules regarding investigations (see June 12, 2012 Alert), and the company’s failure to meet and confer with CFPB staff prior to filing the petition. The CFPB’s rules on investigations require subject companies to file a petition to modify or set aside a CID within 20 calendar days of service of the CID. The ruling again serves as a cautionary tale to future parties of the importance of meeting and conferring with the CFPB prior to challenging CIDs.  In the CFPB’s first denial of a petition to set aside a CID, the CFPB highlighted the company’s failure to make a “good faith effort” to negotiate the terms of the CID (see October 2, 2012 Alert).

The CFPB released its first Supervisory Highlights Report. The report, which covers supervision work completed between July 21, 2011 and September 30, 2012, focuses on problems found by examiners and the corrective actions and remedies financial institutions were directed to undertake. The report’s findings include deficient compliance management systems and regulatory violations at financial institutions related to credit cards, credit reporting and mortgage lending. For example, CFPB examiners found instances where the credit limit of a consumer under the age of 21, with an account associated with a consumer 21 or older, was raised without the consent of the co-applicant. Supervisory Highlights reports are expected to be issued periodically for the purpose of keeping the public and financial services industry apprised of the CFPB’s examination program.  

The CFPB also released its appeals policy for supervised institutions, which permits a supervised institution to request a review of a less than satisfactory compliance rating (a 3, 4 or 5) or any underlying adverse finding, as well as any adverse finding included in a supervisory letter. The appeals process is handled by a committee consisting of the management at the CFPB’s Washington, D.C. headquarters and representatives of the regional offices involved in the matter under review.

Finally, the CFPB issued an updated Supervision and Examination Manual, incorporating procedures for the mortgage origination and servicing, payday lending, consumer reporting and consumer debt collection markets.

Citing a lack of comprehensive data available on a complete, national scale, the CFPB and the Federal Housing Finance Agency announced that they have entered into an interagency agreement to partner on the creation of a National Mortgage Database, expected to be the first comprehensive repository of detailed mortgage loan information. The database will include information compiled throughout the life of a mortgage loan, such as the borrower’s financial and credit profile and the ongoing payment history of the loan. Personally identifiable information will not be maintained in the database. Data will be updated on a monthly basis, tracking as far back as 1998. The database will allow the agencies to (1) monitor the relative health of the mortgage markets and consumers, (2) provide new insight on consumer decision making, (3) monitor new and emerging products in the mortgage market, (4) view both first and second lien mortgages for a given borrower, and (5) understand the impact of consumers’ debt burden. Development of the dataset is currently underway, with early versions of the full dataset expected in 2013.

The Federal Housing Finance Agency’s Office of Inspector General released a report recommending that the FHFA broaden the scope of its supervision of Fannie Mae and Freddie Mac to include review of their deficiency management approaches. The report found that neither Fannie Mae nor Freddie Mac pursue recoveries on deficiencies as their primary loss mitigation strategy, focusing instead on foreclosure alternatives to minimize losses (e.g., loan modifications). The report also noted that the strategies for recouping losses and approaches to pursuing deficiency judgments differ between Fannie Mae and Freddie Mac. For example, Fannie Mae articulated its intention to focus on strategic defaulters in a June 2010 press release and plans to lock-out strategic defaulters, while Freddie Mae has not yet established a policy for pursuing strategic defaulters. Ultimately, the OIG recommended that the FHFA:

• Routinely obtain deficiency-related information (e.g., size of Fannie Mae and Freddie Mac’s deficiencies, recovery rates);
• Incorporate deficiency management into the FHFA’s supervisory review process; and
• Issue written guidance to Fannie Mae and Freddie Mac on managing the process for deficiency collection.

The FHFA plans to develop a framework for deficiency-related information by April 2013; incorporate deficiency management into its supervisory review process by July 2013; and issue guidance to Fannie Mae and Freddie Mac on deficiency management by September 2013.

FinCEN issued an advisory to financial institutions to provide guidance on filing Suspicious Activity Reports on third-party payment processors’ activities. Non-bank or third-party payment processors are defined as “financial institution customers that provide payment processing services to merchants and other business entities, typically initiating transactions on behalf of merchant clients that do not have a direct relationship with the Payment Processor’s financial institution.” The advisory notes that the recent increase in certain criminal activity has highlighted the potential risks that third-party payment processors present to the payment system, for example, money laundering. The advisory provides a list of suspicious activities usually associated with third-party payment processors engaged in improper or illegal activity, including, but not limited to, fraud, multiple accounts at financial institutions and elevated rates of return of debit transactions due to unauthorized transactions.

FinCEN suggests that as part of their due diligence, financial institutions determine whether (1) external investigations or legal actions are pending against a third-party payment processor or its principals, and (2) the third party payment processor has obtained all necessary state licenses, registrations and approvals. Additionally, when reporting suspicious activity involving a third-party payment processor, financial institutions should (1) check the appropriate box on the SAR form to indicate the type of suspicious activity, and (2) include the term “payment processor” in both the narrative and subject occupation portions of the SAR.

The FTC announced that it reached a settlement with companies that own and manage payday loan and check cashing stores for consumer privacy violations, including violations of the Fair Credit Reporting Act’s Disposal Rule. The FCRA requires that persons who maintain or possess “consumer information for a business purpose [ ]must properly dispose of such information by taking reasonable measures to protect against unauthorized access to or use of the information in connection with its disposal.” According to the FTC complaint, on multiple occasions, documents containing consumers’ personal information were found in unsecured dumpsters near the companies’ stores.

The companies agreed to pay $101,500 to settle the case, which also involved alleged violations of the Gramm-Leach Bliley Act’s Safeguards and Privacy Rules and violations of the FTC Act. In addition to the monetary penalty, the settlement enjoins the companies from further violations and requires the companies to implement data security programs that will be subject to independent third-party testing for 20 years.

The United States District Court for the Northern District of Ohio held that the National Bank Act and OCC regulations do not preempt claims that a national bank failed to comply with repossession notice provisions contained in the Ohio Retail Installment Sales Act and Uniform Commercial Code.  Plaintiffs alleged that defendant violated the RISA and UCC by failing to disclose the correct date of the public sale and the correct minimum bid, by failing to conduct a commercially reasonable sale and by charging prohibited fees. Defendant argued that the NBA and OCC regulations preempted plaintiffs’ claims. The Court rejected defendant’s arguments that the claims were preempted through express preemption, field preemption and obstacle preemption.

The Court, relying in part on Aguayo v. U.S. Bank, 653 F.3d 912 (9th Cir. 2011) and Epps v. JP Mortgage Chase Bank, 675 F.3d 315 (4th Cir. 2012), rejected defendant’s argument that the RISA and UCC repossession notice and collateral disposition provisions were expressly preempted. The Court determined that the provisions of the RISA and UCC related to the rights to collect debts and would, therefore, not be preempted pursuant to the savings clause contained in 12 C.F.R. § 7.4008(e)(4). The Court also dismissed the argument that repossession notices are “other credit-related documents,” holding that the term draws its meaning from the other terms listed in section 7.4008(d)(8), which relate to documentation at the early stages of a loan. The Court also rejected defendant’s obstacle preemption argument on the grounds that the debt-collection laws could not interfere with defendant’s lending operations because they came into effect only after a borrower defaulted. The Court further noted that defendant could not claim the benefits of a state law that provided it the right to repossess a vehicle and also claim the law significantly interfered with its ability to engage in the business of banking.

On remand from the United States Court of Appeals for the Fourth Circuit, the United States District Court for the District of Maryland partially dismissed a putative class action alleging violations of the Maryland Credit Grantor Closed End Credit Provisions, the Maryland Consumer Protection Act, breach of contract and unjust enrichment, and seeking declaratory relief. Earlier, the Fourth Circuit reversed the federal court’s dismissal of the class action holding that repossession provisions in the CLEC were not subject to federal preemption under the National Bank Act (see April 17, 2012 Alert). To recap, after repossessing plaintiff’s vehicle, defendant sent plaintiff a notice that the vehicle would be sold at a private sale “sometime after 12/28/2009.” However, as required under the CLEC, defendant failed to provide the location of the car once repossessed or the date and location of the sale. After the Fourth Circuit remanded the case back to the federal district court, defendant moved to dismiss the action.

The Court held that similar to its decision in Bediako v. American Honda Finance Corp., 850 F. Supp. 574 (D. Md. 2012), plaintiff’s CLEC claim was damnum absque injuria—wrong without an injury. In particular, the Court held that nothing under the facts in plaintiff’s complaint entitled her to recover monetary damages. Under the CLEC, even a creditor who violates the repossession notice requirements may recover the principal of the loan.  The CLEC only imposes a monetary penalty when the creditor knowingly collects interest and fees in excess of the principal. After the repossession sale, defendant initially sought to recoup the costs and expenses of the sale from plaintiff. However, defendant subsequently agreed not to seek the repossession sale costs and expenses and the remaining principal balance—despite having that ability under the CLEC. On this same ground, the Court also dismissed plaintiff’s CPA claims.  The Court denied class certification on the remaining two claims—breach of contract and declaratory relief—for lack of commonality and typicality as required under the Federal Rules of Civil Procedure.

The United States District Court for the Southern District of Alabama granted defendant’s, a mortgage servicer, motion for summary judgment in a class action in which plaintiff, a mortgagee, alleged violations of the Truth in Lending Act’s notice requirements.

 Plaintiff executed a promissory note secured by a mortgage for real property; the legal title to the mortgage was held by Mortgage Electronic Registrations Systems, Inc. Plaintiff’s loan was subsequently sold to Fannie Mae. After plaintiff defaulted on her loan, MERS assigned the mortgage to defendant so that defendant could conduct a foreclosure in its own name, in accordance with Fannie Mae Guidelines. Plaintiff initiated an action alleging that defendant violated the TILA by failing to provide her with a notice of transfer of ownership. Defendant moved for summary judgment, arguing that the assignment of mortgage from MERS fell within the TILA’s safe harbor provision, which provides that a servicer is not treated as the owner of an obligation “on the basis of an assignment of obligation from the creditor or another assignee to the servicer solely for the administrative convenience of the servicer in servicing the obligation.”

 Relying on Reed v. Chase Home Finance, LLC, --- F.Supp. 2d ---, 2012 WL 4381473 (S.D. Ala. Sept. 26, 2012), the Court found that an assignment will be deemed “for the administrative convenience of defendant” where (1) the assignment assisted the defendant in performing its duties as a servicer, and (2) the purpose of the assignment was for such assistance. Since the assignment of mortgage was required for defendant to foreclose in its own name, the Court determined the standard was met. The Court also rejected plaintiff’s argument that Fannie Mae’s benefit from the assignment—the avoidance of transfer taxes—did not mean the transfer was not for defendant’s administrative convenience.

The Supreme Court of Ohio, in dismissing a foreclosure action filed by Freddie Mac, ruled that a lender or servicer must obtain an assignment of the promissory note and mortgage prior to initiating foreclosure on a defaulted borrower. The Court addressed the question as one of standing, holding that “[s]tanding is…determined as of the filing of the [foreclosure] complaint,” and therefore a party cannot cure a standing defect by taking assignment of the note and mortgage after a foreclosure action has been initiated.

This case once again highlights the importance of complying with state-specific requirements for conducting foreclosures, which can vary widely from one jurisdiction to another. While likely to attract attention for its outcome, the opinion may be of limited import, beyond its clarification of the pre-requisites for a valid foreclosure under Ohio law.  Many plaintiffs raise procedural challenges to foreclosure in the belief that a successful suit will relieve them of their obligations under their promissory notes. The Ohio Supreme Court explicitly rejected any such notion, noting that its dismissal of the foreclosure action was without prejudice to Freddie Mac because defects in the foreclosure process do not impact the borrower’s indebtedness or continuing default. Having received assignment of both the note and mortgage, Freddie Mac will have standing to initiate a new foreclosure, should the borrowers fail to cure their on-going default.

The California Department of Insurance announced that a force-placed insurer will reduce its rates by 30.5 percent, as a part of an agreement with the Department. The insurer’s rate reduction resulted from the Department of Insurance’s examination of California’s largest force-placed insurers’ annual financial statements. The examination found low loss ratios, which are indicative of excessive rates. The Department of Insurance announced that the agreement will result in a $577 annual cost reduction to homeowners, with total estimated savings of $42.7 million. The Department of Insurance also noted that it is contemplating regulations that would require insurers that write force-placed insurance to file the rates as a commodity line, which would restrict an insurer’s ability to deviate from the standard prior approval template.