Consumer Financial Services Alert - November 27, 2012

In an effort to avoid potential consumer confusion and reduce the compliance burden for the industry, the CFPB announced that it is extending the deadline to comply with certain mortgage disclosure requirements, until the final rules integrating all of the disclosure requirements under the Truth in Lending Act and Real Estate Settlement Procedures Act take effect. In its July 2012 proposed rule (see July 10, 2012 Alert), the CFPB introduced the integrated TILA-RESPA disclosures, in addition to other mortgage-related disclosures. The proposed rule also proposed delaying the effective date of some disclosures, such as disclosures on a consumer’s liability for debt payment after foreclosure and the creditor’s policy for accepting partial payment. The decision to extend the deadline for compliance was in response to overwhelming support from the industry for additional time to provide the required disclosures, so that the entire TILA-RESPA disclosure integration regime could go into effect at once. The CFPB anticipates publishing these final rules next year.

The CFPB issued a bulletin related to the implementation of the remittance transfer rule under Regulation E.  Earlier this year, the CFPB proposed a final remittance rule to become effective in February 2013 (see August 7, 2012 Alert). The bulletin outlines the CFPB’s plan to issue a proposal in December 2012 to "refine three elements" of the rule regarding foreign remittance transfers, including: (1) errors resulting from incorrect account numbers provided by senders of remittance transfers, (2) the disclosure of certain foreign taxes and third-party fees, and (3) the disclosure of sub-national, foreign taxes. The CFPB also plans to delay implementation of the rule at least until Spring 2013, after it finalizes the proposal.

Several Congress members sent the CFPB a letter in August 2012 requesting that it delay the effective date of the rule by two years, citing concerns that the new rule will result in an increased risk on providers and increased costs to consumers (see August 21, 2012 Alert). The CFPB has already released a safe harbor countries list for remittance transfers (see October 2, 2012 Alert), an International Fund Transfers Small Business Compliance Guide (see October16, 2012 Alert) and an unofficial complete Remittance Transfer Rule and Interpretations.

As required by the Dodd-Frank Act, the CFPB and the FRB announced increases to the dollar threshold for exempt transactions under Regulation Z, the Truth in Lending Act’s implementing regulation, and Regulation M, the Consumer Leasing Act's implementing regulation. Dodd-Frank increased the threshold for exempt transactions from $25,000 to $50,000 and required that the threshold be adjusted annually for inflation, measured by the annual percentage increase in the Consumer Price Index. Effective January 1, 2013, Regulation Z and Regulation M will cover consumer credit transactions and consumer lease transactions, respectively, of $53,000 or less. Currently, Regulation Z and Regulation M cover transactions of $51,800 or less. The dollar threshold in Regulation Z does not apply to real estate transactions or student loan transactions, which are subject to Regulation Z regardless of the transaction dollar amount.

The CFPB also increased the fee trigger for protection under the Home Ownership and Equity Protection Act of 1994 from $611 to $625 for 2013. As a result of the adjustment, the HOEPA provisions of Regulation Z will apply to loans in which the total points and fees exceed the greater of $625 or 8% of the total loan amount.

The CFPB and Department of Education announced that over 500 colleges and universities have committed to adopting the Financial Aid Shopping Sheet. The Shopping Sheet provides a standardized award letter allowing students to more easily compare financial aid packages and make more informed decisions on where to attend college. It is expected that the participating colleges and universities will begin using the Shopping Sheet for the 2013-2014 school year.

The United States District Court for the Central District of California granted the CFPB's petition for a preliminary injunction against a number of individuals alleged to have operated a fraudulent loan modification scheme. In Consumer Financial Protection Bureau v. Gordon, et al., the CFPB investigated and later charged a California attorney and several associates with numerous violations of the Consumer Financial Protection Act, based on their operation of a scheme designed to solicit payment from distressed mortgage borrowers in exchange for the negotiation of loan modifications. The terms and conditions of defendants’ services violated the CFPA for, among other reasons, collecting fees for modification services when, in fact, no modification was procured and accepted. The Court issued the preliminary injunction following its prior issuance of a temporary restraining order, asset freeze and appointment of a receiver to investigate defendants’ operations in July of 2012 (see August 7, 2012 Alert). Finding that good cause existed to continue these measures, the Court issued the injunction as necessary to preserve its ability to "grant effective final relief for consumers in the form of monetary restitution and disgorgement or compensation for unjust enrichment." The Gordon matter offers an early precedent for the prosecution of fraudulent mortgage relief services and illustrates the range of measures available to the CFPB in its efforts to combat fraud in diverse aspects of the consumer financial services sector.

The CFPB announced that, in conjunction with the FTC, it is issuing warning letters to mortgage lenders and brokers concerning potentially misleading mortgage advertisements in violation of the Mortgage Acts and Practices Advertising Rule and Section 5 of the FTC Act. Both agencies have also launched formal investigations. The Mortgage Acts and Practices Advertising Rule, effective August 2011, prohibits unfair or deceptive acts or practices regarding mortgage loans, loan modifications and foreclosure rescue services; the CFPB and FTC share enforcement authority under the rule. The warning letters focus on mortgage advertisements marketed to the elderly and veterans. The warning letters and formal investigations were sparked by a review conducted by both the CFPB and FTC of hundreds of randomly selected mortgage-related ads, including mortgage loans, refinancings and reverse mortgages. According to the CFPB, the review identified several problems with the advertisements: (1) misrepresentation about government affiliation, (2) inaccurate information about interest rates, (3) misleading statements concerning the costs of reverse mortgages, and (4) misrepresentations about the amount of cash or credit available to a consumer.

The CFPB amended the December 21, 2011 interim final rule establishing a new Regulation V, the implementing regulation for the Fair Credit Reporting Act, to correct typographical and other technical errors in some of the appendices to the interim rule containing model forms. The errors corrected include replacing references to the FTC and its website with references to the CFPB and its website, and correcting typographical errors in Spanish language translation. The amended rule also reflects the promulgation of guidelines and regulations addressing certain obligations of furnishers and users of consumer reports. The corrections were effective November 14, 2012, but use of the model forms, as originally published, will be allowed until further notice. The CFPB expects that orderly discontinuation of such forms will take place when it issues a final rule in 2013.

The CFPB announced the launch of Project Catalyst, an initiative designed to encourage consumer-friendly innovation and entrepreneurship in markets for consumer financial products and services through outreach and collaboration. Through Project Catalyst, the CFPB plans to engage more closely with companies and entrepreneurs in the innovation community to establish firm lines of communication with innovators and understand new and emerging products in the market. Identifying the goals for Project Catalyst—outreach and collaboration—Director Richard Cordray stated that two approaches in its collaboration are promising: data sharing and disclosure testing. As part of the inaugural phase of Project Catalyst, three companies, BillGuard, Plastyc and Simple, have agreed to provide the CFPB with anonymized data about consumer behaviors and trends. The CFPB expects to use the data to better inform policy making decisions.

The FDIC and FinCEN recently assessed a $15 million civil money penalty against an insured state chartered nonmember bank for alleged violations of the Bank Secrecy Act and its implementing regulations. Specifically, the FDIC and FinCEN found that the bank failed to establish and implement an anti-money laundering program that complied with the FDIC’s requirements. At a minimum, an AML program must: (1) provide a system of internal controls to assure ongoing compliance, (2) provide for independent testing for compliance conducted by bank personnel or by an outside party, (3) designate an individual or individuals responsible for coordinating and monitoring day-to-day compliance, and (4) provide training for appropriate personnel. The FDIC and FinCEN further found that the bank failed to timely report suspicious activity, having filed 46 late suspicious activity reports, often a year or longer after the underlying activity occurred, covering $1.6 billion in suspicious activity.

The FDIC and FinCEN determined that the bank’s AML program was inadequate for its high risk customers, including third-party payment processors and money services businesses. The agencies found that the bank failed to adequately assess many of the AML risks outlined in FinCEN’s recent advisory, “Risk Associated with Third Party Payment Processors," (see November 13, 2012 Alert). For example, with respect to third-party payment processors, the bank ignored "red flags" such as high unauthorized return rates, and with respect to money services business customers, failed to undertake a risk review of its check cashing customers, despite rapid growth of the business line.

Martin Gruenberg, Acting Chairman of the FDIC, noted the civil money penalty “emphasizes the importance of having strong internal controls to assure compliance with anti-money laundering regulations and to detect and report potential money laundering or other illicit financial activities."

The Department of Treasury released a report reviewing the implementation of its 2011 guidance containing single point of contact requirements. The report, "Making Contact: The Path to Improving Mortgage Industry Communication with Homeowners," noted that three implementation models have emerged: (1) Direct Model, (2) Pod Model, and (3) Appointment-Based Model. Under the Direct Model, the most common model, an individual SPOC serves as the relationship manager; under the Pod Model, a team of SPOCs is available to assist homeowners in the loan modification process; and under the Appointment-Based Model, a customer service representative takes inbound calls and schedules an appointment with a SPOC. The report also noted that challenges remain in the implementation of SPOC requirements. In particular, the report noted that the effectiveness, assignment timing, staffing and caseload, communications, and compensation and career path for SPOC employees warrants additional review by servicers.

Another New Jersey court has rejected a claim to vacate a final judgment of foreclosure where mortgagors delayed in asserting a defense to the foreclosure. Here, the mortgagors argued that the mortgagee lacked standing to bring a foreclosure action on the ground that an assignment of mortgage was not signed and recorded until 7 months after the foreclosure complaint was filed.

The Court determined that in the post-judgment context, the mortgagors’ delay of several years prior to asserting the defense precluded lack of standing from being a meritorious defense to the foreclosure complaint. The Court also noted that lack of standing would not render a judgment void because, in New Jersey, standing is not an element of jurisdiction. As a result, the Court affirmed the lower court’s holding that the mortgagors did not file their motion within a reasonable time after the final judgment of foreclosure. This ruling is one of many New Jersey court rulings demonstrating an unwillingness to allow borrowers to sit on their rights during foreclosure proceedings (see October 16, 2012 Alert).

The United States District Court for the Eastern District of California dismissed a putative class action brought against a mortgage lender, its affiliates and private mortgage insurance providers for alleged violations of the Real Estate Settlement Procedures Act and common law unjust enrichment. Plaintiff's claims arose out of captive reinsurance arrangements pursuant to which private mortgage insurance providers, with whom he did not contract, were required, as a condition of doing business with the mortgage lender, to enter into reinsurance contracts with an affiliate of the mortgage lender. Citing HUD’s characterization of captive PMI arrangements as a "sham" when "premium payments... are given to the reinsurer even though there is no reasonable expectation that the reinsurer will ever have to pay,” plaintiff alleged that defendant’s reinsurance arrangement with its PMI providers violated RESPA. Plaintiff also alleged unjust enrichment based on the amounts ceded to its PMI affiliates and the steady stream of business the PMIs received in return for ceding premiums.  Defendants sought to dismiss the class action.

The Court dismissed the RESPA and common law claims against the mortgage lender and its affiliates for failure to timely file suit. The Court rejected plaintiff's equitable tolling and discovery rule claims on the ground that plaintiff did not exercise due diligence in perceiving and reserving his legal rights. The Court was also not swayed by plaintiff’s fraudulent concealment arguments, holding that the Ninth Circuit has repeatedly rejected claims of fraudulent concealment where it serves as the basis of plaintiff's claim reasserting the principle that such arguments are untenable because they ‘merge the substantive wrong with the tolling doctrine’ and ‘would eliminate the statute of limitations.’”

Most notably, the Court dismissed, with prejudice, plaintiff's claim against the PMI defendants for lack of standing. The Court reasserted its previous finding that plaintiff failed to allege that any injury he suffered was “fairly traceable to the non-contracting defendants.” Specifically, the Court found that plaintiff failed to allege facts establishing a connection between the PMI defendants, such that a court could find plaintiff's allegations— that the PMI defendants acted in concert” to “effectuate a captive reinsurance scheme”—plausible.

The United States District Court for the Western District of Virginia has issued an order striking the class allegations from a putative class action complaint on competing grounds—if named plaintiff signed the client agreement, then the arbitration clause barring class action litigation would be valid and enforceable; if she did not sign the agreement, her allegations failed to meet the commonality prong necessary to plead a class action under Federal Rule of Civil Procedure 23.

Significantly, in striking the class-wide allegations based on the issue of the client agreement, the opinion arguably imposes a higher level of specificity on the pleading of consumer class actions. Specifically, named plaintiffs (and their counsel) must take care to articulate a specific position as to any agreement that may or may not govern their relationships with defendants and plead their putative classes accordingly. If a named plaintiff concedes the existence of an operative agreement, his or her named class may be broader, as most consumers do execute such agreements in connection with financial services products, but his ability to engage in class action litigation may be forestalled by a binding arbitration clause.  Alternatively, a plaintiff may deny the existence of a binding client agreement, but, in doing so, he runs the risk that his putative class may be smaller (or non-existent) due to a lack of commonality, as was the outcome in this case.

The recent enactment of the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012 has resulted in amendments to the Servicemembers Civil Relief Act that directly impact the timing and validity of foreclosures on properties held by armed forces personnel. Effective February 2, 2013, the time period during which the SCRA renders invalid any sale, foreclosure, or seizure of property based on a breach of a secured obligation will be extended from 9 months to one year following the borrower's period of military service. This extension will not affect any actions taken pursuant to either a court order or waiver by the servicemember. The amendments also extend the period during which a court, sua sponte or upon motion by the servicemember, may stay a foreclosure proceedings or "adjust the obligation to preserve the interests of all parties" from 9 months to one year after a servicemember's period of military service. The applicable time period for a stay or adjustment under this provision has likewise been extended to include one year following the period of military service. These extensions are temporary; beginning January 1, 2015, the relevant time periods will drop from one year to 90 days.