Consumer Financial Services Alert - January 10, 2013

In conjunction with its Mortgage Policy Field Hearing today, the CFPB has finalized the ability-to-repay and qualified mortgage rules. In announcing the final rule, Director Richard Cordray stated that the rules are “designed to assure the reliability of mortgages.” Although the text of the rule is expected to be available on the CFPB’s website beginning tomorrow, the CFPB released a factsheet and summary of the ability-to-repay and qualified mortgage rules. Consistent with urges from Congress and the mortgage industry groups (see July 24, 2012 and May 1, 2012 Alerts), the final qualified mortgage rule creates a safe harbor for loans that satisfy the definition of a qualified mortgage and are not “higher priced”, as defined by the Federal Reserve Board. Under the ability-to-repay rule, creditors are required to consider, at a minimum, the following eight underwriting factors: (1) current or reasonably expected income and assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (4) the monthly payment for mortgage-related obligations, (6) current debt obligations, alimony and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. The rule is effective January 10, 2014.

The CFPB will hold a subsequent field hearing on mortgage policy in Atlanta, Georgia on January 17, 2013 when more mortgage related rules are expected.

Congress has passed and the President has signed a bill that amends Section 1821(t) of the Federal Deposit Insurance Act—governing the sharing of information without waiving privilege—to include the CFPB as a “covered agency.” Section 1821(t) concerns covered entities sharing information with an agency without waiving privilege.  Although the CFPB previously issued a guidance bulletin in response to concerns from supervised entities over the protection of privileged information (see February 21, 2012 Alert), without the legislative fix, supervised entities were concerned that the CFPB would be required to turn over privileged information to third parties.

The CFPB announced that in line with Project Catalyst (see November 27, 2012 Alert), it is proposing a policy to approve requests by supervised entities for waivers from consumer disclosure obligations to allow for the testing of alternative disclosures. The CFPB hopes the proposed policy will lead to more effective disclosure rules and practices. The policy is divided into four sections:  (1) Section A describes which proposed programs will be considered eligible for a temporary waiver; (2) Section B lists factors the CFPB may consider in deciding which eligible programs to approve for such a waiver; (3) Section C describes the CFPB’s procedures for issuing waivers; and (4) Section D describes how the CFPB will disclose information about the programs. Some factors the CFPB will consider in determining whether to grant a waiver include improvements to consumer understanding, increased cost effectiveness and decreased consumer risk. The comment deadline is February 15, 2013.

The CFPB has released its report on the findings of its first major study on credit reporting practices, Key Dimensions and Processes in the U.S. Credit Reporting System: A Review of How the Nation’s Largest Credit Bureaus Manage Consumer Data.  According to CFPB Director, Richard Cordray, the report provides “baseline knowledge” about the industry. The CFPB is the first federal government agency with a mandate to oversee both credit reporting agencies and those institutions that provide credit reporting agencies with consumer data (see July 24, 2012 and September 5, 2012 Alerts). As detailed in the CFPB’s report, financial institutions, in particular a small number of the nation’s largest banks, provide a significant amount of this consumer data to CRAs. According to the report, the ten largest providers of consumer credit data account for 57% of the information sources CRAs use to compile consumer credit reports. These information sources, known as “trade lines,” include a number of products frequently originated and serviced by financial institutions, such as car loans, home mortgage loans, and credit card accounts.

The CFPB, in conjunction with its review of the Credit Card Accountability Responsibility and Disclosure Act of 2009, announced that it is seeking public comment on the CARD Act’s impact on consumers and the credit market. Areas that the CFPB is seeking comment on include, for example, the CARD Act’s impact on the substantive terms and conditions of credit card agreements and pricing, marketing, underwriting and other practices; and whether the CARD Act adversely impacted the safety and soundness of credit card issuers.  The comment deadline is February 19, 2013.

In a case involving the first joint enforcement action between the CFPB and several state agencies, the United States District Court for the Southern District of Florida has entered an order requiring a nationwide debt-relief services company to refund up to $100,000 to consumers who were charged advance fees for debt settlement services. The complaint alleged that defendant instructed consumers to cease making payments to their pay-day loan creditors, and, instead, to authorize electronic fund transfers into a designated account controlled by defendant’s payment processor.  Defendant told consumers that once the account balance reached a certain level, it would attempt to settle the consumer’s debt.  However, prior to actually settling any debt, and in violation of FTC Rules, the Dodd-Frank Act, and various state consumer protection laws, defendant and its payment processor collected a variety of advance fees, such as processing fees.

In addition to the civil money penalty, the debt-relief company also agreed to the entry of an injunction barring further unlawful conduct and ongoing compliance monitoring. The relatively small civil money penalty likely reflects the debt-relief company’s cooperation with the CPFB following notice of the joint investigation. This action is part of a broader effort by the CFPB to address unlawful conduct in the consumer debt-relief industry.

The CFPB announced proposed revisions  to its final rule on remittance transfers, issued on February 7, 2012, and supplemented on August 20, 2012 (see August 7, 2012 Alert). The proposed revisions amend the disclosure requirements imposed on remittance transfer providers with respect to foreign taxes and the fees imposed by the designated recipient’s financial institution. For example, under the proposed revisions, a remittance transfer provider will only be required to disclose foreign taxes imposed by a central government; however, if local foreign taxes are not included in the disclosure, an indication that the disclosed amount is an estimate will be required.  In addition, if a remittance transfer provider does not have specific knowledge regarding the variables that impact the amount of foreign taxes, the remittance transfer provider “may disclose the highest possible tax that could be imposed on a remittance transfer with respect to any unknown variable.”

The proposed revisions also amend the error resolution procedures. Under the proposed revisions, if certain conditions are met, a remittance transfer provider is relieved from bearing the cost of funds that cannot be recovered when funds are not received by a designated recipient due to incorrect or insufficient information. The CFPB extended the rule’s effective date from February 7, 2013, to 90 days after the proposal is finalized. Comments on the delay of the effective date are due January 15, 2013 and comments on the proposed changes to the disclosure and error resolution requirements are due January 30, 2013.

The CFPB published its Student Lending Examination Procedures.  The procedures include guidance for examination of all aspects of private education loans and for examination of the servicing of legacy Family Federal Education Loan Program loans. The Examination Procedures contain the following seven modules, which may be used in various combinations during examinations: (1) advertising, marketing, and lead generation; (2) customer application, qualification, loan origination and disbursement; (3) loan repayment, account maintenance, payoff processing and payment plans; (4) customer inquiries and complaints; (5) collections, accounts in default and credit reporting; (6) information sharing and privacy; and (7) examination conclusion and wrap-up (required in all examinations).

The CFPB announced that it has reorganized the Office of Supervision staff and offices. The Office of Supervision was previously organized into two offices—the Office of Nonbank Supervision and the Office of Large Bank Supervision—but will now be organized into the Office of Supervision Examinations and the Office of Supervision Policy. The Office of Supervision Examinations will plan and execute examinations and ensure policies and procedures are followed, and the Office of Supervision Policy will ensure that the CFPB’s supervision policy is consistent with the law and the CFPB’s mission, and across products, charters, and regions.

The CFPB announced that the ceiling on allowable charges under Section 612(f) of the Fair Credit Reporting Act will remain unchanged at $11.50 for 2013. The FCRA requires consumer reporting agencies, upon request from a consumer, to disclose, among other things, certain information contained in the consumer’s file, source of the information and inquiries on the consumer’s file. Section 612(f) of the FCRA allows a consumer reporting agency to charge consumers a reasonable amount for making this disclosure to the consumer. The FCRA also requires the CFPB to increase the amount of allowable charges each year based on the Consumer Price Index.

The CFPB issued a final rule specifying how it issues rules and when rules will be considered issued.  Under the rule, CFPB rules are deemed issued upon the earlier of (1) the posting of the final rule on the CFPB’s website, or (2) the publication of the final rule in the Federal Register.

The CFPB issued a final rule increasing the asset-size exemption threshold for banks, savings associations and credit unions from $41 million to $42 million, based on the annual percentage change in the Consumer Price Index.  The Home Mortgage Disclosure Act and its implementing regulation, Regulation C, require mortgage lenders in metropolitan areas to collect data about their housing-related lending activity and annually report the data to their federal regulator.  Depository institutions meeting asset-size limitations are exempt from the disclosure requirements. As of December 31, 2012, banks, savings associations and credit unions with assets of $42 million or less are exempt from collecting data in 2013.

The FTC announced that it has obtained a temporary restraining order against a debt relief operation that allegedly charged financially distressed consumers hundreds of dollars based on false claims that it could obtain consolidation rates as low as zero percent. The FTC charged the debt relief operation with multiple violations of the FTC Act for misrepresentations to consumers, as well as for violations of the Telemarketing Sales Rule for (1) charging fees prior to providing any debt relief; (2) calling consumers listed on the Do Not Call Registry; (3) misrepresenting their identity, the purpose of the calls, and the nature of the goods and services being sold; and (4) making illegal robocalls. The TRO prevents the debt relief operation from collecting any fees for its product or services and requires the operation to disable its website.

The FDIC has issued general guidance on the emerging market for mobile payment services, encouraging supervised banks to be proactive in addressing a new technology—mobile payments—that is expected to achieve a significant share of the traditional market for consumer payment processing. The FDIC defines “mobile payment” as the use of a mobile device, often a smartphone or tablet computer, to initiate a transfer of funds. The FDIC’s concern is that while traditional banks remain an integral part of the mobile payment market, these banks have much less control over the process, and often must rely on unrelated non-bank entities to complete the mobile payment transaction. For this reason, the FDIC emphasized the need for institutions to be “particularly conscious” of the potential risk of fraud in mobile payments. The FDIC also advised institutions that the regulatory expectations for managing mobile payments are “generally consistent” with those associated with other financial services, and that there are no safe harbors or carve-outs for mobile payment transactions. For example, institutions are required to provide disclosures under the Truth in Lending Act for mobile payment transactions using credit cards.

The FTC has issued its report to Congress detailing the steps it has taken to implement new practices for debit card transactions mandated by the Dodd-Frank Act. The FTC’s report describes a multi-faceted approach to implementing rules intended to improve all aspects of the debit card market, ranging from consumer disclosures to the mechanics of payment card networks. The FTC sought input from retailers that process debit card payments, consumers who use these products, and law enforcement personnel tasked with combating fraud in the market for debit cards. Recognizing the popularity of debit cards within minority and immigrant communities, the FTC published guidelines for merchants in a host of languages, including Spanish, Korean, Vietnamese and Chinese. The FTC states that its process for implementing new debit card regulations under Dodd-Frank is ongoing, and will include additional work on the emerging market for mobile payment systems and review of payment networks for compliance with the provisions of the Dodd-Frank Act and the Federal Reserve rules governing offers of consumer credit linked to debit card payment networks.

The United States Court of Appeals for the Ninth Circuit has affirmed the dismissal of a claim under the Real Estate Settlement Procedures Act by borrowers alleging that letters from the borrowers challenging the monthly payment due on their loan were “qualified written requests” triggering the servicer’s duty to respond under RESPA, RESPA provides an action for damages where a servicer fails to respond to certain types of inquiries from borrowers relating to the servicing of their loans, inquiries known as “qualified written requests.”  The lower court held that because the letters did not seek information relating to the servicing of the loan, but rather challenged the loan’s terms, they did not constitute qualified written requests. Plaintiff appealed.

The Ninth Circuit considered both the statutory definition of “qualified written request” and the broader policy objectives underlying RESPA, which Congress intended to serve consumer protection purposes. Affirming the dismissal, the Ninth Circuit focused on the statute’s requirement that to qualify as a “qualified written request,” a letter must request information relating to the servicing of a loan. Excluded from this definition would be requests for information relating to the “transactions and circumstances surrounding a loan’s origination.” The Ninth Circuit’s ruling follows the reasoning adopted by the Seventh Circuit when it considered this issue in Catalan v. GMAC Mortgage Corp., 629 F.3d 676 (7th Cir. 2011). Together, these opinions provide a strong precedent establishing that RESPA does not provide a means of challenging the validity of an underlying debt or the specific terms of a loan agreement. 

The United States Court of Appeals for the Ninth Circuit has held that federal law preempts a state consumer protection statute related to the posting of overdrafts to consumers’ bank accounts, but does not preempt state law prohibiting fraudulent and misleading representations.  Plaintiffs filed a class action against defendant, a bank, alleging that defendant’s use of high-to-low posting of overdrafts was unfair and fraudulent under the California Unfair Competition Law, among other claims. The practice of high-to-low positing is a bookkeeping method in which debit and credit card transactions are posted to a consumer’s bank account from highest to lowest, regardless of the order the transactions are presented to a bank. The lower court held that defendant’s high-to-low posting method was an unfair practice in violation of California law; permanently enjoined the bank from the use of high-to-low posting of overdrafts; and awarded $203 million in restitution to plaintiffs. Defendant appealed, arguing that the National Bank Act preempted the use of a state law to dictate its posting method.

In finding that the NBA and OCC regulations preempt state regulation of the posting order, the Ninth Circuit noted that “the ‘business of banking’ and the power to ‘receive deposits’ necessarily include[s] the power to post transactions.”  Further, the Ninth Circuit noted that OCC interpretive letters have considered high-to-low posting and associated overdraft fees to be a “pricing decision authorized by federal law.” Concluding that the “ability to choose a method of posting transactions is a useful and necessary component of a posting process that is integrally related to the receipt of deposits,” the Court reversed the lower court’s ruling.  The Ninth Circuit also rejected plaintiff’s argument that defendant’s posting practice should be considered safe and sound banking principles under OCC regulations, holding that whether such practices are safe and sound banking principles “is an inquiry that falls squarely within the OCC’s supervisory powers.”

However, the Ninth Circuit rejected defendant’s argument that California law prohibiting misleading statements was preempted by OCC regulations, noting that in warning banks that they may be subject to state laws prohibiting unfair or deceptive acts or practices, the OCC cited to the California UCL. The Ninth Circuit held that because California’s prohibition on misleading statements did not significantly interfere with the bank’s ability to offer checking accounts or choose a posting method, the law was not preempted. Ultimately, the Ninth Circuit vacated the injunction and the award of $203 million in restitution, but remanded the issue of fraudulent or misleading representations concerning defendant’s posting order back to the lower court to determine the appropriate relief.

The Ninth Circuit has issued an amended opinion clarifying that “prior express consent” under the Telephone Consumer Protection Act means “consent to call a particular telephone number in connection with a particular debt that is given before the call in question is placed.” The TCPA prohibits calls made to cellular telephones using an automatic telephone dialing system or an artificial or prerecorded voice unless made for emergency purposes or “with the prior express consent of the called party.” This ruling offers protection to parties that obtain a debtor’s cell phone number even after the original transaction resulting in the debt has concluded.

Defendant argued the lower court erred in provisionally certifying a class because, in part, individualized issues of consent should have precluded a finding of typicality and commonality—some debtors might have agreed to be contacted at any telephone number, including numbers obtained after the original transaction. The Ninth Circuit originally rejected this argument. Relying on a 2008 FCC declaratory ruling, the Ninth Circuit held that “prior express consent is deemed granted only if the wireless telephone number was provided by the consumer to the creditor, and only if it was provided at the time of the transaction that resulted in the debt at issue.”  Defendant, along with amici, filed a petition for panel rehearing or rehearing en banc.  The Ninth Circuit denied the request, but amended the original opinion to substantially broaden its interpretation of “prior express consent.” Relying on the same 2008 FCC ruling, the Court clarified that the phrase means consent (1) tied to the particular debt, (2) to call a particular number, (3) that is given before the call in question. This suggests that consent may be given to any party—e.g., the original creditor, subsequent purchasers, debt collectors—and at any time before the subject call, so long as the consent is connected to the debt at issue.

This broader rule makes sense in light of the practical realities of modern business, where consumers may provide their cell phone numbers at varying times during the business relationship. The decision also leaves open the possibility that evidence of varied timing for consent may help defeat class certification, although the provisional certification was upheld in Meyer because PRA did not show “a single instance where express consent was given before the call was placed.”

The Office of the Comptroller of the Currency and the Federal Reserve Board announced that they have reached an agreement in principle with ten mortgage servicing companies that are currently subject to enforcement actions for mortgage loan servicing and foreclosure practices.  The mortgage servicing companies have agreed to provide $3.3 billion in direct payments to consumers harmed by the servicers’ practices and $5.2 billion in other relief (e.g., deficiency judgment forgiveness and loan modifications). The settlement is in response to complaints by both industry and consumer groups that the Independent Foreclosure Review was costly and was not providing relief to consumers.