Consumer Financial Services Alert - June 25, 2013

To resolve issues "identified during the implementation process," the CFPB issued a proposal to clarify and make "narrow" revisions to the mortgage rules it finalized in January (see January 22, 2013 Alert). The proposal seeks to clarify several provisions of the mortgage servicing rules. First, the CFPB seeks to amend the loss mitigation provisions under the implementing regulation for the Real Estate Settlement Procedures Act, Regulation X. For example, the proposal seeks to allow servicers the flexibility to offer short-term forbearance plans to borrowers with incomplete loss mitigation applications. Second, the proposal seeks to revise the definition of points and fees for purposes of the cap on points and fees under the qualified mortgage rule (see January 10, 2013 Alert) and the threshold for points and fees for high-cost mortgages. In particular, the proposal seeks to add commentary to clarify what compensation must be counted as loan originator compensation for retailers for manufactured homes and their employees. For example, the sales price would not be compensation that is paid for loan origination activities. Third, while it re-examines the definitions of "rural" and "underserved," the CFPB proposed two exceptions for small creditors. For example, under the proposal, all small creditors, regardless of whether they operate in predominantly "rural or underserved" areas will be permitted to originate balloon high-cost mortgages if the loans meet the requirements for qualified mortgages. Fourth, the CFPB seeks to revise the definition of "loan originator.” In particular, the proposal and commentary addresses when certain administrative or clerical employees of a creditor or loan originator become “loan originators” and subject to the loan originator compensation rule (see January 22, 2013 Alert). For example, under the proposal, the definition of “loan originator” does not include an employee of the creditor or loan originator who provides loan originator or creditor contact information to a consumer, provided the employee does not, among other things, “discuss particular credit terms available from a creditor.” Fifth, the proposal clarifies when credit insurance premiums are considered to be calculated and paid on a monthly basis for purposes of the statutory exclusion from the prohibition for certain credit insurance premium calculation and payment arrangements. Recently, the CFPB delayed implementation of the prohibition on credit insurance premiums (see June 6, 2013 Alert). Finally, the CFPB seeks to change the effective date of certain provisions of the rules governing loan originator compensation (e.g., scope, compensation, anti-steering) to be effective on January 1, 2014 as opposed to January 10, 2014. Comments are due by July 22, 2013.

The CFPB launched a webpage to assist in complying with newly adopted mortgage rules, most of which are effective in January 2014 (see January 10, 2013 Alert discussing ability-to-repay and qualified mortgage rule and January 22, 2013 Alert discussing mortgage rules). The webpage feature links to compliance guides and videos providing information on how to comply with the mortgage rules, including, the ability-to-repay and qualified mortgage rules, the rules governing loan originator compensation and escrow requirements and the mortgage servicing rules, among other rules.

In conjunction with the FDIC, the CFPB announced the launch of "Money Smart for Older Adults," a financial resource tool to aid individuals that are 62 and older and raise awareness on how to prevent identity theft and financial exploitation. Among other things, the resource tool provides information on common types of financial exploitation, such as power of attorney fraud, abuse by caregivers, investment fraud, and telephone scams. The resource tool also provides information on identity theft, medical identity theft, and planning for unexpected life events and disasters. Under the Dodd-Frank Act, the CFPB was required to establish an Office of Financial Protection for Older Americans to provide for the financial literacy of older Americans (i.e., individuals who have 62 years or more) on protection from unfair, deceptive, and abusive practices and on current and future financial choices, including through the dissemination of materials to seniors on such topics.

The CFPB solicited comments on a proposed information collection titled, "Policy to Encourage Trial Disclosure Programs: Information Collection," designed to help facilitate access and innovation in the consumer financial products and services markets. The information collections seeks public input in the following areas: (1) whether the collection of information is necessary for the performance of the CFPB’s functions; (2) whether the CFPB’s estimated burden of collecting information is accurate; (3) ways to enhance the information being collected; and (4) ways to minimize the burden on respondents. Comments are due by July 18, 2013.

The FTC issued revised guidance on complying with the Fair Credit Reporting Act’s “red flags” rule, a rule aimed at protecting consumers by requiring certain businesses to implement a written identity theft prevention program to detect the warning signs of identity theft and take steps to prevent the crime and mitigate its damage. The guidance clarifies that only those financial institutions and creditors that have “covered accounts” are subject to the rule. “Covered accounts” include consumer accounts that permit multiple payments or transactions and any other account that a financial institution or creditor offers or maintains that could have a reasonably foreseeable risk to customers or the safety and soundness of the financial institution or creditor from identity theft. In addition, the guidance also provides answers to several FAQs and offers a four-step process for developing a program that will comply with the rule. The four-step process includes: (1) identifying relevant red flags, (2) detecting red flags, (3) preventing and mitigating identity theft and (4) updating the program.

The FHFA released its fifth annual report to Congress summarizing its supervisory and regulatory activity in 2012 including its examination of Fannie Mae, Freddie Mac, and the twelve Federal Home Loan Banks as well as the banks’ Office of Finance. The report notes that while Fannie Mae and Freddie Mac each generated positive income for the first time since 2006, they remained "critical concerns" in 2012, and the ongoing stress in the nation’s housing markets continues to pose significant challenges. The report also highlights that Fannie Mae and Freddie Mac guaranteed $1.3 trillion in new mortgages in 2012, representing 77 percent of all mortgages originated that year, and that since September 2008, Fannie Mae and Freddie Mac have completed nearly 2.7 million actions to prevent foreclosures—more than half of which have been loan modifications.

The Federal Reserve Bank of New York settled with a bank holding company and its a state-chartered bank for violations of the Bank Secrecy Act. The settlement comes after the FRB’s inspection of the bank’s anti-money laundering compliance programs, in which the FRB found deficiencies in the bank’s compliance risk management program, internal controls, customer due diligence procedures and transaction monitoring processes with respect to compliance with BSA/AML requirements and a non-bank subsidiary’s due diligence practices involving foreign correspondent accounts.

The terms of the settlement require both the bank holding company and the bank to submit quarterly reports to the FRB, submit an acceptable revised written BSA/AML compliance program, which includes policies and procedures that ensure account holders are identified and verified and submit a revised suspicious activity monitoring and reporting program. The bank is also required to submit an acceptable revised program for conducting customer due diligence and engage an independent consultant to conduct an account and transaction review to determine whether suspicious activity monitoring and reporting was conducted properly from July 1, 2012 through December 31, 2012.

The United States Supreme Court indicated that it will review an opinion from the United States Court of Appeals for the Third Circuit involving a challenge to a neighborhood redevelopment project in New Jersey based on the disparate impact doctrine. Initially brought in district court, the district court granted summary judgment for defendant on the grounds that plaintiffs, citizens of the neighborhood subject to the redevelopment project, could not show that the redevelopment plan to replace low-income units with middle income units was discriminatory. On appeal, the Third Circuit vacated the district court’s decision on grounds that it had misapplied the standard for determining whether plaintiffs could establish a prima facie case. Applying the disparate impact doctrine to the facts of the case, the Third Circuit first concluded that plaintiffs could show that the project would result in a disparate impact based on statistics provided by an expert, which was sufficient for establishing a prima facie case. Second, after a prima facie case was established, defendants had the burden to provide a legitimate reason for their actions, to which the Third Circuit agreed that alleviating blight was a legitimate interest. Third, once a legitimate interest was shown, defendants also had the burden of showing that a less discriminatory alternative was unavailable. Based on the brevity of the factual record, the Third Circuit was unable to conclude that a less discriminatory alternative was not available and remanded the case back to the district court.

The Supreme Court granted certiorari to decide whether disparate impact claims are cognizable under the Fair Housing Act. The case has important implications given the use of the disparate impact doctrine by many federal agencies in addressing alleged discrimination in mortgage lending. Recently, HUD adopted a rule on the disparate impact doctrine (see February 19, 2013 Alert) and the CFPB reaffirmed that the disparate impact doctrine was applicable when the CFPB exercises its supervisory and enforcement authority (see May 1, 2012 Alert).

The South Carolina Supreme Court rejected borrowers’ claim that a lender engaged in the unauthorized practice of law by entering into a loan modification agreement with the borrowers. After defaulting on their mortgage loans, the borrowers entered into loan modification agreements with their lender. However, the borrowers defaulted on the mortgage and the lender initiated foreclosure proceedings. The borrowers petitioned the South Carolina Supreme Court for declaratory relief.

The South Carolina Supreme Court dismissed the borrowers challenge, holding that lenders do not engage in the unauthorized practice of law by preparing and mailing loan modifications to borrowers and recording the executed documents without participation of a licensed attorney. To hold otherwise, according to the Court, would "create a cost to the consumer outweighed by the benefit." The Court rejected the borrowers’ reliance on Doe v. McMaster, 585 S.E.2d 773 (2003), in which the Court mandated attorney supervision for refinancing of mortgages. The Court distinguished the loan modification process with refinancing of a loan noting that a loan modification is an adjustment to an existing loan to accommodate borrowers who have defaulted; whereas a refinancing is the issuance of an entirely new loan.

The Massachusetts Division of Banks approved a net present value model designed by the Massachusetts Bankers Association for community banks to comply with Massachusetts’ foreclosure law. In August 2012, the Massachusetts legislature passed, and Governor Deval Patrick signed into law, An Act Preventing Unlawful and Unnecessary Foreclosures (see August 7, 2012 Alert). The Massachusetts law requires creditors to, among other things, take reasonable steps and make a good faith effort to avoid foreclosure of certain mortgage loans by considering foreclosures alternatives, including modifying the loan. A creditor is presumed to have acted reasonably and in good faith if it identifies a modified mortgage loan that achieves the borrower’s affordable monthly payment and conducts a compliant NPV analysis comparing the net present value of the modified mortgage loan and the creditor’s anticipated net recovery that would result from foreclosure. The law requires the creditor to agree to modify the loan where the net present value of the modified mortgage loan exceeds the anticipated net recovery at foreclosure. Both the law and its implementing regulations provide that the NPV analysis must be based on models used by the federal Home Affordable Modification Program, FDIC Loan Modification Program, Massachusetts Housing Finance Agency loan program, or any model approved by the Division of Banks. The NPV model developed by the Massachusetts Bankers Association is primarily for use by community banks.

The monitor for the National Mortgage Settlement released a progress report on the mortgage servicers’ compliance with the National Mortgage Settlement’s servicing guidelines. The report, "Summary of Compliance: A Report from the Monitor of the National Mortgage Settlement," summarizes the reports from the individual mortgage servicers and noted that the National Mortgage Settlement is "uncovering problems" with servicers’ performance in three primary areas: (1) the loan modification process; (2) providing single points of contact for distressed borrowers and (3) maintaining accurate billing and statement records. The report also indicated that the monitor intends to exercise his authority under the National Mortgage Settlement to impose discretionary metrics on servicers in order to address these areas, and that he expects to submit additional reports on consumer relief during the next six weeks.