Consumer Financial Services Alert - August 6, 2013

The CFPB filed a complaint in the United States District Court for the District of Utah against a mortgage company and two of its principals, alleging that the mortgage company gave bonuses to loan originators who steered consumers into mortgages with higher interest rates in violation of the Consumer Financial Protection Act and the Federal Reserve Board’s 2010 compensation rule, which prohibits any person from compensating a loan originator based on a term or condition of a mortgage loan. In particular, the CFPB alleged that in an attempt to circumvent the 2010 compensation rule issued by the FRB, the mortgage company paid quarterly bonuses to loan officers in amounts that varied based on the interest rates of the loan. The CFPB further alleged that the mortgage company did not refer to the quarterly bonus program in its written compensation agreement with its loan officers, nor did the mortgage company refer to the quarterly bonus plan in any written policies—in violation of the CFPA and the record retention requirements of Regulation Z.

The CFPB solicited comments on a proposed information collection titled, “Fair Credit Reporting Act (Regulation V).” The information collection seeks public input on: (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 September 23, 2013.

The CFPB is also renewing its proposed information collection, titled “Truth in Savings (Regulation DD).”  Comments are due August 30, 2013.

The CFPB’s Student Loan Ombudsman released its mid-year report on private student loans. The report identifies complaints made by private student loan borrowers (e.g., loan origination or servicing). The CFPB Ombudsman noted that the report seeks to highlight issues that may be cause for particular concern—either because of the amount of related complaints received or because of the practices described by consumers. Many of the complaints received by the CFPB relate to consumer’s inability to modify the repayment terms of their loan to either lower the monthly payment or reflect the borrower’s improved credit profile and creditworthiness. The report also detailed other challenges private student loan borrowers face, including protections under the Servicemembers Civil Relief Act. This report is a follow-up to the report issued by the CFPB in October 2012 (see October 16, 2012 Alert).

The FDIC, OCC, and FRB issued a joint statement encouraging financial institutions to work with private student loan borrowers that are encountering financial difficulty. The agencies noted that “[p]rudent workout arrangements are consistent with safe-and-sound lending practices.” The agencies also noted that financial institutions’ student loan workout arrangements resulting in adverse credit classifications or troubled debt restructurings under GAAP will not be criticized. Finally, the agencies stated that financial institutions should provide clear and easily accessible information to student loan borrowers regarding available workout arrangements, including eligibility requirements and the modification process.

The FRB announced amendments to its prior enforcement action against a mortgage servicer for deficient practices in mortgage loan servicing and foreclosure processing. The amendments are similar to those announced in early 2013 with other mortgage servicers (see March 5, 2013 Alert) and will require the mortgage servicer to pay $230 million in cash payments to borrowers. The amendments will allow borrowers whose homes were in some stage of the foreclosure process with the mortgage servicer in 2009 and 2010 to receive compensation. Similar to the previous amended consent orders with other servicers, the mortgage servicer is expected to undertake loss mitigation efforts focused on foreclosure prevention. The amendments to the consent order replace requirements related to the Independent Foreclosure Review for the mortgage servicer.

The United States District Court for the District of Columbia dismissed a challenge to Title X of the Dodd-Frank Act, which created the CFPB. Plaintiffs—a Texas federally-chartered bank, two advocacy groups, and eleven states—filed suit challenging the constitutionality of the CFPB and the appointment of Richard Cordray as director of the CFPB. In particular, plaintiffs alleged that the recess appointment of Mr. Cordray violated Article II, Section 2 of the Constitution—the Appointments Clause—because President Obama failed to obtain the “advice and consent” of the Senate. Defendants moved to dismiss the complaint arguing that plaintiffs lacked standing under Article III of the Constitution, or in the alternative, that plaintiffs’ claims were not ripe.

At the outset, the Court noted that other than the Texas federally-chartered bank, plaintiffs were not subject to regulation or supervision by the CFPB, and thus faced a significant hurdle in attempting to establish standing. In analyzing whether bank-defendant had standing, the Court noted that to have standing, the bank had to show some “certainly impending” harm resulting from a rule issued under Mr. Cordray’s directorship. Although to prove standing, the bank alleged that it suffered injury from compliance costs incurred and suffered injury from the CFPB’s remittance rules, mortgage servicing rules, and rules prohibiting unfair trade practices and acts, the Court ultimately held that the federally-chartered bank failed to make such a showing. Any compliance costs, according to the Court, were self-inflicted, as the bank voluntarily undertook such costs. The Court also rejected the bank’s alleged injuries based on specific rules issued by the CFPB. The Court held that the bank offered too few remittances to be subject to the CFPB’s remittance rules and the bank had never been subject to an enforcement action by CFPB related to any unfair trade practices or acts. Of import, the Court noted that at the time of filing the suit in June 2012, the CFPB’s mortgage servicing rules had not been issued, and thus, the bank identified no impending injury from any of them. The Court inferred that the bank’s decision to exit the mortgage lending business before rules were promulgated was based on a “generalized fear (or dislike) of the law, and not the mere possibility of increased costs associated with the rules governing mortgages.” As such, the Court held that all of the bank’s alleged injuries were too attenuated to confer standing, and too dependent on contingencies to present a ripe dispute.

The Court also dismissed challenges to two other provisions of the Dodd-Frank Act—the provisions establishing the Financial Stability Oversight Council and allowing for designation of certain entities as systemically important financial institutions and the provisions that established the Orderly Liquidation Authority—also for lack of standing and failure to present a ripe controversy.

The California Court of Appeals reversed a lower court’s ruling and held that California’s anti- deficiency statute precluded a lender from seeking a deficiency judgment against a borrower following a short sale. After plaintiff, a borrower, defaulted on her mortgage loan, she negotiated with a third party to sell her home for a price less than the outstanding balance on the mortgage loan. Defendant, a mortgage lender, agreed to the short sale with certain conditions; specifically that plaintiff was still liable for any deficiency balance remaining on the loan after application of the proceeds from the sale. After the property was sold, defendant began collection activities on the remaining balance of the mortgage loan. As a result, plaintiff filed suit seeking a  declaratory judgment that the requested deficiency violated California’s anti-deficiency statute. The lower court ruled, among other things, that California’s anti-deficiency statute only applied after a property was sold by judicial or non-judicial foreclosure. Plaintiff appealed.

The California Court of Appeals ruled that the plain language of the anti-deficiency statute was not limited to foreclosure sales—or property sold after a judicial or non-judicial foreclosure. The Court also cited legislative intent to broadly construe the statute to accomplish its twin aims—(1) discouraging the overvaluation of real property; and (2) protecting borrowers during times of economic decline—and even cited one item of legislative history expressly stating that the statute applied to short sales. Defendant countered that plaintiff was required to invoke the “security first rule,” which requires a lender to foreclose on secured property before attempting to collect the accelerated underlying debt, and insist on foreclosure in order to avoid a deficiency judgment. In rejecting defendant’s argument, the Court ruled the “security first rule” applies only to judicial foreclosures, and has no place in this case involving a short sale proposed by plaintiff after defendant commenced a non-judicial foreclosure proceeding. Citing Lawler v. Jacobs, 83 Cal.App.4th 723, 736-737 (2000) and Palm v. Schilling, 199 Cal.App.3d 63, 76 (1988), the Court also rejected defendant’s argument that plaintiff waived her claims under California’s anti-deficiency noting that it is well-established that such claims cannot be waived.

The United States Court of Appeals for the Eleventh Circuit held that an assignment of mortgage from MERS to a servicer, which allowed the servicer to commence foreclosure proceedings, was for the “administrative convenience of the servicer in servicing the obligation.” As a result, the servicer was exempt from the disclosure requirements under the TILA, which would have otherwise required the servicer to provide written notification of the transfer within 30 days of the assignment. Plaintiffs, borrowers facing foreclosure, filed a class action against defendant, a mortgage servicer, alleging that defendant failed to inform plaintiffs that it had been assigned an interest in their mortgage in violation of the Truth in Lending Act. The lower court granted defendant’s summary judgment motion holding that as a servicer, defendant was exempt from such disclosure requirements under TILA. Plaintiffs appealed.

In reaching its holding, the Court relied on the Merriam-Webster Online Dictionary to define “administrative convenience” as “that which allows performance of a managerial action or requirement.” The “administrative convenience” exception is triggered if the servicer was assigned the obligation “solely for the administrative convenience of the servicer in servicing the obligation.” Since defendant would not have been able to foreclose on the mortgage without the assignment of mortgage, the Court concluded the assignment was an “administrative convenience” within the meaning of TILA, and affirmed the lower court’s dismissal of the class action. This is the second such case in which the Eleventh Circuit has found in favor of a servicer advancing the “administrative convenience” exception under TILA (see May 28, 2013 Alert).

Once again trumpeting the state’s focus on deceptive debt collection practices, the New York Department of Financial Services announced a proposal to create new regulations imposing specific notice requirements on debt collectors. The proposed rules would require debt collectors, within 5 days of initial communication with debtors, to provide written notice of debtors’ rights under the federal Fair Debt Collection Practices Act, as well as under federal statutes exempting certain benefits (e.g., Social Security benefits) from being subject to a judgment. The proposed rules would also require debt collectors to provide the name of the original creditor and a detailed itemized accounting of the debt. Further, the debt collector would be required to notify the debtor of any debts where the debt collector believes the statute of limitations had run, and inform the debtor that such debt may be legally unenforceable. Of import, the proposed rules would impose debt verification requirements beyond those contained in the FDCPA and require the debt collector to produce the signed agreement that created the debt, a “chain of title” to the debt ownership, relevant account numbers, and any prior settlement agreement concerning the debt.

The regulations are subject to a 45-day notice and comment period. While most of the proposals are effective immediately if adopted, certain requirements related to a debt collector’s duty to provide information verifying the debt would not become effective until 180 days after adoption. California recently took similar action to regulate debt buyers when its state legislature passed the Fair Debt Buyers Practices Act (see July 9, 2013 Alert).

In an effort to “streamline and modernize” its regulations governing financial institutions, the Massachusetts Division of Banks announced it will hold informational hearings and accept written comments to get input from consumers, the financial services industry and advocacy groups. The first informational hearing was held on July 30 and focused on regulations governing the establishment and operation of electronic branches and consumer protection in electronic fund transfers, disclosures of consumer credit costs and terms, unfair and deceptive practices, and the conversion of co-operative banks and saving banks from mutual to stock forms, among other regulations.

The second informational hearing will be held on August 13, 2013 and will focus on regulations governing: (1) small loans, sales finance and insurance premium finance companies; (2) licensing of mortgage lenders and brokers; (3) licensing of foreign transmittal agencies; (4) licensing and regulation of check cashers; and (5) record-keeping for licensees. In addition to receiving testimony and comments at the two informational hearings, the DOB will also be accepting written comments through August 20, 2013.