Consumer Financial Services Alert - August 20, 2013

The CFPB released an updated compliance guide to assist small creditors in complying with the remittance transfer rule. The guide is intended to be an “easy-to-use summary” of the remittance rule and highlight issues that small creditors may face when implementing the rule. The updated guide incorporates the CFPB’s changes to the remittance transfer rule including the disclosure of institution fees and foreign taxes and the procedures that apply to errors that result from a consumer providing incorrect information.

In conjunction with the release of the small business compliance guide, the CFPB announced that it made clarifying and technical corrections to the rule amended in May 2013 (see May 14, 2013 Alert). In particular, the CFPB amended the provision setting forth remedies for errors that occur when a sender provides incorrect or insufficient information to the remittance transfer provider.

The CFPB and five other federal regulators—the FRB, FDIC, FHFA, NCUA, and OCC—issued a proposal to further amend Regulation Z, with regard to appraisal requirements for a subset of higher-priced mortgage loans. The agencies previously amended Regulation Z with respect to higher-priced mortgage loans to change the escrow maintenance requirements (see January 22, 2013 Alert) and create exemptions from certain appraisal requirements (see July 23, 2013 Alert). This proposal seeks to create additional exemptions from the appraisal requirements for higher-priced mortgage loans for: (1) transactions secured solely by existing manufactured homes and not land, (2) “streamlined” refinancings, specifically those where the owner or guarantor of the refinancing is the owner or guarantor of the existing obligation and other requirements are met, and (3) extensions of credit of $25,000 or less. The agencies seek comment on over 50 questions raised in the proposal, including matters such as whether to place additional conditions on the transactions proposed for exemption and input on existing and alternative valuation methods. Comments must be received on or before September 9, 2013.

The CFPB issued updates to its examination procedures for the Truth in Lending Act and the Real Estate Settlement Procedures Act to incorporate the mortgage rules finalized by the CFPB in January 2013 (see January 10, 2013 Alert for discussion of ability-to-repay final rule and January 22, 2013 Alert for discussion of mortgage servicing rules). In addition to changes to the ability-to-repay and qualified mortgage rule, the updated examination procedures cover rules governing high-cost mortgages and appraisals for higher-priced mortgages; amendments to the escrows rule; and changes to credit card rules. The CFPB notes a focus on the following areas: lenders’ consideration of borrowers’ ability to repay in making lending decisions; the banning or limiting of certain points, fees, and “risky features”; requirements for providing monthly statements and disclosures; restrictions on dual-tracking (processing foreclosure and loan modifications simultaneously on parallel tracks); requirements for access to servicer personnel and licensing/certification requirements for appraisers. 

In conjunction with the release of the amended examination procedures for the mortgage rules, the CFPB also updated its small business compliance guide for the ability-to-repay and qualified mortgage rule (see April 16, 2013 Alert for previous compliance guide). The updated guide incorporates changes made to the ability-to-repay and qualified mortgage rule in June and July (see June 11, 2013 Alert).

The CFPB solicited comments on a proposed information collection titled, “Development of Metrics to Measure Financial Well-being of Working-age and Older American Consumers.” The CFPB intends to collect quantitative data to develop and refine survey instruments to measure adult consumers’ financial well-being. 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 October 7, 2013.

The FTC reached a settlement with a nationwide specialty consumer reporting agency for violations of the Fair Credit Reporting Act and Section 5 of the FTC Act. FCRA imposes special obligations for nationwide specialty consumer reporting agencies, which are generally consumer reporting agencies that compile and maintain files on consumers on a nationwide basis relating to, among other things, check writing history. Under FCRA, nationwide specialty consumer reporting agencies are required to, among other things, provide consumers with free file disclosures.

The complaint alleged that the consumer reporting agency, in violation of FCRA, did not follow proper dispute procedures, mainly failures in the reinvestigation process, and failed to follow reasonable procedures to assure maximum possible accuracy of the consumer report information it was providing. The FTC also alleged that the consumer reporting agency violated parts of FCRA’s furnisher rule, which, among other things, requires consumer reporting agencies to provide free annual file disclosures and to have a streamlined process to obtain such disclosures. The FTC maintained that the consumer reporting agency failed to create a streamlined process for consumers and failed to establish reasonable written policies and procedures regarding the accuracy and integrity of the information it furnished. In particular, the FTC alleged that consumers had difficulty in obtaining their annual file disclosures from the consumer reporting agency because the consumer reporting agency required consumers to submit more information than was reasonably necessary to properly identify the consumers before it would provide the annual file disclosures. The terms of the settlement require the consumer reporting agency to pay civil money penalties, improve its dispute procedures and comply with the furnisher rule by maintaining a streamlined process for consumers to request their free annual reports.

The FTC’s settlement comes after the CFPB issued a warning to consumer reporting agencies. In December 2012, the CFPB previously released a guidance bulletin setting forth its expectations for nationwide specialty consumer reporting agencies and after an investigation, issued warning letters detailing consumer reporting agencies’ failure to comply with FCRA and Regulation V, the implementing regulation for FCRA (see December 11, 2012 Alert).

The United States Court of Appeals for the Ninth Circuit reversed a lower court’s dismissal of two lawsuits by borrowers who alleged that their loan servicer breached an agreement to offer a permanent loan modification after the borrowers made all required payments under their trial payment plan. The borrowers alleged that defendant, a bank, never offered them a permanent loan modification despite an agreement for permanent modification if the borrowers complied with the requirements of their trial payment plan. The lower court dismissed the borrowers’ actions holding that the language of the trial payment plan could not support a contract for a permanent loan modification. The lower court also ruled that defendant’s promise to offer a permanent modification was conditioned on sending the borrowers a signed modification agreement, which defendant did not do. The borrowers appealed.

Citing Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), the Ninth Circuit, rejected defendant’s argument that, pursuant to the  terms of the trial payment plan, no permanent modification exists until the servicer, at its sole discretion, sends the borrower a permanent modification agreement. To the contrary, the Ninth Circuit opined that “[t]he more natural and fair interpretation of the [trial payment plan] is that the servicer must send a signed Modification Agreement offering to modify the loan once borrowers meet their end of the bargain.” The Ninth Circuit noted the importance of determining the borrower’s qualifications for the Home Affordable Modification Program at the time it agreed to extend the trial payment plan. If the borrower does not qualify for HAMP, the Ninth Circuit reasoned, “it could have and should have denied [the borrower] a modification on that basis” instead of offering the trial payment plan. Ultimately, the Ninth Circuit ruled that an oral agreement to make the trial payment plan permanent could support a breach of contract claim (i.e., no written agreement was required). Notably, the Ninth Circuit recognized that if a borrower fails to provide all documents required under the trial payment plan, the servicer may assert this failure as a basis for not making a modification permanent. 

Of import was the particularly stinging concurring opinion by Judge John Noonan. Asserting that the “self-contradictory” trial payment plan served no purpose “except the fraudulent purpose of inducing [the borrower] to make the payments while the bank retained the option of modifying the loan or stiffing him,” Judge Noonan argued that defendant drafted the trial payment plan agreement, and therefore, should be held to it.

As a result of its investigation into illegal online payday lending, the New York Department of Financial Services announced that it sent cease and desist letters to numerous payday lenders directing them to cease offering to lend and lending money at usurious rates. Under New York law loans made by non-bank lenders in the amount of $250,000 or less with an interest rate that exceeds 16% per annum constitute civil usury. Further, loans made with interest rates exceeding 25% per annum constitute criminal usury. DFS’s investigation uncovered that numerous out-of-state lenders were using the internet to solicit and provide illegal payday loans in violation of the New York’s usury limits. DFS noted that it “will aggressively pursue appropriate enforcement against payday lenders that refuse to cease and desist their illegal activity in New York.”

Of import, DFS cited access to the Automated Clearing House network as the main method by which these payday lenders are able to conduct their illegal activities, and sent letters to over 100 banks requesting their assistance in cutting off illegal payday lenders’ access to the ACH network. This is the second such effort by DFS to curb payday lending. In March 2013, DFS issued warning letters to debt collectors about collecting illegal, usurious loans made in New York, including payday loans made over the internet, by phone or by mail (see March 5, 2013 Alert).

Several states have settled with a mortgage lender for violations of various state licensing laws. After an investigation into the practices of the mortgage lender, state banking regulators determined that the lender was engaged in mortgage loan origination activities for which a mortgage loan originator licensed was required. The terms of the settlement require the mortgage lender to eliminate certain positions within its organization, require its loan originators to obtain mortgage origination licenses, provide the regulators with scripts it develops for its unlicensed employees when speaking with borrowers and provide quarterly reports to the regulators. The lender also agreed to reimburse the Pennsylvania Department of Banking and Securities for its investigative costs and pay over $2 million in civil money penalties to various state banking regulators.

After reportedly issuing subpoenas to several companies affiliated with bitcoins, the New York Department of Financial Services announced it was determining whether to regulate bitcoins and other virtual currencies. According to DFS, regulation of virtual currency will lend legitimacy and stability to the fledgling industry, and suggests establishing “safety and soundness requirements” so that funds entrusted to virtual currency companies “will not get stuck in a digital black hole.” DFS also warned that penalties could result from facilitating criminal activity, and argues that, like “any other industry, greater transparency and accountability [are] critical to promoting sustained, long-term investment.” The notice of inquiry seeks comment and information on whether virtual currencies are more appropriately regulated through augmenting existing money transmission regulations, or issuing entirely new, industry-specific regulatory guidelines.