Consumer Financial Services Alert - October 1, 2013

The CFPB issued updates to its examination procedures for payday lending. The updated examination procedures include guidance for examiners of payday lenders that make loans to servicemembers, including reviewing for violations of the Military Lending Act. The MLA covers active duty military members and their dependents and applies to all closed-end payday loans of $2,000 or less with terms of 91 days or less that include creditors’ access to consumer deposit accounts. The MLA limits annual percentage rates on payday loans to 36%, prohibits loan rollovers (or same-creditor refinances, renewals or consolidations) unless they result in more favorable terms for the borrower, prohibits lenders from making servicemembers waive their rights under the Servicemembers Civil Relief Act, and prohibits lenders from requiring military members to repay loans by allotment of their wages. This move by the CFPB is part of an increasing focus on payday lending by both federal and state regulators. For example, both the New York Department of Financial Services and the Massachusetts Division of Banks have issued warning letters to supervised entities that deal with payday lenders (see August 20, 2013 Alert and April 16, 2013 Alert, respectively). The CFPB also released its initial findings on payday loans and deposit advance products in April 2013 (see April 30, 2013 Alert).

The CFPB announced that it and the OCC have issued a consent order against two affiliated banks alleging violations of federal consumer protection laws for deceptive marketing of their add-on products (i.e., payment protection, credit score tracking, identity theft protection and wallet protection). The banks were found to have engaged in unfair billing practices, in violation of UDAAP, between October 2005 and June 2012 by charging customers for identity protection products that were neither properly authorized nor ultimately received by the customers. In some instances, customers were charged for interest and fees incurred as a result of exceeding their credit limits due to the additional costs charged for the products. 

The consent order calls for civil money penalties of $20 million and up to $309 million in restitution to the banks’ customers. This is the third in a line of enforcement actions taken against supervised entities related to credit add-on products (see July 24, 2012 Alert and October 2, 2012 Alert). In addition to the civil money penalties and consumer restitution, the banks are required to develop a consumer compliance internal audit program, submit to an independent audit and improve third-party vendor oversight a compliance program. The OCC separately ordered the banks to pay $60 million in civil money penalties.

The OCC also took enforcement action against the banks related to their collections litigation practices and the banks’ efforts to comply with the Servicemembers Civil Relief Act. The banks are required to provide remediation for eligible servicemembers and conduct an internal audit of its collections litigation practices.

The CFPB denied two online payday lenders’ petition to set aside a civil investigative demand. The lenders claimed they are chartered under the laws of federally recognized Indian tribes and therefore, the CFPB’s investigation did not meet the first prong of the test established in the CFPB’s first order denying a petition to set aside a civil investigative demand—that the investigation was for a lawfully authorized purpose (see October 2, 2012 Alert).

In denying the petition, the CFPB noted that the Consumer Financial Protection Act provided it the authority to issue civil investigative demands to tribally-affiliated lenders. The CFPB further analyzed its authority over tribal lenders using the general rule established in FPC v. Tuscarora Indian Nation, 362 U.S. 99, 116 (1960) (Supreme Court established general rule that a general statute applying to all persons includes Indians and their property interest) and the exceptions to the rule established in Donovan v. Coeur d’Alene Tribal Farm, 751 F.2d 1113 (9th Cir. 1985). Ultimately, the CFPB concluded that none of the exceptions in Coeur d’Alene apply, the general rule in Tuscarora controlled and therefore, the CFPA applied to tribally-affiliated lenders. The CFPB also rejected the lenders’ argument that civil investigative demands did not provide adequate notice of the purpose and scope of the investigation and made vague and overly broad requests as “baseless.” The CFPB, however, did invite the lenders to “continue to discuss, and seek to resolve, issues about the scope and burden of individual interrogatories and document requests with the [CFPB] enforcement team.” The ruling serves as a caution to future parties of the importance of meeting and conferring with the CFPB prior to challenging CIDs. In the CFPB’s first denial of a petition to set aside a CID, the CFPB highlighted the company’s failure to make a “good faith effort” to negotiate the terms of the CID.

The FHFA released a bulletin establishing supervisory expectations for deficiency balance management for Fannie Mae and Freddie Mac. In October 2012, the FHFA-OIG released a report on FHFA’s oversight of GSE’s deficiency management policies and procedures recommending that the FHFA broaden the scope of its supervision of the GSE’s deficiency management practices (see November 13, 2012 Alert). The bulletin establishes factors that should be considered when making the determination of whether to pursue recovery of deficiency balances as part of a deficiency balance management program. A deficiency balance occurs when proceeds from a foreclosure sale are insufficient to satisfy the outstanding unpaid principal balance and other fees and expenses of a defaulted loan. In certain circumstances the GSEs are entitled to recover deficiency balances from defaulting borrowers, which can include obtaining a deficiency judgment. 

The bulletin provides that the GSEs should maintain formal policies and procedures for their deficiency balance management programs and such programs should identify relevant factors to consider when determining to take action to recover a deficiency balance from a defaulting borrower. These factors should include, among others: (1) jurisdiction of foreclosure; (2) mortgage insurance; (3) loss mitigation efforts on the part of the borrower; and (4) loan/borrower specific factors (e.g., whether the loan was owner-occupied or purchased for investment purposes).

The FTC announced that it reached a settlement with a debt collector for violations of the Fair Debt Collection Practices Act and the FTC Act. The FDCPA generally governs collection practices by third-party debt collectors. According to the FTC complaint, the debt collector used text messages to collect debts without the debtor’s consent and without providing required disclosures, unlawfully claimed that it was a law firm, and used mailing envelopes with an image of a large arm holding a person hanging upside down and shaking money from his pockets. 

The terms of the settlement include a $1 million civil penalty. In addition to the monetary penalty, the debt collector is prohibited from, among other things, sending text messages without disclosing that it is a debt collector, including anything other than the debt collector’s address and business name on mailing envelopes, and representing or implying that it is a law firm. The debt collector is also required to obtain express consent before contacting a borrower by text message. The debt collector is also required to submit compliance report to the FTC detailing such things as their current address and businesses and describing their compliance with the settlement.

The California Court of Appeal reversed a lower’s court’s dismissal of a lawsuit by a borrower alleging that her lender breached an agreement to offer a permanent loan modification after she made all required payments under a 3-month trial payment plan. The borrower claimed that although she fully complied with all the requirements of a loan modification agreement with the lender and continued making on-time payments, the lender never offered her a permanent loan modification. She claimed that despite the terms of the loan modification agreement, the lender neither sent her a signed copy of the permanent agreement nor permanently modified her loan. The borrower further alleged that instead of notifying her that she did not qualify for the modification, the lender foreclosed on the property. The lower court dismissed the borrower’s lawsuit and she appealed.

Citing the Ninth Circuit’s recent ruling in Corvello v. Wells Fargo, Nos. 11-16234, 11-16242, 2013 WL 4017279 (9th Cir. 2013) (see August 20, 2013 Alert for discussion of case), the California Court of Appeal reversed. Recognizing that the borrower could not show literal compliance with the statute of frauds, which requires a writing signed by the party against whom the contract is sought to be enforced, the Court held that the borrower may be able to show that equitable estoppel bars the lender from asserting the statute of frauds defense. The Court found that the loan modification agreement was “ambiguous at best and illusory at wors[t]” and, as such refused to enforce the trial payment plan’s provision that it would not take effect unless signed by both parties noting that to do so would “essentially nullif[y] other express provisions of the trial [payment] plan” that showed the lender’s intent to be bound even if it did not execute a signed copy of the permanent modification agreement. The Court also rejected the lender’s argument that equitable estoppel did not apply because the borrower was only making payments that the trial payment plan required her to make in the first place, ruling that the borrower increased her obligations in the permanent modification agreement by agreeing to pay “unpaid and deferred interest, fees, escrow advances and other costs.” The Court also suggested that the borrower may have a claim—which borrower never pled—for unjust enrichment, based on a 2011 law review article, Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications (2011) 86 Wash.L.Rev. 755 claiming that loan servicers have a financial incentive not to modify loans or foreclose, but to maximize the duration of the delinquent servicing period.

The ruling serves as a cautionary reminder of courts’ increasing willingness to require lenders who participate in HAMP to offer borrowers a permanent loan modification. Many states have enacted legislation requiring lenders to make a good faith effort to either avoid foreclosure or modify loan terms prior to initiating a foreclosure (see e.g., January 22, 2013 Alert).

The Pennsylvania Supreme Court reversed a lower state court’s order to set aside a foreclosure judgment and sheriff’s sale. After the borrower defaulted and prior to initiating foreclosure, the mortgage company sent the borrower notice under the Pennsylvania Homeowner’s Emergency Mortgage Act, which among other things, required the mortgage company to inform the borrower of an option for an in-person meeting with the mortgage company. However, the borrower and mortgage company reached a settlement in which the mortgage company received a judgement for the accelerated amount due on the mortgage, but agreed not to execute the judgment so long as the borrower made regular payments. However, the borrower defaulted on her obligations under the settlement agreement and the mortgage company filed a praecipe for writ of execution and subsequently sold the property at a sheriff’s sale. The borrower moved to set aside the judgment and the sheriff’s sale alleging that because the mortgage company failed to provide the required notice, the trial court lacked subject matter jurisdiction over the foreclosure. The lower court and subsequent state appellate court agreed holding that it lacked jurisdiction because the required notice was deficient. The mortgage company appealed.

In reaching its decision the Pennsylvania Supreme Court noted that the question was whether the required notice “imposes jurisdiction prerequisites, which ‘relate[] solely to the competency of the particular court…to determine controversies of the general class to which the case … belongs[,]’ or whether there are procedural requirements, which impact the ‘ability of a [court] to order or effect a certain result.’” The Court agreed with mortgage company and that a defective notice did not implicate the court’s jurisdiction, but rather its power to act. The Court also referenced a recent New Jersey Supreme Court case, U.S. Bank N.A. v. Guillaume, 38 A.3d 570 (N.J. 2012), involving a similar pre-foreclosure notice and noted that the New Jersey notice was “substantially similar” to the required notice in Pennsylvania. The Court held that the borrower’s “failure to pay the mortgage according to its terms” gave the mortgage company its cause of action. To act on that cause of action, according to the Court, the mortgage company was required to give the statutory notice. Ultimately, the Court concluded that despite the defectiveness of the required notice, the lower court’s jurisdiction was not affected, and remanded to the case to the trial court.