Consumer Financial Services Alert - June 10, 2014

The CFPB published its semi-annual update of its rulemaking agenda. The rulemaking agenda includes rulemaking actions in the pre-rule, proposed rule and final rule states, as well as long term actions and completed actions. According to the rulemaking agenda, the CFPB plans to issue rules in the mortgage space, including amendments to the Home Mortgage Disclosure Act and Regulation C, the implementing regulation for HMDA, further amendments to Regulations X and Z, rules defining “larger participants” in the auto lending markets and the international money transfer market, rules regarding debt collection, loans and deposit advance products, consumer overdraft products and prepaid cards, among other rules.

The CFPB announced that it has entered into a consent order with a real estate brokerage company and its affiliate, which provides title examination, title insurance and real estate closing services, for alleged violations of Section 8 of the Real Estate Settlement Procedures Act and its implementing regulation. Section 8 of RESPA prohibits a person from paying or receiving a “fee, kickback, or thing of value” pursuant to a referral agreement with an affiliate, unless certain conditions are met. Such conditions include that the agreement or arrangement be disclosed to the consumer (and that the disclosure include an estimated charge or range of charges), that the consumer not be required to use the affiliate and that the “thing of value” be limited to a return on an ownership interest. According to the CFPB, the real estate brokerage either required consumers to use the affiliate for title and closing services or influenced the consumers to do so, did not use the form of disclosure appended to the regulation and included marketing statements in its disclosure “touting the benefit and value of the affiliated entities.”

The terms of the consent order require the companies to refrain from violating RESPA, to ensure that the provided disclosure complies with RESPA and in the model format and to ensure that training materials provided to their real estate agents emphasize that agents cannot require the use of an affiliate. The companies were also ordered to pay a civil money penalty of $500,000 to the CFPB. This is the second such enforcement action this year taken by the CFPB related to violations of the anti-kickback provisions of RESPA (see March 4, 2014 Alert).

The CFPB solicited comments on a proposed information collection titled, “Telephone Survey Exploring Consumer Awareness of and Perceptions Regarding Dispute Resolution Provisions in Credit Card Agreements.” The information collection follows a field hearing on arbitration clauses and the release of a study on arbitration clauses (see December 10, 2013 Alert and December 23, 2013 Alert). Section 1028(a) of the Dodd-Frank Act required the CFPB to conduct a study of pre-dispute arbitration agreements and clauses. The CFPB intends to conduct a telephone survey of 1,000 credit card holders to “explore” the role of dispute resolution provisions in consumer card acquisition decisions and consumers’ default assumptions regarding their dispute resolution rights (e.g., consumer awareness without supplementation from external sources) to learn about their experiences interacting with the debt collection industry. The CFPB intends to use the information collected through the survey to inform it in its rulemaking on debt collection. 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 June 30, 2014.

The CFPB announced that it will hold a field hearing in New Orleans, LA on June 12, 2014, on mobile financial services.

The FRB repealed its several regulations including Regulation DD, Truth in Savings and, Regulation P, Privacy of Consumer Financial Information. The Dodd-Frank Act granted rulemaking authority for a number of consumer financial protection laws to the CFPB. The CFPB adopted interim final rules substantially similar to the FRB’s Regulation DD and Regulation P, and as a result, the FRB repealed its Regulation  DD and Regulation P.

In conjunction with the repeal of Regulations DD and P, the FRB also issued final amendments to its Identity Theft Red Flags rule in Regulation V, the implementing regulation for the Fair Credit Reporting Act. The Identity Theft Red Flags rule requires financial institutions and creditors to adopt identity theft prevention programs. The amendments to the rule amend the definition of “creditor” and updates a cross-reference in Supplement A to Appendix J to reflect a transfer of rulemaking authority to the CFPB. In particular, the amendments clarify in amending the definition of “creditor” and in connection with certain amendments to the Fair Credit Reporting Act, that the Red Flags rule only applies to creditors that regularly extend credit or obtain consumer reports in the ordinary course of their business to reflect a transfer of rulemaking authority to the CFPB. The Identity Theft Red Flags rule, however, still applies to all financial institutions whether they meet the revised definition of “creditor.”

The repeal of Regulation DD and Regulation P and the amendment to the Identity Theft Red Flags rule become effective on June 30, 2014.

The United States District Court for the Northern District of Illinois granted summary judgment denying a putative class action suit against a mortgage servicer for alleged violations of the Truth in Lending Act concerning the prompt crediting of payments. Plaintiffs alleged that the mortgage servicer failed to credit their payments as of the date of receipt in violation of TILA and Regulation Z. According to plaintiffs, the mortgage servicer did not promptly credit online payments at the time plaintiffs completed the online payment form. As a result of the mortgage servicer’s policy, plaintiffs’ payments were not credited to their account within two days and they were assessed late fees. The mortgage servicer moved for summary judgment.

Section 1464 of the Dodd-Frank Act amends TILA and requires servicers to credit a payment to the consumer’s loan account as of the date of receipt. In rejecting the argument that the online payment form was the equivalent of a check because the form used the image of a check, the Court took the position that it was an instruction for plaintiffs’ banks to wire payment (an electronic transfer). The Court also relied on the CFPB’s staff commentary to Regulation Z on the “date of receipt”, to conclude that the mortgage servicer’s crediting of the payments at the time it received the payments from the third-party bank, and not at the time the payment instruction was sent, was appropriate.

The United States Court of Appeals for the Seventh Circuit affirmed a lower court’s ruling conditioning a borrower’s right to rescission under the Truth in Lending Act on the borrowers’ tendering repayment of the principal loan balance. After the borrowers defaulted on their two mortgage loans, the lender initiated foreclosure proceedings. The borrowers sent a notice of rescission for the first loan citing that the servicer failed to provide the required disclosure statements in violation of TILA. The lender agreed to rescind the first loan if the borrowers tender amounts advanced to them. The borrowers refused and sent a notice of rescission for their second mortgage loan. The borrowers subsequently filed suit alleging violations of TILA. In particular, the borrowers alleged that the lender failed to properly respond to its initial notice of rescission. The lender moved for summary judgment or in the alternative for the lower court to “set reasonable rescission procedures.” The lower court ruled that it was proper to require the borrowers to tender amounts advanced to them in return for a rescission of their mortgage loan. The borrowers sought to: (1) tender the amounts advanced to them by making installment payments over the life of the loan or (2) be allowed six months to obtain financing to make the tender. The lender requested that the borrowers tender the amounts advanced within 30 days. The lower court required the borrowers to tender amounts advanced within a certain time period or the court would rule in favor of the servicer on the borrowers’ rescission claim. The borrowers were unable to tender the amount advanced to them and the lower court entered judgment in favor of the lender. The borrowers appealed.

Citing Regulation Z, the Seventh Circuit recognized that courts are allowed to define procedures for implementing the rescission process under TILA, including procedures to “determine the amounts owed” before rescission can proceed. “Tender is inherently part of rescission,” the Court ruled, and the borrowers were not entitled to rescission without it. The Seventh Circuit also agreed with the lower court that allowing the borrowers to tender the amounts advanced to them over the life of the loan with no interest as inequitable to the lender. The Seventh Circuit noted that the lender in this case was an assignee of the loan, and thus not directly responsible for the violations of TILA that resulted in the borrowers’ rescission rights, a violation the Court described as “hyper-technical.” In general, a borrower’s right to rescind his or her loan under TILA has been at the forefront of recent circuit decisions and advocacy by federal consumer protection agencies. In particular, the United States Supreme Court granted certiorari of an appeal from the Eighth Circuit involving a dispute as to whether notice alone was sufficient to effectuate a rescission under TILA (see April 29, 2014 Alert).

Joining the Seventh Circuit, the United States Court of Appeals for the Eleventh Circuit ruled that the term “called party” in the Telephone Consumer Protection Act means the party who actually received the call, not the party whom the caller intended to call. The TCPA prohibits, among other things, 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.” A former bank customer, consented to be called at the number provided, but by the time the lender called the number to attempt to collect a debt, the number had been transferred to another person. The actual recipient of the call was a minor, whose mother bought him the account and sued on his behalf arguing that neither she nor her son consented to be called concerning the debt incurred by the former holder of the telephone number. The lender argued that it intended to call the former customer, and the term “called party” in the TCPA should be construed as the call’s intended recipient.

The Eleventh Circuit affirmed the lower court’s ruling that the called party was not the former customer, but the person who actually received the call. Noting that the term “called party” is not defined in the TCPA or its implementing regulations, the Court examined its use within the TCPA, but did not find a clear answer. The Court then turned to the broader statutory context.  Examining the private right of action provision granted in the TCPA, the Court adopted plaintiff’s argument that, because the statute conditioned damages on the caller’s intent but did not so condition liability, the intent of the caller, while pertinent to damages, was irrelevant to liability. The Court also considered the legislative history, which focused on the disruptive effect on calls to the actual recipients. The Court also cited a regulatory impact statement summarizing the bill as requiring “the prior express consent of the recipient of the call.” According to the Court, the impact statement was the most conclusive indication of legislative intent that the term “called party” means the party that was actually called. Of note, the Eleventh Circuit agreed with the Seventh Circuit, the only other Circuit to have addressed this issue, in Soppet v. Enhanced Recovery. 679 F.3d 637 (7th Cir. 2013) which held that “called party in [the TCPA] means the person subscribing to the called number at the time the call is made,” and thus “called party” could not simply mean “intended recipient.”

In the wake of recent focus on student loan debt, the Senate Committee on Banking, Housing and Urban Affairs held a hearing on the “Student Loan Servicing: the Borrower’s Experience.” The concern shown in some testimony at the hearing suggests that there may be a push to regulate the student loan industry. Several individuals were invited to speak including, a college financial aid director, a local teacher and the Student Veterans of America. Similar to the CFPB’s concern, many of the witnesses testified on the impact of student loan debt on borrowers. The witnesses proposed, among other things, having only two repayment options: standard and income-based, that servicers be required to give notice of servicing transfer similar to mortgage servicing transfers, and numerous proposals around SCRA-protections (e.g., requiring automation for determining active duty service and SCRA-protections and no loss of SCRA-protections in refinancings and consolidation).

At a competing hearing, the Senate Budget Committee held a hearing on the “Impact of Student Loan Debt on Borrowers and the Economy,” in which the Assistant Director at the CFPB testified. The Assistant Director raised similar concerns as those raised in the Senate Committee on Banking, Housing and Urban Affairs. In particular, the Assistant Director at the CFPB discussed the impact of student loan debt on small business and entrepreneurship and health care and education—noting that student loan debt could “skew labor market outcomes.” The Assistant Director also raised issues in student loan servicing and refinancings of student loans.