Consumer Financial Services Alert - March 25, 2008 March 25, 2008
In This Issue

HUD Issues Proposed RESPA Reform Rule

HUD issued a proposed rule aimed at improving the disclosure requirements for mortgage settlement costs under the Real Estate Settlement Procedures Act. Among other things, the proposal would:

  • standardize the GFE;
  • require page one of the GFE to provide a summary of the loan terms and total settlement charges;
  • include disclosure of yield spread premiums in the GFE;
  • facilitate comparison of the GFE and the HUD–1/HUD–1A Settlement Statements;
  • help ensure that borrowers are made aware of final loan terms and settlement costs at settlement, by reading and providing a copy of a “closing script” to borrowers;
  • clarify HUD–1 instructions;
  • clarify and update escrow account requirements and mortgage servicing transfer provisions;
  • clarify current regulations on discounts and explain when RESPA permits certain pricing mechanisms, such as average cost pricing and volume discounts, that benefit consumers;
  • amend the definition of “required use” to include incentives for the use of a particular service provider, for example builder discounts for using an affiliated lender; and
  • make clear that all RESPA disclosures may be provided to consumers in electronic form, so long as the E-Sign Act requirements are met.
Comments on the proposal are due on May 13, 2008. The proposal provides a 12-month transition period for compliance once finalized. Click here for a copy of the proposal.

Federal District Court Rejects Claims Challenging Loan Discount Fee Because Interest Rate Charged Not “Settlement Service” Under RESPA

The U.S. District Court for the Southern District of Alabama dismissed a lawsuit claiming that a lender violated Section 8(b) of the Real Estate Settlement Procedures Act by charging a loan discount fee and not discounting the interest rate charged. The Court in Wooten v. Quicken Home Loans held Section 8(b) cannot be applied to alleged “overcharges” without a mark-up of a third party charge or the splitting of fees. The Court also held the allegation that the lender charged a fee to discount the interest rate but did not provide a discounted rate was not actionable because interest rates charged in connection with loans are not “settlement services.” Goodwin Procter partner Tom Hefferon represented Quicken Home Loans. The Court distinguished this case from an identical one brought against another lender in the same court (Gunter v. Chase Bank) because the lender there did not argue that interest is not a “settlement service.” Click here for a copy of Wooten v. Quicken Loans, Inc., No. 07-00478 (S.D. Ala. March 10, 2008).

Eleventh Circuit Joins Other Circuit Courts in Determining That RESPA Does Not Permit Excessive Fee Claims

The Eleventh Circuit joined the Second, Third, Fourth, Seventh and Eighth Circuits in concluding that Section 8(b) of the Real Estate Settlement Procedures Act cannot be used to challenge allegedly excessive settlement service charges where any service at all has been performed and there is no fee splitting or mark-up. Plaintiffs challenged the lender’s escrow waiver fee. The Court reversed a class certification decision, and ordered that the case be dismissed, for two reasons. First, the Court held that an earlier appellate panel’s finding that the lender had, in fact, provided some service in exchange for the fee was the law of the case, and thus the amended complaint alleging no services were provided could not stand. Second, the Court held that Section 8(b) does not apply to claims that a settlement fee is excessive in relation to the goods or services rendered. Because Section 8(b) “is not a price control provision,” the Court held that a claim is only stated if no services are rendered in exchange for the fee. Click here for a copy of Friedman v. Market Street Mortgage Corp., No. 05-13820 (11th Cir. March 20, 2008).

Federal Banking Agencies Release Proposed Revisions to Interagency Flood Insurance Questions and Answers

The federal banking agencies released for comment new and revised interagency questions and answers regarding flood insurance. The proposed changes include substantive modifications to questions and answers pertaining to construction loans and condominiums. The agencies also propose new questions and answers in a number of areas, including second lien mortgages, the imposition of civil money penalties, and loan syndications/participations. Finally, the agencies propose to revise and reorganize certain existing questions and answers to clarify areas of potential misunderstanding and to provide clearer guidance. Comments are due May 20, 2008. Click here for the proposal.

Federal Appeals Court Finds Creditor’s Pre-Screened Letter Meets FCRA Firm Offer Requirements

The First Circuit has held that the Fair Credit Reporting Act does not require a prescreened mailing to include specific credit terms, such as an interest rate, in order to qualify as a “firm offer of credit.” In Sullivan v. Greenwood Credit Union, the Court analyzed both the statutory definition of “firm offer of credit,” which does not require that a prescreened mailing include specific credit terms, and the overall statutory scheme, which contemplates subsequent communications between the lender and consumer to develop the specific terms of credit. The Court distinguished the Seventh Circuit’s 2004 decision in Cole v. U.S. Capital, Inc., as limited to circumstances in which the purported offer of credit is merely a sham used in an attempt to sell the consumer a non-credit product. Click here for a copy of Sullivan v. Greenwood Credit Union, No. 07‑2354 (1st Cir. March 19, 2008).

FTC Issues 2008 Fair Debt Collection Practices Report to Congress

The FTC issued to Congress its annual report on the Fair Debt Collection Practices Act. This report summarizes the FTC’s administration and enforcement of the FDCPA during 2007. It presents an overview of the types of consumer complaints received by the FTC, descriptions of the FTC’s debt-collection law enforcement actions, and a summary of the FTC’s consumer and industry education initiatives. Click here for a copy of the report.

FDIC Publishes Article on Developing LMI Deposit Customers

The FDIC published an article in its FDIC Quarterly describing the challenges low- and moderate-income households face in building assets and examining the incentives banks have for encouraging these customers to save. The article also describes some strategies banks have used to build profitable relationships that also benefit lower-income consumers. Click here for a copy of the article.

Administration Recommends Market and Regulatory Changes to Mortgage Securitization Process

The U.S. Treasury, FRB, SEC and the Commodity Futures Trading Commission issued a joint policy statement recommending market and regulatory changes to the mortgage securitization process from origination to mortgage-related derivatives valuation. The recommendations include: (1) requiring nationwide licensing standards for mortgage brokers, (2) regulatory steps to encourage asset managers to develop an independent view of the risk characteristics of mortgage backed financial instruments, and (3) reform of the ratings process used by the credit ratings agencies, including requiring underwriters of asset backed securities to represent the level and scope of due diligence performed on the underlying securities. The statement also urges the FRB to implement final rules under the Home Ownership and Equity Protection Act once comments have been considered. Click here for a copy of the statement.

FRB Provides List of Foreclosure Resources for Consumers

The FRB established a webpage that lists resources for consumers who are having difficulty making home mortgage payments. Click here to jump to the webpage.

Massachusetts Issues Letter on Securing Vacant, Foreclosed Properties

The Massachusetts Commissioner of Banks, along with the State Fire Marshall, issued a letter regarding the responsibilities of lenders in securing vacant, foreclosed properties. Among other things, the letter states that lenders must secure vacant, foreclosed buildings by first obtaining the written approval of both the head of the fire department and the building department for the method of securing the building. Click here for a copy of the letter.

FDIC Issues Alert on Advance Fee Loan Scams

The FDIC issued a special alert to the banks it supervises, warning of advance fee loan scams. The FDIC has observed a significant increase in the number of unsolicited e-mails advertising mortgage refinancing, debt consolidation and elimination, small business loans, and special loan programs for veterans and minorities. While some of these e-mails may advertise legitimate loan programs and lenders, the FDIC reports that advance fee loan scams are becoming more prevalent. The FDIC cautions that fraudulent logos and letterhead of legitimate financial institutions or government agencies may appear on documents that are faxed to the loan applicant. Click here for a copy of the special alert.