Consumer Financial Services Alert - June 17, 2008 June 17, 2008
In This Issue

Texas Trial Court Denies Class Certification of Wrongful Foreclosure Claim

A trial court in El Paso, Texas recently denied class certification of a wrongful foreclosure claim in which plaintiffs claimed a lender’s notice of intent to accelerate and foreclose violated Texas law. The notice stated that the borrower’s failure to cure “may” result in acceleration and foreclosure. Plaintiffs alleged Texas law required the use of the word “will” instead of “may,” and sought class certification on the ground that each class member received the same notice with the “may” language. The court denied certification because the lender’s liability turned on class member-specific proof concerning the damages of each borrower, if any, resulting from foreclosure, borrower knowledge of defendant’s intent to accelerate and foreclose, and the relevant terms of each borrower’s mortgage contract. The court also denied certification because it would not be the “superior” way to resolve the claims given that plaintiffs’ claim sought to impose “substantial liability” upon the lender “for an alleged technical violation of law under circumstances where the putative class members suffered no actual damage caused by” defendant’s use of the word “may” instead of “will.” Goodwin Procter partners Tom Hefferon and Brooks Brown represented Washington Mutual Bank, as successor to defendant HomeSide Lending, Inc. Click here for a copy of Punzalan v. HomeSide Lending, Inc., No. 2003-1308 (Tex. Cty. Ct. at Law – El Paso May 30, 2008) (Villa, J.).

President Signs Credit and Debit Card Receipt Clarification Act

President Bush signed into law H.R. 4008, the Credit and Debit Card Receipt Clarification Act of 2007. The Act was passed in response to a series of class action lawsuits alleging that merchants violated the Fair Credit Reporting Act by printing and providing consumers with a credit or debit card receipt that included the card’s expiration date. The Act provides that a merchant that printed a card receipt with an expiration date between December 4, 2004 and the date the Act was enacted, has not willfully violated FCRA, so long as it otherwise complied with FCRA’s provisions regarding truncation of card account numbers. The Act’s provisions apply to all actions, other than non-final actions, filed before or after its passage. Click here for a copy of the Act and floor debate when it passed the House.

FDIC Seeks $200 Million From Credit Card Company and Two Banks for Deceptive Credit Card Marketing

The FDIC issued enforcement actions against CompuCredit Corporation and two FDIC-supervised banks for allegedly marketing subprime credit cards in violation of the Federal Trade Commission Act. The FDIC settled with a third bank also involved with CompuCredit.

The enforcement actions seek orders that would correct the FTC Act violations, and provide restitution to consumers in the form of credits for certain fees and charges arising from the alleged deceptive marketing practices. It is estimated that such credits will exceed $200 million. The restitution is being sought against CompuCredit, First Bank of Delaware and First Bank & Trust. The FDIC is also seeking civil money penalties of $6.2 million against CompuCredit, and a total of $431,000 against First Bank of Delaware and First Bank & Trust.

Separately, the FTC filed a parallel federal court action against CompuCredit.

Click here for a copy of the FDIC’s press release which contains links to the FDIC orders.

OCC Releases Mortgage Metrics Report

The OCC released a report focused on delinquencies, loss mitigation actions, and foreclosures in mortgage loans serviced by national banks. In February of this year, the OCC began requiring the nine largest national bank mortgage loan servicers to submit comprehensive mortgage loan data on a monthly basis. The report analyzes data submitted on each of the more than 23 million loans held or serviced by these nine banks from October 2007 through March 2008. The $3.8 trillion portfolio represents 90% of mortgages held by national banks and about 40% of mortgage loans overall. Findings of the report include:

  • The overall mortgage servicing portfolio of the nine banks reflects credit quality that is relatively satisfactory and relatively stable. The number of current and performing loans remained at about 94% over the entire six-month period.
  • While subprime mortgage loans constituted less than 9% of the total portfolio, they sustained twice as many delinquencies as either prime or Alt-A mortgage loans.
  • Serious delinquencies, defined as bankrupt borrowers who are 30 days delinquent and all delinquencies greater than 60 days, increased just one-tenth of a percentage point during the period, from 2.1% to about 2.2%.
  • Among loss mitigation actions, payment plans predominated, outnumbering loan modifications in March 2008 by more than four to one, but loan modifications increased at a much faster rate during the period.
  • Subprime mortgage loans accounted for 43% of all loss mitigation actions at the end of March, while making up less than 9% of the portfolio. Loss mitigation actions exceeded newly initiated foreclosures among subprime borrowers by nearly 2 to 1.
  • Foreclosures in process are on the rise – climbing from 0.9% of the portfolio to 1.23% – but the number of new foreclosures varied considerably month to month and was down substantially in March from a high in January.
  • Seriously delinquent subprime loans had fewer new foreclosure starts than similarly delinquent prime or Alt-A mortgages, perhaps reflecting the national emphasis on developing alternatives and assistance programs for this class of borrowers.
Click here for a copy of the report.

FDIC Issues Guidance on Managing Third-Party Relationships

The FDIC issued guidance concerning managing third-party risk. The guidance discusses the types of potential risks that third-party relationships may pose to banks and how banks should manage these risks through risk assessment, due diligence in selecting a third party, contract structuring and review, and oversight.  According to the FDIC, future compliance examinations may focus upon the failure of banks to manage these risks, and corrective actions, including enforcement actions, may be pursued for deficiencies related to third-party relationships that pose a safety and soundness or compliance management concern or result in violations of applicable laws or regulations. Click here for a copy of the guidance.

FDIC Publishes Articles Related to Housing Market Downturn

The FDIC published it summer edition of Supervisory Insights, featuring articles on improving the transparency of certain securitization products, managing the effects of the growth in hybrid ARM products, the appropriate use of interest reserves, and communicating internal control deficiencies as part of the audit process. Click here for a copy of Supervisory Insights.

Massachusetts Seeks to Increase Lender Responsiveness to Loan Modification Requests

Massachusetts Governor Deval Patrick asked the Massachusetts Division of Banks to begin evaluating state licensed mortgage lenders on the basis of the speed and number of loan modifications they complete for delinquent borrowers seeking help. The request is intended to enhance a provision in Massachusetts’ recently enacted foreclosure prevention law, which extends Community Reinvestment Act-type requirements to non-bank mortgage lenders. Under the CRA, the Division of Banks evaluates a lender’s record of helping to meet the mortgage credit needs of the areas within which it does business and this effort would become part of the evaluation. Click here for a copy of the Governor’s press release.