Consumer Financial Services Alert - August 26, 2008 August 26, 2008
In This Issue

Federal Appeals Court Rules for Lenders in Federal Preemption, FDCPA and EFTA Cases

In a busy week for the Sixth Circuit, the Court issued three decisions favorable to lenders.

Federal Preemption. The Court ruled that the mortgage lending activities of a third party that is an exclusive agent of a federal savings bank are preempted by the Home Owners’ Loan Act, reversing a trial court decision we reported on in the October 9, 2007 Alert. Following the reasoning of the Supreme Court’s decision in Watters v. Wachovia, the Court found that because the activity being challenged – mortgage lending – was both field and expressly preempted by HOLA, Ohio could not force the exclusive agents of a federal thrift to register with the state before originating loans there. As in Watters, the Sixth Circuit made its determination based on the Home Owners’ Loan Act without analyzing whether the OTS’ opinion that the activity was preempted was entitled to deference. Click here for a copy of State Farm Bank, FSB v. Reardon, No. 07-4260 (6th Cir. Aug. 22, 2008).

FDCPA. The Court affirmed a grant of summary judgment for a defendant under the Fair Debt Collection Practices Act. Plaintiff alleged that the defendant violated FDCPA by stating in its initial collection communication that plaintiff was required to dispute her debt in writing. The Sixth Circuit concluded that even if the communication violated FDCPA, the defendant’s mistaken interpretation of law satisfied the “bona fide error” defense. The Court rejected plaintiff’s claim that FDCPA mirrored the Truth in Lending Act, which does not contain a bona fide error defense for mistakes of law, reasoning that TILA explicitly excludes interpretations of law from its definition of a “bona fide error,” but FDCPA does not. Click here for a copy of Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, LPA, No. 07-03964 (6th Cir. Aug. 18, 2008).

EFTA. The Court also ruled that the Electronic Funds Transfer Act is not violated by an ATM screen message informing customers that they “may” be charged a service fee, coupled with an on-screen message asking whether the customer wishes to proceed and accept the fee. The Court rejected plaintiff’s argument that the original message should have indicated that a fee “will” be charged, to comply with EFTA. Click here for a copy of Clemmer v. Key Bank Nat’l Assoc., No. 07-3936 (6th Cir. Aug. 22, 2008).

Massachusetts Bankruptcy Court Denies Request for Stay Relief Due to Insufficient Proof of Standing

A Massachusetts bankruptcy judge has ruled that parties who cannot prove that they hold a note or mortgage or service a mortgage loan, do not have standing to pursue motions for relief from the automatic stay or to defend against objections to proofs of claim. The court found that the trustee of a securitization loan pool lacked standing because (1) it failed to show each assignment along the chain, including assignments between two related lender entities; (2) one assignment was ineffective, as the limited power of attorney under which the assignment was granted did not provide the required authority; and (3) the trustee failed to introduce any evidence that the loan at issue was part of the pooling and servicing agreement, e.g., the trustee did not submit the mortgage loan schedule as evidence. The court also required the servicer and trustee to show cause why sanctions should not be imposed for filing a motion for relief from stay without sufficient evidence of standing. Click here for a copy of In re: Hayes, No. 07-13967 (Bkcy. D. Mass. Aug. 19, 2008).

Massachusetts Governor Signs Legislation Amending 18-65 Law

Massachusetts Governor Deval Patrick signed legislation that amends Massachusetts’ law on savings and checking accounts of persons 65 or older or 18 or younger. The amendment clarifies that a Massachusetts bank may assess fees on such accounts for certain services in accordance with the bank’s published service charge schedule, including stop payment orders, wire transfers, certified or bank checks, money orders, deposit items returned, transactions at electronic branches and through other electronic devices, and services not directly associated with the deposit, withdrawal or transfer of funds from such accounts that are approved by the Massachusetts Division of Banks. The amendment goes into effect on November 3, 2008. Click here for a copy of the amendment.

FTC Issues Final Telemarketing Sales Rule Amendments Regarding Prerecorded Calls

The FTC issued a final rule including two amendments to the Telemarketing Sales Rule. One amendment bars telemarketing calls that deliver prerecorded messages unless a consumer previously has agreed to accept such calls from the seller. The other modifies the Telemarketing Sales Rule's method of calculating the maximum permissible level of “call abandonment,” meaning calls for which a person answers the telemarketer call but is not connected with a live salesperson.

The final rule will:

  • Prohibit telemarketing sales calls that deliver prerecorded messages, whether answered in person by a consumer or by an answering machine or voicemail service, unless the seller has previously obtained the recipient's signed, written agreement to receive such calls. The amendments will not affect consumers’ ability to continue to receive calls that deliver purely “informational” prerecorded messages notifying recipients, for example, that they have a service appointment or similar messages. Such "informational” calls are not covered by the Telemarketing Sales Rule because they do not attempt to sell the called party any goods or services.
  • Permit sellers to obtain the required permission for prerecorded message sales calls from a consumer in any manner permitted by the Electronic Signatures In Global and National Commerce Act.
  • Require that sellers provide, at the outset of all prerecorded messages, an automated keypress or voice-activated interactive opt-out mechanism so that consumers can opt out as easily as they can from a live telemarketing call.
  • Modify the method of calculating the maximum permissible level of call abandonment. The current 3% permissible abandonment rate will remain in place, but the final rule will permit it to be calculated over a 30-day period, rather than on a daily basis as is now the case.
The provisions of the final rule requiring permission from consumers to receive prerecorded messages are effective September 1, 2009. The provisions requiring that all prerecorded telemarketing calls provide an automated interactive opt-out mechanism are effective December 1, 2008. And, the amendment modifying the method for measuring the maximum allowable rate of call abandonment is effective October 1, 2008. Click here for the final rule.

HUD Issues RESPA FAQs on Real Estate Agent Compensation

In response to questions asked by the National Association of Realtors, HUD issued FAQs regarding real estate agent compensation under the Real Estate Settlement Procedures Act. The FAQs suggest that (1) real estate agents cannot be compensated as loan originators if they do not provide loan origination services or provide only nominal loan origination services, such as merely taking an application, (2) lenders may compensate real estate agents who are bona fide employees of the lender for referral activities, (3) whether an employee is “bona fide” is determined by the actual work performed, particularly whether the work is “actual, necessary, and distinct” from the services the employee provides in another capacity, (4) a real estate agent affiliated with a lender must comply with RESPA regardless of whether the real estate brokerage is affiliated with the lender, and (5) accelerated payment of compensation and charitable donations in exchange for referrals are “things of value” under RESPA. Click here for the FAQs.

FDIC Publishes Newsletter Answering Common Consumer Questions

The FDIC issued its Summer 2008 FDIC Consumer News publication which provides answers to common questions regarding deposit insurance and bank failures. The newsletter also offers tips on what consumers can do if their home equity line of credit has been reduced or frozen. Click here for the newsletter.

OTS Issues Q&As on Discount Program

Responding to questions from a federal savings bank, the OTS issued Q&As on a proposed discount program to be offered to consumers through a third-party vendor. The discount program would provide services such as roadside assistance, emergency reimbursement, and car rental and lodging discounts, and the bank would retain a portion of the membership fee as compensation. The Q&As suggest that: (1) these activities are permissible under the Home Owners’ Loan Act, (2) there is no legal issue with accepting a percentage of the program fee as compensation, and (3) if the bank decides to use its logo on the membership card, it should be careful in doing so and should provide adequate disclosures that make clear that a third-party vendor is providing the products and services. Click here for the Q&As.