Consumer Financial Services Alert - August 11, 2009 August 11, 2009
In This Issue

FRB Amends Regulation Z to Implement Provisions of the Higher Education Opportunity Act

The FRB published a final rule that amends Regulation Z to implement the Higher Education Opportunity Act. The rule requires creditors offering private student loans to provide a number of new disclosures that must be given at different times in the loan origination process. At the application stage (and with solicitations that don’t require an application) creditors must provide general information about loan rates, fees and terms, including an example of the total cost of a loan based on the maximum interest rate the creditor can charge. These disclosures must inform the prospective borrower of, among other things, the potential availability of federal student loans and the interest rate for those loans, and that additional information about federal loans may be obtained from schools or the Department of Education website. Also, once a consumer applies for a loan, the rule requires the consumer to complete a “self certification form” with information about the cost of attendance at the subject school. At the time an application is approved, the creditor must provide a set of transaction-specific disclosures, including information about the rate, fees and other terms of the loan. The creditor must disclose, for example, estimates of the repayment amount based on both the current interest rate and the maximum rate that may be charged. The creditor must also disclose the monthly payment at the maximum rate of interest. At consummation, the creditor must provide updated cost disclosures substantially similar to those provided at approval. The consumer’s three-day right to cancel the transaction must also be disclosed. In addition to the new disclosure requirements, the rule implements the Higher Education Opportunity Act’s restriction on the use of an educational institution’s name, emblem, mascot, or logo in a way that implies that the institution endorses a creditor’s loan product. The effective date of the rule is 180 days after publication in the Federal Register. Click here for the rule and here for the FRB’s press release which includes links to model disclosure forms and samples.

FRB Issues Consumer Affairs Letter Transmitting Revised Interagency Fair Lending Procedures

The FRB issued a Community Affairs Letter which transmits revised Interagency Fair Lending Examination Procedures and summarizes the key revisions. The revised examination procedures reflect significant changes in credit markets, credit products, and credit practices since the procedures were last updated. Specifically, the new procedures clarify examination procedures related to pricing, steering, redlining, broker activity, performing examinations with small sample sizes and data accuracy. Click here for the letter and here for the procedures.

FTC Delays “Red Flags” Rule Enforcement Until November 1

The FTC announced that it will delay enforcement of its “Red Flags” rule to give creditors and financial institutions additional time to develop and implement written Identity Theft Prevention Programs. The new enforcement date is November 1, 2009. This is the second delay of the rule. The FTC had already delayed its implementation of the rule until August 1, 2009. This announcement does not affect the FTC’s address discrepancy rule, which applies to all users of consumer reports, and its change-of-address rule, which applies to card issuers, which became effective November 1, 2008. Click here for a copy of the press release announcing the delay.

FTC Proposes Amendments to Telemarketing Sales Rule

The FTC issued a Notice of Proposed Rulemaking to amend its Telemarketing Sales Rule to address the sale of debt relief services (e.g., credit counseling, debt settlement and debt negotiation services). The proposal would, among other things, (1) define the term “debt relief service”; (2) ensure that telemarketing transactions involving debt relief services are subject to the Telemarketing Sales Rule, regardless of the medium through which such services are initially advertised; (3) mandate certain disclosures and prohibit misrepresentations in the telemarketing of debt relief services; and (4) prohibit any person from requesting or receiving payment for debt relief services until the services have been fully performed and documented to the consumer. Comments on the proposal are due by October 9, 2009. Click here for a copy of the proposal.

OCC Issues Guidance Regarding Credit Card Accountability Responsibility and Disclosure Act Look-Back Provision

The OCC issued guidance regarding the “look-back” provision of the Credit Card Accountability Responsibility and Disclosure Act of 2009, which provides that increases in annual percentage rates after January 1, 2009 must be reviewed at least once every six months to assess whether factors contributing to the APR increase have changed. According to the OCC, APRs might require reduction if such factors are no longer present, although the OCC notes that the Act does not “require a reduction in any specific amount.” Effective August 22, 2010, national banks must conduct such reviews on any accounts on which the APRs were increased on or after January 1, 2009. Both the FRB and OTS have issued similar guidance to the banks they supervise. Click here for the OCC’s guidance.

Treasury Publishes Servicer Loan Modification Performance Report

The Treasury Department released its first Servicer Performance Report in connection with the federal Making Home Affordable loan modification program. The report provides cumulative data through July 2009. According to the report, 38 servicers have signed participation agreements to modify loans under the Making Home Affordable Program, 239,247 trial modifications have been started and 406,542 trial period plan offers have been extended to borrowers. Click here for Treasury's press release and here for the report.

FFIEC Issues Statement on Loan Modifications

The FFIEC issued a statement reminding mortgage servicers of their obligation to obtain the greatest recovery possible for a loan’s owner when considering loan modifications. The FFIEC recognizes that institutions servicing first and subordinate liens on the same mortgaged property may be faced with potential conflicts of interest. But, according to the FFIEC, a servicer’s decision “to modify the first-lien mortgage should not be influenced by the potential impact of the modification on the subordinate lien loan and vice versa. Any ownership interest in the subordinate lien cannot be a consideration.” Click here for the statement.

Treasury Announces New Program Providing Incentives to Modify Loans in Areas Where Home Price Declines Have Been Steepest

The Treasury Department issued a supplemental directive to provide additional incentive payments for Making Home Affordable Program participants that modify loans on properties in areas where home price declines have been steepest. The incentive payments will be calculated based on a formula that takes into account the rate of recent home price decline in a particular market, as well as the unpaid principal balance and market-to-market loan-to-value ratio of the mortgage loan. Click here for the directive.

FRB Publishes Tips on Dealing with HELOC Freezes or Reductions

The FRB published a guide for consumers that explains their rights and lenders’ responsibilities when home equity lines of credit are frozen or credit limits are reduced, and provides information for those seeking to have a HELOC reinstated. Click here for the guide.

FRB Publishes Mortgage Loan Shopping Tips

The FRB made available on its website a publication titled 5 Tips for Shopping for a Mortgage, which is designed to help homebuyers find the mortgage that is best for them by, among other things, encouraging comparison shopping. English and Spanish versions are available. Click here for the English version and here for the Spanish version.

OCC Updates Consumer Protection Exam Procedures

The OCC revised the electronic version of the Other Consumer Protection Laws and Regulations booklet, which includes examination procedures for a wide range of consumer protection topics. The revisions incorporate new procedures for the Servicemembers Civil Relief Act, John Warner National Defense Authorization Act, Regulation M, Electronic Signatures in Global and National Commerce Act and the privacy provisions of the Gramm-Leach-Bliley Act. Click here for the OCC's related bulletin and here for the booklet.

FRB Adjusts HOEPA Loan Fee Trigger

The FRB published its annual adjustment to the dollar amount of fees that triggers additional requirements and limitations under the Truth in Lending Act for home mortgage loans having rates or fees above a certain amount. The new dollar amount of the fee-based trigger is $579, effective January 1, 2010. The adjustment applies to so-called HOEPA loans, not to the new rules, adopted in July 2008, for "higher-priced mortgage loans." The rules for higher-priced mortgage loans use a different rate-based trigger. Click here for the Federal Register notice announcing the adjustment to the HOEPA loan fee trigger.

Massachusetts Enacts SAFE Act Legislation

Massachusetts enacted legislation in compliance with the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008, which calls for states to establish a scheme for the licensing and supervision of individuals originating mortgage loans. Among other things, the new law requires mortgage loan originators to register with the Nationwide Mortgage Licensing System, complete pre-licensing and continuing education, submit to fingerprinting for the purpose of a criminal history background check, pass a written test and meet surety bond coverage requirements. Mortgage loan originators employed by a depository institution or its operating subsidiary who have registered with the Nationwide Mortgage Licensing System are exempt from the new law. The law became effective July 31, 2009, with the mortgage loan originator licensing provisions taking effect on July 31, 2010 or July 31, 2011, depending on certain factors. Click here for the new law.