Consumer Financial Services Alert - December 15, 2009 December 15, 2009
In This Issue

Federal Appeals Court Affirms Dismissal of Lawsuit Challenging Termination of HELOCs

The First Circuit recently affirmed the dismissal of a putative nationwide class action alleging that a bank breached its contracts and violated the Truth in Lending Act and state consumer protection law by terminating home equity lines of credit when payments were only a few days late. The agreement permitted the bank to terminate the HELOC and accelerate the outstanding balance if plaintiffs breached a material obligation of the agreement by, among other things, failing to meet its repayment terms. The agreement separately provided for a late fee in the event that the minimum payment was not received within 10 days of the due date. Plaintiffs argued that this late fee provision created a 10-day “grace period” during which time the HELOC could not be terminated or accelerated, and relied heavily on the perceived inequity in the bank being able to terminate a credit line when it could not even impose a small late fee during that time. The Court affirmed the district court’s dismissal, finding that the unambiguous language of the agreement permitted the bank’s actions. The Court held that the late fee provision was separate and distinct from the bank’s right to terminate or accelerate the HELOC, and that it did not extend the time in which plaintiffs were required to make their payments. The Court also rejected plaintiffs’ claims under TILA and Massachusetts’ consumer protection statute on similar grounds. Goodwin Procter partner Jim McGarry represented National City Bank, both in the district court and in the First Circuit. Click here for Cunningham v. National City Bank, No. 09-1255 (1st Cir., Nov. 25, 2009).

Federal Appeals Court Decertifies Putative Class for Alleged Violations of RESPA

The Fifth Circuit recently overturned the certification of a putative statewide Real Estate Settlement Procedures Act class action alleging excessive charges for title insurance. Plaintiffs claimed a title insurer violated a Texas law requiring automatic title insurance discounts on refinances where the prior loan was less than seven years old. Plaintiffs alleged that the insurer’s “over-charge” (by failing to discount) constituted an unearned fee, which was allegedly improperly split with the insurer’s agents in violation of RESPA Sections 8(b) and 8(c). The Fifth Circuit reversed the class certification grant, holding that individual issues predominated over class issues. The Court found that plaintiffs needed to demonstrate that the alleged “overcharge” was not justified by any services performed by the title insurer or its agents for each potential class member, requiring individual proof for each class member, and making class certification inappropriate. The Court upheld the certification of plaintiffs’ secondary equitable state law claims, but ordered the district court to consider whether a supplemental jurisdiction over the state law claims was justified given the decertification of the RESPA class.  Click here for Mims v. Stewart Title Guaranty Company, No. 09-10127 (5th Cir., Dec. 9, 2009).

HUD Issues Proposed Rule on SAFE Act Minimum Standards

HUD issued a proposed rule setting forth the minimum standards the Secure and Fair Enforcement for Mortgage Licensing Act provides states to meet in licensing mortgage loan originators. The proposal seeks to interpret and clarify undefined or ambiguous terms contained in the Act, such as "engage in the business of a loan originator," "take an application," and "offering or negotiating." HUD also proposes procedures for determining state compliance with the SAFE Act licensing and registration system requirements and addresses how it will respond if it finds that a state has failed to comply. The proposal is subject to a 60-day comment period following publication in the Federal Register. Click here for the proposal.

FRB Issues Guidance on Applicability of Adverse Action Notices to Mortgage Loan Modification Requests

The FRB issued a Consumer Affairs letter concluding that, under certain circumstances, adverse action notices under Regulation B are required for mortgage loan modifications, including modifications under the federal Making Home Affordable Modification Program. The letter analyzes modifications to determine if there is (1) an extension of credit, (2) an application, (3) an adverse action on the application, and (4) a borrower delinquency or default on the loan. Using a hypothetical HAMP modification, the letter opines that (1) the extension of the right to defer payment is an extension of credit, (2) where a borrower submits sufficient information for the servicer to evaluate the borrower for a modification, it qualifies as an application for an extension of credit, (3) if a servicer evaluates a borrower's information according to HAMP's guidelines and declines the request, then the servicer has taken an adverse action, and (4) adverse action notices are required for borrowers whose mortgage loans are not currently delinquent or in default. Click here for the letter.