Consumer Financial Services Alert - April 5, 2011 April 05, 2011
In This Issue

FRB Clarifies Credit Card Act Rules

The FRB issued a final rule amending Regulation Z to clarify certain aspects of prior rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009. The Act requires that, before opening a new credit card account or increasing the credit limit on an existing account, card issuers consider a consumer’s ability to make the required payments on the account. The rule addresses practices that can result in extensions of credit to consumers who lack the ability to pay. Specifically, the rule provides that credit card applications generally cannot request a consumer’s “household income” because that term is too vague to allow issuers to properly evaluate the consumer’s ability to pay. Instead, issuers must consider the consumer’s individual income or salary.

In addition, the rule clarifies that:

  • Promotional programs that waive interest charges for a specified period of time are subject to the same protections of the Act as promotional programs that apply a reduced rate for a specified period. For example, an issuer that offers to waive interest charges for six months will be prohibited from revoking the waiver and charging interest during the six-month period, unless the account becomes more than 60 days delinquent.
  • Application and similar fees that a consumer is required to pay before a credit card account is opened are covered by the same limitations of the Act as fees charged during the first year after the account is opened. Because the total amount of these fees cannot exceed 25% of the account's initial credit limit, an issuer that, for example, charges a $75 fee to apply for a credit card with a $400 credit limit generally will not be permitted to charge more than $25 in additional fees during the first year after account opening.

Compliance with the rule is mandatory beginning October 1, 2011. Click here for the rule.

FRB Increases Credit Amount Thresholds for Coverage Under Regulations M and Z

The FRB issued two rules that will increase the threshold amounts for coverage under Regulation M and Regulation Z from $25,000 to $50,000. Under the new rules, which implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, consumer credit transactions and consumer leases with contractual obligations up to $50,000 will be covered by Regulations M and Z. The rules are effective on July 21, 2011, and, beginning in 2012, the $50,000 threshold will be adjusted annually for inflation by the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. Click here for the Regulation M rule and here for the Regulation Z rule.

Federal Agencies Seek Comment on Proposed Risk-Retention Rule

Six federal agencies are seeking comment on a proposed rule that would require sponsors of asset-backed securities to retain at least five percent of the credit risk of the assets underlying the securities and would not permit sponsors to transfer or hedge that credit risk.

The rule is proposed by the FRB, OCC, FDIC, SEC, HUD and the Federal Housing Finance Agency. It would provide sponsors with various options for meeting the risk-retention requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, the options include:

  • retention of risk by holding at least five percent of each class of ABS issued in a securitization transaction (also known as vertical retention);
  • retention of a first-loss residual interest in an amount equal to at least five percent of the par value of all ABS interests issued in a securitization transaction (horizontal retention);
  • an equally-divided combination of vertical and horizontal retention;
  • retention of a representative sample of the assets designated for securitization in an amount equal to at least five percent of the unpaid principal balance of all the designated assets; and
  • for commercial mortgage-backed securities, retention of at least a five percent first-loss residual interest by a third party that specifically negotiates for the interest, if certain requirements are met.

As required by Dodd-Frank, the proposal includes descriptions of loans that would not be subject to these requirements, including asset-backed securities that are collateralized exclusively by residential mortgage loans that qualify as “qualified residential mortgages”. The proposal would establish a definition for QRMs -- incorporating such criteria as borrower credit history, payment terms, and loan-to-value ratio -- designed to ensure they are of very high credit quality. The proposal also includes investor disclosure requirements regarding material information concerning the sponsor's retained interests in a securitization transaction.

The proposal also has a zero percent risk-retention requirement for ABS collateralized exclusively by commercial loans, commercial mortgages, or automobile loans that meet certain underwriting standards. As with QRMs, these underwriting standards are designed to be robust and to ensure that the loans backing the ABS are of very low credit risk.

Comments on the proposal must be received by June 10, 2011. Click here for the proposal.

U.S. District Court Holds That Servicer Not Required to Provide ECOA Adverse Action Notice to Borrower Denied Permanent HAMP Modification

A U.S. District Court judge recently concluded that a mortgage loan servicer did not violate the Equal Credit Opportunity Act when it denied a borrower’s request for a permanent loan modification under the Home Affordable Modification Program without providing a written adverse action notice. The borrower was current on her mortgage payments prior to applying for a modification under HAMP, and made each of her trial period payments in full and on time. After being verbally notified that her request for a modification had been denied, the borrower brought suit against the servicer, alleging that the servicer had failed to provide the written notice of adverse action required by ECOA. The court granted the servicer’s motion to dismiss. The court observed that ECOA’s notice requirements “do not apply where the consumer requesting credit is delinquent or in default on an existing credit arrangement with the creditor,” and that a consumer’s default status is determined at the time the creditor takes action with respect to the consumer, rather than the time the consumer applies for credit. Although the plaintiff was not delinquent when she applied for HAMP, and timely made each of her HAMP trial payments, the HAMP Trial Period Plan explicitly provided that it was “not a modification of the Loan Documents.” The court therefore concluded that because the plaintiff had made only reduced trial payments during the trial period – rather than the full monthly payments due under her original note – she was not current on her payments at the time her modification request was denied. Accordingly, no written notice of the reasons for the denial was required under ECOA. Click here for Davis v. Citimortgage, No. 10-12136 (E.D. Mich. March 11, 2011).