Consumer Financial Services Alert - April 17, 2012 April 17, 2012
In This Issue

House Representatives Send Letter to CFPB Seeking Assurance of Cost-Benefit Analysis on All New Rules Issued

House Representatives Randy Neugeberger and Shelley Capito submitted a letter to the CFPB seeking assurance that the CFPB will conduct “rigorous, transparent cost-benefit analysis” when issuing new rules. The letter also requested that CFPB Director Richard Cordray respond to a series of questions posed in the letter. Among the questions asked by the Representatives include: whether the CFPB would commit to adopting a rule only if it determines that the rule’s economic benefits outweigh its costs; and how the CFPB defines “significant rule” for purposes of Section 1022(d) of the Dodd-Frank Act, which requires the CFPB to evaluate the effectiveness of a “significant rule” five years after the rule’s effective date. Rep. Neugeberger is the Chairman of the Subcommittee on Oversight and Investigations and Rep. Capito is the Chairman of the Subcommittee on Financial Institutions and Consumer Credit within the Committee on Financial Services. Click here for the letter.

CFPB Previews Mortgage Servicing Rules Coming this Summer

The CFPB previewed mortgage loan servicing rules under consideration. Generally, the rules would implement requirements of the Dodd-Frank Act, which would go into effect on January 21, 2013, unless final rules are issued on or before that date. The concepts in the rules being considered outside the Dodd-Frank provisions are consistent with servicing requirements in the recent mortgage servicing consent orders and related Fannie Mae and Freddie Mac guidelines. Rulemaking is planned in eight areas:

Monthly Mortgage Statements. Servicers would be required to provide borrowers with monthly statements containing certain information, such as a summary of loan terms; breakdown of payments by principal, interest, fees, and escrow; late fee warnings; and information about loss mitigation options for delinquent borrowers.

ARM Adjustment Disclosures. Earlier disclosures of interest rate changes on most ARMs would be required. The disclosures would include an explanation of how the new payment is determined and when the change goes into effect; amount of the new payment; list of alternatives that may be pursued if the new monthly payment is unaffordable; contact information for housing counselors; and amount of any prepayment penalty.

Force-Placed Insurance. Servicers would be required to provide two notices to borrowers before charging for forced-placed insurance. The notices would include a good faith estimate of the insurance cost.

Communication of Loss Mitigation Options. Servicers would be required to make good faith efforts to contact delinquent borrowers to inform them of their options to avoid foreclosure. In these contacts, servicers would have to provide borrowers with information about the foreclosure process, loss mitigation options, and housing counselor availability.

Payment Crediting. Payments would have to be credited to the account on the day received. Partial payments may be retained in a suspense account, but must be applied to the earliest delinquent payment when the suspense account balance reaches one full monthly payment.

Error Resolution. Servicers notified of certain servicing-related errors by borrowers would generally have to acknowledge receipt of the notice within five days and conclude the investigation in 30 days. Shorter timeframes would be imposed on errors relating to payoffs and foreclosures.

Access to Servicer Foreclosure Prevention Team. Servicers would be required to provide delinquent borrowers with direct, ongoing access to staff dedicated to servicing troubled borrowers.

Recordkeeping. Servicers would have to establish information management policies designed to minimize errors; maintain records of borrower contacts; and facilitate loss mitigation by managing information submitted by borrowers and providing servicing personnel access to borrower records.

Greater details of the rules are contained in an outline prepared by the CFPB for the Small Business Regulatory Enforcement Fairness Act Panel convened to consider the potential impact of rulemaking on small businesses. The outline includes model disclosures that have been undergoing testing. The CFPB also provided the Panel with questions to consider in its evaluation. The CFPB indicated that it expects to formally propose these rules this Summer, and to finalize them in January 2013. Click here for the CFPB’s fact sheet on the rules under consideration, here for the outline and here for the panel questions.

CFPB Proposes Rule to Narrow Scope of Regulation Z

The CFPB issued a proposed rule to limit the reach of Regulation Z’s credit card fee restrictions. This proposed rule seeks “to resolve the uncertainty caused by . . .  litigation.”  In First Premier Bank et al v. The United States Consumer Financial Protection Bureau et al, 819 F. Supp. 2d 906 (D. S.D. Sept. 23, 2011), a credit card issuer sought and obtained a preliminary injunction against the FRB, preventing it from enforcing 12 C.F.R. § 1026.52(a). First Premier alleged that the FRB exceeded its authority by expanding Regulation Z to apply to fees the consumer is required to pay prior to account opening – rather than the first year of the account as required by the Credit Card Accountability and Responsibility Disclosure Act of 2009, which amended the Truth in Lending Act. The CFPB’s proposal would limit Regulation Z’s credit card fees restrictions to only during the first year after account opening. The CFPB noted that its proposal may impose potential costs on consumers by allowing creditors to collect fees that may be disallowed absent the proposal. The period for public comment ends on June 11, 2012. Click here for the proposed rule and click here for the order.

CFPB Launches College Financial Aid Comparison Tool

The CFPB launched a new prototype Financial Aid Cost Comparison Tool. The new web tool enables consumers to compare the price of college by allowing consumers to input financial aid information received from colleges and any scholarships received, and also adjust for family contributions. The Financial Aid Cost Comparison Tool is part of the CFPB’s wider focus on the private student loan market.  Click here for the CFPB press release, here for the Cost Comparison Worksheet, and here for information on the tool.

CFPB to Hold Supervised Banks and Nonbanks Responsible for Service Providers’ Violations of Federal Consumer Financial Protection Laws

The CFPB issued a guidance bulletin emphasizing that it expects supervised banks and nonbanks to oversee business relationships with service providers (defined in Section 1002(26) of the Dodd Frank Act as “any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service”) to ensure compliance with federal consumer protection laws. The CFPB noted that the mere fact that a supervised bank or nonbank enters into a business relationship with a service provider does not absolve the supervised bank or nonbank of responsibility for complying with federal consumer financial protection laws to avoid consumer harm.

The CFPB advised that it expects supervised banks and nonbanks to “have an effective process for managing the risks of service provider relationships.” The steps that should be taken to ensure that the business arrangement between supervised banks and nonbanks and service providers do not present unwarranted risks to consumers include:

  • Conducting thorough due diligence to verify that the service provider understands and is capable of complying with federal consumer financial protection laws;
  • Requesting and reviewing the service provider’s policies and procedures to ensure the service provider conducts appropriate training and oversight of its employees;
  • Setting forth clear expectations about compliance in contracts with the service provider and the consequences for non-compliance;
  • Establishing internal controls and on-going monitoring of compliance with federal consumer financial protection law; and
  • Addressing problems promptly.

Click here for the bulletin.

CFPB Continues to Push Its Interpretation of the Rescission Period under TILA

The CFPB continues to push its interpretation of the rescission period under the Truth in Lending Act by filing an amicus brief in the Third Circuit (see April 3, 2012 Alert for previous discussion of Tenth Circuit case). TILA provides consumers a statutory right to rescind certain types of mortgages within three days after consummation of a loan where a lender provides the required disclosures. If a lender fails to provide the consumer with the required disclosures, the right to rescind expires three years after consummation of the loan or upon sale of the home, whichever occurs first. A consumer can exercise the right to rescind by notifying the creditor of his/her intention to rescind the loan.

In this case, plaintiffs sent notices of rescission to defendants within three years and subsequently filed suit after the lenders refused to rescind the loans. However, in ruling on defendants’ motion to dismiss, the district court held that “mere invocation without more . . .will not preserve the right [to rescind] beyond the three-year period” and dismissed the suit as time-barred. Similar to the argument presented in its amicus brief filed in the Tenth Circuit, the CFPB argued that the recession period under TILA only defines the time to notify the lender and not the time to sue the lender.

Whether a consumer must both notify and sue a lender within the three year deadline under TILA is being heavily contested. In fact, as the CFPB noted in its amicus brief, there are at least 10 appeals pending in four circuits presenting the same issue. Click here for the CFPB’s amicus brief.

CFPB Issues Annual Consumer Response Report

The CFPB issued its annual Consumer Response Report which outlines the process by which the CFPB handles consumer complaints, statistics on the types of complaints received, how companies responded to complaints, and consumers review of companies’ responses. The CFPB also noted that it in some instances, complaints were referred to the Division of Supervision, Enforcement, and Fair Lending and Equal Opportunity for further action. Click here for the Annual Report.

CFPB Releases Debt Collection Report

The CFPB submitted its first report to Congress on its efforts to enforce the Fair Debt Collection Practices Act. The report is divided into five sections:  background; complaints received by the FTC; the CFPB's debt collection supervision program; developments in the FTC's enforcement and the CFPB's advocacy; recent policy initiatives; and future plans for further cooperation between the FTC and the CFPB. Click here for the report.

Industry Coalition Pushes for Broad Definition of "Qualified Mortgage"

Mortgage industry groups sent a letter to the CFPB urging it to broadly define "Qualified Mortgage" in its forthcoming Ability to Repay regulation.  Section 1411 of the Dodd-Frank Act amends the Truth in Lending Act to require creditors making residential mortgage loans to determine whether the borrower is reasonably able to repay the loan.  Under Section 1412 of Dodd-Frank, a borrower receiving a qualified mortgage will be presumed to be able to repay the loan.  In the letter, the industry groups argued that a broad definition would aid in the housing market recovery, by increasing the pool of qualified borrowers, and also reduce costs to borrowers who otherwise might be burdened with the costs of riskier non-qualified mortgage loans. Click here for the letter.

FRB Issues Policy on Renting REO Property

The FRB issued a Policy Statement on Rental of Residential Other Real Estate Owned Properties. Banking organizations may rent one- to four-family OREO properties without having to demonstrate continuous active marketing of the properties. The policy statement also set forth the FRB’s expectations for rental of the properties, including a general guideline for evaluating the overall costs, benefits, and risks of renting, and specific expectations for large-scale residential OREO rentals. Further, the FRB advised that banking organizations are expected to comply with all applicable state and federal law including landlord-tenant laws, property maintenance standards, eviction protections under the Protecting Tenants at Foreclosure Act, and protections under the Servicemembers Civil Relief Act. Banking organizations are also required to review homeowner and condominium association bylaws and local zoning laws for prohibitions on renting the property. Click here for the press release here for the FRB letter, and here for the policy statement.

FTC Announces Schedule for Reviewing Regulations

The FTC announced its 2012 schedule for reviewing regulations, which include the following three guides: Guides for the Rebuilt, Reconditioned and Other Used Automobile Parts Industry; Guides for the Jewelry, Precious Metals and Pewter Industries; and Guides for Advertising Allowances and Other Merchandising Payments and Services. Four rules concerning the Hodler in Due Course Rule, and Deceptive Pricing and Advertising have been rescheduled for 2013 and 2017. Click here for the press release.

NCUA Launches Financial Literacy Website for Kids

The NCUA has created a website for kids to learn about money, including how it is made and used, and also how children can start a savings account. Click here to link to the website.

OCC Issues Examination Procedures for the S.A.F.E. Act

The OCC issued interagency examination procedures for the Secure and Fair Enforcement for Mortgage Licensing Act. The S.A.F.E. Act prohibits individuals from engaging in the business of a residential mortgage loan originator without first obtaining federal registration as a mortgage loan originator or state license and registration as a state-licensed mortgage loan originator. The examination procedures lay out the background and requirements of the S.A.F.E. Act and Regulation G. Click here for the examination procedures.

Fourth Circuit Revives Class Action Allowing Claims under Maryland’s Repossession Statute

The Fourth Circuit vacated and remanded a lower court’s decision, holding that the repossession provisions in Maryland’s Credit Grantor Law are not subject to federal preemption. Plaintiff entered into a retail sales installment contract for the purchase of a used vehicle. Defendants repossessed the vehicle after plaintiff failed to make payments. Defendants sent plaintiff a notice stating that the vehicle would be sold at a private sale and that she had a right to redeem the vehicle. However, as required under the Credit Grantor Law, the notice did not disclose the location of the vehicle or the time and place where it was to be sold.

Plaintiff filed a putative class action against defendants alleging violations of the Credit Grantor Law. Defendants moved to dismiss the class action for failure to state a claim, alleging the relevant provisions of the statute were preempted by the National Bank Act and its implementing OCC regulations. The lower court ruled in favor of defendants and dismissed the class action. Plaintiff appealed.

The Fourth Circuit reversed the lower court’s dismissal based on federal preemption for a number of reasons. First, the OCC regulations do not expressly preempt state repossession laws. Second, citing Aguayo v. U.S. Bank, 653 F.3d 912 (9th Cir. 2011), the Court concluded that the National Bank Act and OCC regulations do not “occupy the field” of lending-lending regulation because the OCC has “explicitly avoided full field preemption in its rulemaking” and had not “been granted full field preemption by Congress.” Third, preemption was not appropriate because repossession rights are granted to national banks under state law, not federal law.

The Fourth Circuit rejected defendants’ argument that the power granted by the National Bank Act to make loans included the power to collect on the loans and, therefore, “preemption is implied.” The Court noted that in the OCC regulations, debt collection and extension of credit are related, but treated differently. In reaching it decision, the Court also pointed to the U.S. Supreme Court’s recognition that national banks are subject to state debt collection laws. See National Bank v. Commonwealth, 76 U.S. 353 (1869). Click here for the Fourth Circuit’s opinion.

The Department of Justice Sues Mortgage Bankers for Violations of Fair Housing Act and Equal Credit Opportunity Act

The Department of Justice filed a complaint against a mortgage banker alleging violations of the Fair Housing Act and Equal Credit Opportunity Act. The complaint alleges that defendant engaged in a pattern and practice of race and national origin discrimination by charging African American and Hispanic borrowers higher interest rates and fees on home mortgage loans compared to the rates and fees the defendant charged to similarly-situated non-Hispanic white borrowers. The Department of Justice alleged that in hundreds of instances African American and or Hispanic borrowers with similar credit and risk profiles as white borrowers, entering in the same type of home mortgage loan, paid higher interest rates and fees. Click here for the complaint.

Eighth Circuit Affirms Dismissal of RICO Suit over Alleged Inflated Appraisals

The Eighth Circuit affirmed a lower court’s dismissal of plaintiffs’ lawsuit over an alleged “inflated appraisal fee scheme.” Plaintiffs filed a putative class action alleging violations of the Racketeer Influenced and Corrupt Organizations Act, the Real Estate Settlement Procedures Act, and several state laws. Plaintiffs alleged the defendants “skimmed the difference” between the actual cost of the appraisal and that which was disclosed and charged in the HUD-1 settlement statement. Plaintiffs maintained that defendants required appraisers into performing appraisals at below market rate, but did not pass along the reduced appraisal fees to plaintiffs. The lower court held that plaintiffs lacked standing under RICO and the state anti-racketeering statute because the alleged RICO violations did not cause plaintiffs to suffer any “concrete financial loss.” More specifically, the lower court held that the plaintiffs would have been in the same financial position in the absence of the alleged RICO violations. The Eighth Circuit agreed.

Notably, the Eighth Circuit affirmed the lower court’s dismissal of plaintiffs’ Section 8(a) RESPA claim, noting that the company which arranged real-property appraisals did not appraise properties, but simply hired an appraiser on an approved list and “merely forwarded the appraisal” to the lender. The Eighth Circuit held further that plaintiffs would have to allege “more than the mere fact of a referral and the possibility of improper control to sustain a claim under Section 8(a).” The Eighth Circuit also agreed with the lower court’s dismissal of plaintiffs’ Section 8(b) RESPA claim, pointing to its ruling in Haug v. Bank of America, N.A., 317 F.3d 832 (8th Cir. 2003), in which it held that Section 8(b) is an anti-kickback provision which “unambiguously requires at least two parties to share a settlement fee in order to violate the statute.” Like the allegations in Haug, plaintiffs’ allegations were about marking up the appraisal fee, and “an overcharge, standing alone, does not violate Section 8(b) of RESPA.” Click here for the opinion.

District Court Rules on Payment Protection Plan Allegations

The District Court for the Western District of Washington partially dismissed a putative class action for a dispute over payment protection plans. Plaintiff filed a putative class action alleging various state common law claims, including that defendant continued to market and sell its payment protection plan to the self-employed, despite excluding them from protection under its plans.

The Court granted defendant’s motion to dismiss plaintiff’s breach of covenant of good faith and fair dealing claim, finding it preempted because the claim was based on a disclosure, (i.e., duty to disclose the self-employment exclusion during contract formation), which is governed by the National Bank Act. Plaintiff’s remaining state law claims for breach of contract and unjust enrichment survived. Click here for the order.

New York State Department of Financial Services to Further Investigate Force-Placed Insurance Practices

New York’s Department of Financial Services announced that it intends to continue investigating force-placed insurance practices of insurers operating in New York. The Department conducted an initial review, the result of which raised concerns that has led to requests from the Department for more detailed and extensive information, including how rates and expected losses are calculated and itemized reports of insurers’ expenses. The result of the Department’s initial investigation have led it to widen the depth of it’s investigation. The Department plans to hold public hearings in May to hear from interested parties about the whether the rates for force-placed insurance are excessive. Click here for the Department’s press release.