Consumer Financial Services Alert - May 15, 2012 May 15, 2012
In This Issue

Agencies File Joint Memorandum Arguing Section 1681c of FCRA Does Not Violate First Amendment

The CFPB, FTC and DOJ intervened in a lawsuit alleging that Section 1681c of the Fair Credit Reporting Act, which prohibits consumer reporting agencies from disclosing arrest records and other adverse information that is older than seven years, violates the commercial speech doctrine under the First Amendment. The agencies argued that plaintiff’s reliance on Sorrell v. IMS Health Inc., 131 S. Ct. 2653 (2011) was misplaced because Sorrell does not require strict scrutiny for commercial speech. Rather, according to the agencies, the court should apply the standard articulated in Central Hudson Gas & Electric Corp., v. Public Service Commission, 447 U.S. 557 (1980), which provides for both intermediate and strict scrutiny. Applying Central Hudson, the agencies concluded that Section 1681c satisfies the intermediate scrutiny test because it protects consumer privacy, long held to be a substantial government interest, and because Section 1681c is no more extensive than necessary to serve that interest. Click here for the press release and here for the memorandum.

CFPB Outlines Mortgage Loan Originator Rules Under Consideration

In materials provided to the Small Business Review Panel, the CFPB outlined its plans to implement the loan originator compensation provisions of the Dodd-Frank Act that place restrictions on the ability of creditors and consumers to compensate mortgage loan originators. These restrictions are similar to those contained in the rule issued by the FRB in April 2011, which prohibits a creditor from compensating a loan originator based on the terms and conditions of the transaction.

The Dodd-Frank Act generally provides that loan originators may only be compensated by consumers, but may also be compensated by the creditor when the following two conditions are met: (1) the originator must not receive any compensation directly from the consumer; and (2) the consumer must not make an upfront payment of discount points, origination points, or fees, other than bona fide third-party fees not retained by the creditor, the loan originator, or affiliates.  The Dodd-Frank Act gives the CFPB authority to create exemptions to the second condition if it finds that the exemptions are in the public interest.  In its proposal, the CFPB states that it is considering using its exemption authority to permit consumer payment of upfront points and fees under certain circumstances, including, for example, if the discount points are bona fide, meaning they result in a minimum reduction of the interest rate for each point paid, and the creditor offers an option of a no discount point loan.

The CFPB also indicated its intention to carry out its authority under Dodd-Frank to ensure that loan originators are “qualified.” Currently, the Secure and Fair Enforcement for Mortgage Licensing Act imposes registration or licensing requirements on loan originators, but these requirements differ based on whether the loan originator is an employee of a bank or non-bank.  Under the CFPB’s proposal, all loan originators of banks and non-banks would be subject to certain qualifications and requirements, including the same standards for character, fitness, and financial responsibility; criminal background checks; and training. Click here for the related press release, here for the outline provided to the Small Business Review Panel, and here for discussion issues given to Panel members.

CFPB’s Regulatory Focus on Nonbanks

In a speech to the 2012 Simon New York City Conference, Director Richard Cordray signaled that the CFPB’s most pressing issue is nonbank reform. Director Cordray noted that the CFPB is not seeking to stymie new financial products, but rather to provide a stronger regulatory framework, especially for nonbanks, such as mortgage lenders, originators, payday lenders and those who provide private student loans. Click here for Mr. Cordray’s prepared remarks.

CFPB Stresses Fairness and Transparency in Qualified Mortgage Rulemaking

CFPB Deputy Director Raj Date indicated that the CFPB is fully aware of industry concerns over the final qualified mortgage rule, but stressed the importance of fairness and transparency in the rule. Mr. Date stated that in promulgating the rule, the CFPB is considering a range of issues, including: (1) a careful definition of lower-risk qualified mortgages to minimize compliance burdens; (2) market stabilization; (3) avoidance of disincentives that would prevent lenders from making “prudent, profitable loans in the non-traditional segments”; (4) encouraging competitive market conditions; and (5) issuing a “sensible rule that works for the market throughout the credit cycle,” while remaining attentive to the fragility and risk-averseness of the current market. The CFPB is expected to issue the final rule this summer. Click here for Mr. Date’s prepared remarks.

CFPB Names Head of the Office of Minority and Women Inclusion

The CFPB named Stuart Ishimaru as the head of the newly-created Office of Minority and Women Inclusion, required by Section 342 of the Dodd-Frank Act. Mr. Ishimaru was the former Commissioner of the Equal Employment Opportunity Commission, and in the past served within the Civil Rights Division at the DOJ. The OMWI is charged with promoting diversity both at the CFPB and at the financial institutions regulated by the CFPB. Click here for the press release and here for Mr. Cordray’s related remarks.

CFPB Seeks Comment on Qualitative Testing of Mortgage Servicing Related Model Forms

The CFPB is soliciting comments concerning its proposal to qualitatively test mortgage servicing related model forms and disclosures, for use in future proposed and final model forms, as well as for revisions to model forms. The specific comments sought are on (1) whether the testing is necessary, and (2) ways to enhance the quality and clarity of the information to be collected. Comments are due July 10, 2012. Click here for the related notice.

FTC Affirms Consumers’ Rights Under Holder in Due Course Rule

The FTC issued an advisory opinion affirming its interpretation of the holder in due course rule. The rule permits consumers who enter into credit contracts with a seller of goods to assert the same legal claims and defenses against a third party who purchases the credit contract as they would have against the original seller. The advisory opinion, issued in response to a request from the National Consumer Law Center and other consumer protection advocacy groups, clarifies that courts should not limit consumers’ ability to seek affirmative relief only to instances where a rescission right under state law exists.  The NCLC requested the opinion after a number of courts denied relief absent a state law rescission claim. Click here for the press release and here for the advisory opinion.

The Treasury Enhances HAMP to Provide Increased Protection for Servicemembers

In conjunction with the CFPB, the Department of Treasury announced enhancements to the Home Affordable Modification Program for military servicemembers who have received orders for a permanent change of station. The enhancements allow military homeowners who are permanently displaced by a job-related move to still qualify as owner-occupants and be eligible for a HAMP mortgage modification. A borrower qualifies for a HAMP mortgage modification if: (1) he/she is displaced due to an out-of-area job transfer and was occupying the home as a principal residence immediately prior to the displacement; (2) he/she intends to return home at some point in the future; and (3) he/she does not own any other single-family real estate.  Military homeowners who do not meet the third criterion may still qualify for a HAMP modification under enhancements for rental properties announced by the Department of Treasury in January 2012.  The new enhancements are effective June 1, 2012. Click here for the related press release from the Department of Treasury, here for the related press release from the CFPB, and here for the January 2012 press release on rental properties.

Circuits Split on TILA’s Rescission Requirements

The Fourth Circuit adopted the CFPB’s interpretation of the Truth in Lending Act (see April 3 and April 17 Alerts) holding that notifying the lender, as opposed to filing a lawsuit, is sufficient to satisfy TILA’s rescission requirements. In its amicus brief, the CFPB took the position that the rescission period under TILA only defines the time to notify the lender and not the time to sue the lender. Using a plain language argument, the Fourth Circuit held that a borrower exercises his/her right of rescission merely by communicating in writing to the creditor his/her intention to rescind. The Court limited its opinion to the question of when a borrower has exercised the right to rescind, and did not address the additional question of when the rescission has been completed and the contract voided.  The Ninth Circuit has held that a borrower must file a lawsuit within the three-year time period in order to exercise the right to rescind. Click here for the opinion.

State Court Holds Affidavits in Debt Collection Suit Violate Hearsay Rule

A Tennessee appellate court reversed a lower court ruling that was based, in part, on affidavits submitted by a debt collector as proof of the debt. The debt collector was a subsequent purchaser of a credit card contract, and at trial sought to introduce evidence of the debtor’s alleged debt through testimony by the debt collector’s in-house attorney. In reversing the lower court, the Court found that two affidavits were “erroneously admitted” under the business records exception because the affiant had no personal knowledge of the facts and prepared them solely for litigation purposes.  The Court also noted that because the debt collector was not the original creditor, it had to establish that it was the owner of the debt. Click here for the order.

Federal Judge Certifies Class Action in Overdraft Fees Litigation

The United States District Court for the Southern District of Florida certified a class action lawsuit alleging that defendants engaged in a systematic scheme to manipulate and re-order debit card transactions to increase the number of overdraft fees imposed on its customers. Plaintiffs alleged that defendant employed a bookkeeping trick to re-order the sequence of debit card transactions from highest to lowest dollar amount at the time of posting to deplete customer accounts more quickly and to collect excessive amounts of overdraft fees. Plaintiffs alleged that, but for the “trick” employed by defendant, sufficient funds would have been in the customers’ accounts.  Further, plaintiffs alleged that defendant did not fairly disclose its bookkeeping practices, but rather actively concealed those practices. In granting class certification, the Court found that plaintiffs provided “significant evidence” to establish the existence of common issues of law and fact related to defendant’s bookkeeping practices. Click here for the order.

Class Certification Challenging Validity of Assignments in Foreclosure Actions Denied

The United States District Court for the District of Massachusetts recently denied a motion for class certification in a case asserting that defendants failed to obtain valid assignments prior to foreclosing.  Plaintiffs claimed that, in contravention of Massachusetts law, defendants’ foreclosures were void under the Massachusetts Supreme Judicial Court’s decision in U.S. Bank Nat’l Ass’n v. Ibanez, 941 N.E.2d 40, (Mass., Jan. 7, 2011), because the assignments were recorded after the foreclosure sales. The Ibanez court held that under Massachusetts law, an assignment is required before a foreclosure sale, and that the lack of an assignment renders the foreclosure sale void and not merely voidable. The District Court here held that plaintiffs failed to meet the commonality and typicality requirements of Fed. R. Civ. P. 23(a), holding that, under Wal-Mart Stores, Inc v. Dukes, 131 S. Ct. 2541 (June 20, 2011), a “determination of whether the [Massachusetts statutory foreclosure requirements were] in fact violated would require 8,000 highly individualized and case-specific inquiries.” The key issue was that the determination of whether an assignment existed prior to the recorded assignment would require a case-by-case analysis.  Goodwin Procter partners James McGarry and Richard Oetheimer represent U.S. Bank, as Trustee for certain securitization trusts.  Click here for the order.

California State Legislature Passes Portion of the California Homeowner Bill of Rights

The California state legislature approved an “anti-blight” bill that is one of six pieces of California’s proposed Homeowner Bill of Rights. The existing provisions of Cal. Civ. Code § 2923.3, which imposes a $1,000 per day fine on property owners who fail to properly maintain foreclosed homes, are set to expire on January 1, 2013. The newly-enacted law extends the operation of the law indefinitely. Click here for the bill.