Consumer Financial Services Alert - May 29, 2012 May 29, 2012
In This Issue

CFPB Focusing on Prepaid Products

In advance of its Prepaid Card Field Hearing, held on May 23, 2012, in Durham, N.C., the CFPB published an advanced notice of proposed rulemaking for prepaid products, commonly referred to as general purpose reloadable (GPR) cards. The CFPB is seeking information on the costs, benefits, and risks to consumers of GPR cards and will consider, among other things, whether:  (1) to expand the Electronic Funds Transfer Act and Regulation E to include all GPR cards; many consumers use GPR cards as substitutes for checking and other deposit accounts, which are currently governed by Regulation E; (2) banks that issue GPR cards should be required to meet FDIC “pass-through” requirements; (3) to develop standardized disclosures that can be read prior to purchasing or using a GPR card; and (4) whether GPR card issuers should be required to provide liability protection from unauthorized transactions.  The CFPB also seeks input and data concerning the efficacy of credit reporting features on GPR cards in enabling consumers to improve or build credit.  Comments are due July 22, 2012.  The CFPB has also launched a series of Ask CFPB questions related to GPR cards designed to help educate consumers on these products.  Click here for Mr. Cordray’s prepared remarks delivered during the hearing, here for the rulemaking notice, and here for the Ask CFPB web tool.

CFPB Issues Proposed Rule on Supervision of Nonbanks

The CFPB proposed a rule that establishes procedures under which it may supervise a nonbank.  Section 1024 of the Dodd Frank Act grants the CFPB the authority to supervise any nonbank that poses a risk to consumers with regard to the offering or provision of consumer financial products or services. Under the proposed rule, the CFPB must first issue a Notice of Reasonable Cause, which informs the nonbank that the CFPB may have reasonable cause to determine that the nonbank is engaging in conduct that poses a risk to consumers.  After the Notice of Reasonable Cause is issued, the nonbank will have an opportunity to respond, and based upon the response, and in conjunction with a recommendation from the Deputy Assistant Director, the Director of Nonbank Supervision will make a final determination about whether the nonbank is subject to the CFPB’s supervisory authority.  According to the proposal, the Notice of Reasonable Cause does not constitute a notice of charges for any alleged violation of federal consumer financial law or other law.  Moreover, the proceedings are informal and do not constitute an adjudicatory proceeding under the Administrative Procedure Act. The comment period ends July 24, 2012.  Click here for the press release and here for the proposal.

CFPB Seeking Qualitative Information on Burden of Regulations

The CFPB is seeking to collect qualitative information on the potential costs of complying with potential new regulations in the mortgage and remittance markets.  The CFPB seeks to understand the potential burdens of compliance in advance of issuing additional rules.   Click here for the related notice.

CFPB Names Assistant Director of the Office of Financial Empowerment

The CFPB named Cliff Rosenthal as the Assistant Director of the Office of Financial Empowerment.  Prior to joining the CFPB, Mr. Rosenthal was the President and Chief Executive Officer of the National Federation of Community Development Credit Unions, a nonprofit association of financial cooperatives dedicated to serving low-income and minority communities.  Click here for Mr. Rosenthal’s prepared remarks regarding his new position.

CFPB Establishes New Ethics and Compliance Program

The CFPB published new ethics regulations, applicable to CFPB employees, which are designed to supplement existing government ethics laws and regulations.  The new rules are similar to the rules imposed by other financial regulatory agencies, but have also been modified to reflect the scope of the CFPB’s supervisory authority over both banks and nonbanks.  Key components of the new regulations establish restrictions and prohibitions on:
  • Outside employment and business activities;
  • Ownership of certain financial interests;
  • Seeking, obtaining or renegotiating credit and indebtedness;
  • Recommendations concerning debt and equity interests;
  • Participating in certain CFPB matters based on credit or indebtedness;
  • Purchasing certain assets; and
  • Participating in particular matters involving outside entities.

Comments are due June 26, 2012, the effective date of the rules. Click here for the press release and here for the rules.

Supreme Court Upholds Limited Interpretation of RESPA

The United States Supreme Court has ruled that 12 U.S.C. § 2607(b), a section of the Real Estate Settlement Procedures Act, applies only to fees shared between two or more settlement service providers, and does not provide a cause of action for borrowers seeking to challenge the collection of fees by lenders.  The borrowers had obtained mortgage loans from the defendant and later filed suit alleging that the defendant violated § 2607(b) by charging them fees for which no services were provided, specifically, a loan discount fee.  The defendant argued successfully in the lower courts that § 2607(b) does not apply to the collection of fees agreed upon between borrowers and lenders unless the fee was impermissibly split among two or more settlement service providers.  Since the loan discount fee was agreed to between the borrower and defendant, and retained by the defendant, the fee was not within the reach of the statute.

The Supreme Court unanimously affirmed the judgment for the defendant and rejected the plaintiffs’ interpretation of the statute, holding that § 2607(b) “unambiguously covers only a settlement-service provider’s splitting of a fee with one or more persons.”  Of equal significance, the Court also affirmatively held that § 2607(b) does not reach a single provider’s alleged retention of an unearned fee, and thus does not provide a means for a borrower to challenge a lender’s fee on grounds that such fee was “unreasonably high.”  The Court’s ruling represents a major victory for the mortgage industry; lenders and settlement service providers have faced many lawsuits in recent years that will no longer be viable as a result of this decision.  Click here for the opinion. The defendant was represented by Goodwin Procter’s Tom Hefferon.

Sixth Circuit Holds Loan Servicer Could be Debt Collector Under FDCPA

The United States Court of Appeals for the Sixth Circuit has held that a loan servicer could be a “debt collector” under the federal Fair Debt Collection Practices Act, depending on whether the loan was assigned for servicing before or after the default occurred.  The Sixth Circuit addressed the distinction between a “creditor” and a “debt collector” for purposes of the FDCPA, holding that an entity that did not originate the debt but later acquired it and sought to collect upon it must be either a “creditor” or a “debt collector.” This ruling potentially undermines a defense to FDCPA claims commonly raised by loan servicers – that neither definition is applicable such that they cannot be liable under the Act.  Under the Sixth Circuit’s ruling, a servicer is a “creditor” if the loan was not in default, or was not alleged to be in default, at the time the servicer assumes its servicing duties, and a loan servicer can be a “debt collector” under the FDCPA if the loan was in default, or was alleged to be in default (such as through the mailing of a dunning letter to a borrower), when the servicer takes assignment of the servicing rights.  Click here for the opinion.

Seventh Circuit Upholds TCPA Violations for Automated Calls to Reassigned Numbers

The United States Court of Appeals for the Seventh Circuit upheld a lower court opinion holding that a bill collector violated the Telephone Consumer Protection Act when it used automated dialers to place calls to cell phone numbers without the consent of the current subscribers, even though a previous subscriber may have granted such consent.  The Court’s opinion turned on whether the term “called party” refers to the current subscriber or the intended recipient.  The plaintiffs argued for the former interpretation, the defendants the latter.  The Court ultimately concluded that, although not defined in the statute, the term “called party” means the current subscriber because the current subscriber must give consent, and, therefore, that consent lapses upon number reassignment.  Click here for the opinion.

Eleventh Circuit Holds FDCPA Applicable to Foreclosure Firms

The United States Court of Appeals for the Eleventh Circuit ruled that the federal FDCPA can apply to a law firm that serves a demand for payment and notice of intent to foreclose upon a defaulted mortgage borrower.  The plaintiffs, defaulted mortgage borrowers, alleged that the defendant, a foreclosure law firm, violated the FDCPA by sending a notice that contained “misrepresentations.”  The trial court granted the law firm’s motion to dismiss, holding that the law firm was not a “debt collector” within the purview of the FDCPA, and that sending the foreclosure letter was not an attempt to collect a debt but instead was merely an attempt to enforce a client’s security interest.

Reversing the trial court, the Eleventh Circuit held that the law firm’s letter could be both an attempt to enforce a security interest and to collect a debt, and, therefore, that plaintiffs had adequately pled a claim for violation of the FDCPA – a ruling that lends support to plaintiffs seeking to hold law firms liable for their role in the foreclosure process.  While holding that the FDCPA is not per se inapplicable to a foreclosure law firm, this opinion may be of limited significance beyond the early pleading stages of case.  The Eleventh Circuit’s based its ruling in part upon the very plaintiff-friendly pleading standard applied to a motion to dismiss, and thus did not examine the actual merits of plaintiffs’ allegation that the law firm’s foreclosure notice contained “misrepresentations.”  Click here for the opinion.

Federal Judge Upholds FTC’s Interpretation of “Uses of Consumer Report”

The United States District Court for the District of Columbia granted the FTC’s motion to dismiss, ultimately, agreeing with the FTC’s interpretation of the meaning of “uses of consumer reports” under the Fair Credit Reporting Act.  According to the FTC, an automobile dealer that does not obtain a consumer report nonetheless “uses” it when the dealer executes a credit contract based upon a third-party financing source’s use of the consumer report. The National Automobile Dealers Association disagreed, filing suit against the FTC alleging that its interpretation of “uses of consumer reports” violated the Administrative Procedure Act because the FTC exceeded its statutory authority and its interpretation was arbitrary and capricious.

The section in dispute, 15 U.S.C. § 1681m(h), was added into FCRA by the Fair and Accurate Credit Transactions Act of 2003, and requires users to provide a Risk-Based Pricing Notice whenever the user offers credit at materially less favorable terms than the most favorable terms available to a substantial portion of consumers, based in whole or in part on information in the consumer report.  In May 2008, the FTC issued a notice and proposed rulemaking and sought public comment on its proposed rules on the form, content, time and manner of delivery for the Notice.  The National Automobile Dealers Association commented on the proposed rule arguing that automobile dealers should be exempt from providing the Notice when they engage in “three-party” financing transactions.  In January 2010, the FTC adopted the Fair Credit Reporting Risk-Based Pricing Regulations, which explicitly rejected the Association’s proposed exemption for automobile dealers.  The FTC reaffirmed its interpretation of “uses of consumer reports” after the enactment of the Dodd-Frank Act in its implementing regulations.

The Court, using the two-step analysis established in Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984), found the FTC’s interpretation consistent with the language of the statute and the interpretation of “use” “promote[s] FCRA’s goal of providing consumers with accurate information about their credit report. Click here for the opinion.

FHFA Raises Concerns with California Proposed Mortgage Reform Bills

The Federal Housing Finance Agency issued a letter to the California state legislature raising concerns on proposed mortgage reform bills under the proposed California Homeowner Bill of Rights.  Several portions of the bill are pending before the California state legislature and at least one has passed the legislature and is waiting to be signed into law (see May 15, 2012 Alert).

The FHFA raised a number of issues.  First, the FHFA stated that the bill, which imposes civil penalties for “robosigned” documents, among other things, is “disconnected from the issues first giving rise to the practice [of robosigning], goes beyond anything in the National Mortgage Settlement, and poses significant risks for the housing market.” In particular, whereas the National Mortgage Settlement did not define “robosigning,” the bill contains “overly broad” definitions of “robosigning.”  The FHFA also expressed concern that the bill, which incorporates protections granted to tenants under the federal Protecting Tenants in Foreclosure Act into California law, could “encourage fraud and abuse of the foreclosure process.”  In particular, the FHFA noted that unlike the federal PFTA, the proposed California version does not contain a bona fide lease requirement; thus allowing property owners to “game the system.”  Click here for the letter.

The House of Representatives Votes to Expand Foreclosure Protections for Servicemembers

The House of Representatives passed an amendment to the National Defense Authorization Bill of 2013, which expands foreclosure protections for servicemembers under the Servicemembers Civil Relief Act. The amendment amends Section 527 (maximum interest rate provision) and Section 533 (mortgage foreclosure protections) by:
  • Extending the time period for which a member may be protected under SCRA for foreclosure from 9 months to 12 months;
  • Extending protections to surviving spouses and totally disabled veterans leaving the military;
  • Eliminating sunset provisions added in 2008;
  • Prohibiting credit discrimination against servicemembers;
  • Requiring lending institutions to designate a SCRA compliance officer; and
  • Requiring lending institutions with $10 billion or more in assets to maintain a toll-free telephone number for SCRA-related matters.
The Senate is taking up similar bills.  Click here for the amendment.

Massachusetts Legislature Approves Changes to Foreclosure Procedures

The Massachusetts House of Representatives unanimously passed House Bill 4087, “An Act to Prevent Unlawful and Unnecessary Foreclosures.”  The bill would require lenders to comply with certain notice requirements and to account for various factors before entering foreclosure proceedings on residential homeowners, including:  (1) the borrower’s ability to pay; (2) the value of a modified loan compared to the value of a foreclosure recovery; and (3) the interest of the lender.  Under the bill, if a modified loan is worth more than the expected foreclosure recovery, the lender would be required to offer a modified loan.  The Senate must now consider the bill and it is expected to be finalized by the end of the legislative session on July 31, 2012.  Click here for the bill.