Consumer Financial Services Alert - June 12, 2012 June 12, 2012
In This Issue

CFPB Issues Rules for Enforcement Actions

The CFPB issued three final rules and one interim final rule governing its enforcement of the consumer protection statutes under its authority. The three final rules relate to “the agency’s investigative and adjudicative processes and [ ] interactions with state law enforcement.” The interim final rule implements the Equal Access to Justice Act. The final rules are effective upon publication in the Federal Register, while the interim final rule will be open for comment for 60 days after publication. Each of the rules is discussed in turn below.

Procedures for Investigations

The CFPB adopted a final rule describing its procedures for investigations. Under Section 1052 of the Dodd-Frank Act, the CFPB has authority to conduct investigations to determine whether any person is or has been engaged in conduct that, if proved, would constitute a violation of any federal consumer financial law. Drawing most heavily from the FTC’s non-adjudicative procedures in constructing the rules, the rule sets forth the CFPB’s authority to conduct investigations, the rights of persons from whom the CFPB seeks to compel information in investigations, and the procedures related to Civil Investigative Demands and Investigative Hearings, among other things. The rule also revises and clarifies certain issues raised by commentators in the public comment period. For example, in response to several comments raising the concern that a staff-level employee could “unilaterally open an investigation or issue a CID,” the rule clarifies that the only the Assistant Director or any Deputy Assistant Director of the Office of Enforcement has the authority to initiate an investigation and issue a CID.

Adjudication Proceedings

Section 1053(e) of the Dodd-Frank Act requires the CFPB to establish procedures for conducting adjudication proceedings. Similar to the final rule on its investigative procedures, this final rule is modeled on the rules of prudential regulators, including the FTC and SEC, as well as on the uniform rules under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Key provisions of the rule include (1) a right to appeal a hearing officer’s recommended decisions and order on a dispositive motion; (2) deadlines for recommended decisions by hearing officers and final decisions by the Director; (3) a limited right to inspect and copy documents obtained by non-Bureau employees (notably, unlike the SEC rules, the rule does not create an obligation to turn over all material, exculpatory information in the CFPB’s possession, but only documents obtained by the Office of Enforcement); and (4) limited discovery – the rule does not allow for certain pre-trial discovery, such as interrogatories and discovery depositions.

State Official Notification

Section 1042(a) of the Dodd-Frank Act permits a state attorney general or regulator to bring an action to enforce Title X of the Act. However, prior to initiating an action, under Section 1042(b), the state official is required to provide notice of the action to the CFPB and the prudential regulator. The final rule sets forth the procedure for notification, including the timing and content of the notice and the notice recipients’ responsibilities. The final rule also clarifies that the CFPB can intervene as a party in a state action, and that the notice provisions do not create a substantive or procedural right against either the United States or the state bringing an action under Title X.

Equal Access to Justice Act

The EAJA requires federal agencies that conduct adversary adjudications to award attorney’s fees and litigation costs, and to establish procedures for the submission and consideration of applications for the award of fees and costs. The interim final rule mainly adopts the 1986 Administrative Conference of the United States model rules implementing the EAJA, with some minor departures that are explained in the rule. For example, unlike the ACUS model rules, the CFPB did not adopt a provision on the maximum rates for attorney’s fees, but rather referred back to the EAJA for the maximum hourly rates for attorney’s fees.

Click here for the related press release; here for the rule relating to investigations; here for the rule of practice for adjudication proceedings; here for the state official notification rule; and here for the interim rule implementing the EAJA.

CFPB Reopens Comment Period on Qualified Mortgage/Ability-to-Pay Rule

The CFPB reopened the comment period on its proposed rule to impose new ability-to-pay requirements and a definition of “qualified mortgage.” The original comment period ended in July 2011. The reopening of the comment period was spurred by new data from the Federal Housing and Finance Agency, which the CFPB believes may be helpful in determining what loan characteristics should be used to define a “qualified mortgage.” The comment period was also opened to allow commenters to provide any available data on the relationship between debt-to-income ratios, among other factors, and delinquencies, which, again, could influence what types of mortgages are considered “qualified.” The CFPB seeks comment and data on six specific areas: (1) the FHFA dataset; (2) data for loans not covered by the FHFA data (i.e., FHA loans or VA loans); (3) any measures of loan performance and their relationship to a consumer’s debt-to-income ratio; (4) any measures of residual income; (5) any measures of the amount of liquid financial reserves available to meet mortgage-related obligations or current obligations; and (6) any measures of stable income and timely housing payments. The comment period ends July 9, 2012. Click here for the press release and here for the related notice.

CFPB Seeks Comment on Information Collection Requirements for Consumer Advisory Board

The CFPB is soliciting comments on the information collection requirements for advisory boards, bodies or panels the CFPB anticipates establishing. Section 1014 of the Dodd-Frank Act requires the CFPB to establish a Consumer Advisory Board to advise and consult the CFPB and to provide information on emerging practices (e.g., regional trends) in the consumer financial products and services industry. The CFPB is seeking selection-related information on Consumer Advisory Board nominees, including background information and financial disclosures. Click here for the notice.

Interagency Memorandum of Understanding on Supervision Under Dodd-Frank

The CFPB and the prudential regulators— the FRB, FDIC, NCUA, and OCC— signed a Memorandum of Understanding that clarifies how the agencies will coordinate supervisory activities under the Dodd-Frank Act. The MOU arranges for the coordination of examinations and information sharing by and between the CFPB and the prudential regulators for depository institutions with more than $10 billion in assets and their affiliates. Key components of the MOU include:

•   The CFPB and prudential regulators establishing a single point of contact within each agency for each covered institution.

•   The coordination of examinations by the CFPB and the prudential regulators to take place simultaneously.

•   Allowing examinees to request that examinations not be conducted simultaneously.

•   The CFPB and prudential regulators sharing draft reports of examination with one another to allow for review and comment.

•   The sharing of supervisory information, including supervisory letters, supervisory actions, memoranda of understanding, appeals of supervisory determinations, final reports of examination, and other material supervisory information.

Click here for the CFPB press release and here for the MOU.

FRB Releases Independent Foreclosure Review Website

The FRB launched a website providing borrowers with information about independent foreclosure reviews resulting from the FRB’s April 2011 enforcement actions against four servicers. The four servicers, along with 23 other servicers, are required to provide independent foreclosure reviews for foreclosure actions that took place in 2009 and 2010. The website provides information about review eligibility, the review process and the deadline to request a review, which was extended to July 31, 2012. Click here for the website.

Supreme Court Grants Certiorari to Debt Collector in FDCPA Suit

The United States Supreme Court indicated that it will review an opinion from the United States Court of Appeals for the Tenth Circuit awarding “costs of suit” to a prevailing debt collector in a Fair Debt Collection Practices Act action. Initially brought in district court, the district court dismissed a lawsuit alleging that defendant debt collector had sent unlawful debt collection “communications” to plaintiff’s place of employment in violation of the FDCPA. Upon dismissal of the case, the district court awarded costs of suit—but not attorney’s fees—to the prevailing debt collector. On appeal, the Tenth Circuit affirmed the lower court’s decision, interpreting the FDCPA as distinguishing the award of costs to a prevailing defendant from an award of attorney’s fees. The Tenth Circuit held that the latter requires a finding that the plaintiff filed suit “in bad faith,” whereas costs could be awarded to a prevailing defendant regardless of the plaintiff’s motives in bringing suit.

The Supreme Court granted certiorari to decide whether a prevailing defendant in an FDCPA case may be awarded costs where the lawsuit was not “brought in bad faith for the purpose of harassment,” a question that has divided the various circuit courts of appeal.

Bank Settles Fair Lending Suit with DOJ

The DOJ has settled its on-going dispute with a large mortgage lender regarding alleged discriminatory practices in the pricing of its loan products offered to African-American and Hispanic home mortgage borrowers. The settlement, set forth in the terms of a Consent Decree entered the same day that the DOJ formally filed its complaint, provides for a number of key provisions and mechanisms including the payment of $21 million into a settlement fund to compensate victims of discriminatory lending practices, establishing a fair lending auditing and monitoring program, and establishing an Equal Credit Opportunity Training Program. Significantly, the Consent Decree notes the mortgage lender’s cooperation with the DOJ’s investigation, and its prior implementation of policies and procedures designed to ensure compliance with federal civil rights law in the operation of its retail lending channel, a conciliatory approach that may have lessened the terms of the eventual settlement. The Consent Decree also provides for entry of a “General Nondiscrimination Injunction” and the creation of a monitoring process whereby the mortgage lender will review its lending practices, report results to the DOJ on a regular basis, and, where necessary, make its lending records available to the DOJ for inspection. Click here to view a copy of the Consent Decree.

California Federal Judge Denies Motion to Compel Arbitration

The United States District Court for the Northern District of California denied a motion to compel arbitration in a putative class action alleging that defendant had a practice of recording telephone calls with persons in California without their consent. Defendant moved to compel arbitration pursuant to an arbitration agreement, arguing that the Federal Arbitration Act preempted claims that the arbitration agreement was unconscionable under California law.

The Court dismissed defendant’s motion, holding that the claims were not preempted by the FAA. The Court ruled that it was not bound by the Supreme Court’s decision in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), because “the finding does not undermine the fundamental attributes of arbitration as an alternative form of dispute . . . [but rather] applies the generally applicable contract principle of unconscionablility.”  Based on that finding, the Court held that the arbitration agreement was both procedurally and substantively unconscionable. On the procedural threshold, the Court gave minimal weight to the fact that it was a contract of adhesion. However, the Court found that many of the agreement’s provisions (e.g., arbitration not waived by self-help remedies, including filing suit; the right to appeal an award in excess of $100,000 or an award of injunctive relief) were substantively unconscionable because they each overwhelmingly benefited defendant.  Click here for the opinion.

Nebraska Federal Court Holds Consumer Lacks Standing in ATM Fee Class Action

The United States District Court for the District of Nebraska found that plaintiff lacked constitutional standing to bring a claim under the Electronic Fund Transfer Act for alleged violations of the fee notice requirement. Under EFTA, an ATM operator who imposes fees on consumers for electronic fund transfers is required to post two notices, both (1) on or at the ATM, and (2) on the screen of the ATM. Plaintiff claimed that the bank failed to provide notice on or at the ATM, but did not allege failure to provide an on-screen notice, or ultimately that he suffered any injury-in-fact at all.

In determining that plaintiff lacked constitutional standing, the Court distinguished this case from prior district court cases holding that, where an ATM operator failed to provide a fee notice on the exterior of the ATM, the statutory violation was an injury. The Court held that constitutional standing requires more than just an injury-in-law, but instead an injury-in-fact. Because plaintiff only alleged a statutory violation, the Court did not grant standing. Additionally, the Court stayed all proceedings in the case pending the U.S. Supreme Court’s decision in First American Financial Corporation v. Edwards, 610 F.3d 514 (9th Cir. June 21, 2010), cert. granted, 131 S. Ct. 3022 (U.S. June 20, 2011) (No. 10-708), addressing a similar issue of standing. This ruling may provide some relief to many banks and credit unions, which have raised this issue in their comments in response to the CFPB’s streamlining regulations notice (see February 21, 2012 Alert). Click here for the opinion.

Maryland Federal Court Holds Bank Setoff Violated Truth in Lending Act

The United States District Court for the District of Maryland partially granted summary judgment in favor of plaintiffs in a class action alleging violations of the Truth in Lending Act. Plaintiffs filed a class action against defendant alleging violations of TILA and the Maryland Consumer Protection Act over defendant’s practice of using funds in customers’ checking and savings accounts to offset debt the consumers incurred on their credit card accounts under its Delinquent Loan Transfer Program. Section 1666(h) of TILA and its implementing Regulation Z prohibit offsetting a cardholders indebtedness arising out of a consumer credit transaction against the funds held in deposit with the card issuer unless there is prior written authorization from the cardholder. The issue before the court was whether the offset was affected by “enforcing a consensual security interest in the funds” as described under Regulation Z.

Rejecting defendant’s argument that Regulation Z permits a creditor to offset an account so long as the creditor has a consensual security interest in the funds, the Court found that Regulation Z actually contains a blanket prohibition on offsets. The Court highlighted other means of lawfully gaining access to a customer’s deposit funds (e.g., attachment and court order). Thus, in order to make a prima facie allegation of violations of Section 1666(h) of TILA and Regulation Z, plaintiff is only required to show that a credit card issuer has taken the deposit funds and used them to satisfy the consumer’s credit card debt.

Ultimately, the Court looked to the FRB’s Regulation Z Official Staff Commentary to hold that the loan documents (i.e., the VISA Agreement and the Account Information Booklet), were insufficient evidence of a consensual security interest as required to defeat the blanket prohibition against offsets under Regulation Z. In particular, because the security interest provision was not set apart, but rather “buried on the eighth of twenty pages of fine print” and “rather than referring to a specific account number or dollar amount, the [security interest] provision simply refer[ed] to ‘any’ and ‘all’ accounts,” the Court held that the security interest provision in the loan documents were the kind of “routine” provision that the Staff Commentary expressly prohibited. Click here for the opinion.

Tenth Circuit Holds Notice Alone Is Insufficient to Effectuate TILA Rescission

The Tenth Circuit held that a borrower’s written notice of rescission within TILA’s three-year rescission period is insufficient to effectively exercise or preserve the right to rescind, when the borrower does not also timely bring an action for rescission. The Court relied in part on the Supreme Court’s decision in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), which established that 15 U.S.C. § 1635(f)’s is a statute of repose meant to limit uncertainty in title. The Court also noted that references in TILA and Regulation Z to notifying the creditor establish that providing “notice is a necessary predicate act” to exercising the right to rescind, but the references do not establish that providing notice is sufficient to exercise the right. The Tenth Circuit’s decision furthers the circuit split on the rescission period under TILA (see February 21, 2012 and May 15, 2012 Alerts).

The Court also found that the borrower’s raising rescission as a defense to a Colorado Rule 120 Proceeding— a non-judicial foreclosure hearing to address the issue of default—within the three-year period was insufficient to exercise the right to rescission. The Court reasoned that a streamlined Rule 120 proceeding does not contemplate the adjudication of rescission claims. Click here for the opinion.

Canadian Bankers Association Publishes Voluntary Guidelines on Mobile Payments

The Canadian Bankers Association published guidelines for near-field communication (“NFC”) based mobile payments, including functional elements, roles, responsibilities and interaction models needed for the development of a NFC-based mobile payments ecosystem. NFC-based mobile payments are contactless payment transactions that require the mobile device to be in close proximity to the reader and require integration of hardware and software on the mobile device. The guidelines discuss the elements needed to enable NFC mobile payments and to process NFC mobile payment transactions. Click here for a summary of the guidelines and here for the guidelines.