Consumer Financial Services Alert - June 26, 2012 June 26, 2012
In This Issue

CFPB Focuses on Private Student Loans

The CFPB recently has taken three steps in line with its directive from the Dodd-Frank Act to compile and analyze data on private student loan borrower complaints and make policy recommendations to the Secretary of Treasury, the Secretary of Education and Congress. First, the CFPB published almost 2,000 comments from borrowers about their experiences in the private student loan market. In an accompanying press release, the CFPB identified common themes in the comments, including the reliance of borrowers on school financial aid offices for guidance on which products to use, borrowers struggling to meet their obligations in today’s economy, and difficulty navigating the repayment process. Second, the CFPB issued a notice and request for information seeking data and information on existing private student loan complaints from state agencies, colleges and universities, lenders and other interested parties. Specifically, the CFPB is seeking information about the complaints that are being submitted by borrowers and the processes institutions have in place to respond to those complaints. Comments are due by August 13, 2012. Finally, the CFPB sent a letter to state attorneys general and state higher education officials inviting their participation in the CFPB's review of the private student loan market. The state agencies were specifically solicited because they may currently be receiving private student loan complaints.

CFPB Focuses on Financial Education and Protection for the Elderly

The Dodd-Frank Act requires the CFPB to facilitate the financial literacy of individuals 62 years and older on future financial choices and protection from unfair, deceptive or abusive practices. The CFPB issued a request for information on consumer financial products and services, financial literacy efforts, and fraudulent or deceptive practices that impact the elderly. The CFPB plans to identify best practices for educating the elderly on personal financial management and develop programs that provide financial literacy and counseling to the elderly. There are five categories of information the CFPB is seeking:

  • Evaluation of senior financial advisor certifications and designations;
  • Providing financial advice and planning information to seniors;
  • Senior certification and designation information sources;
  • Financial literacy efforts; and
  • Financial exploitation of older Americans including veterans

Comments are due by August 13, 2012. Click here for the related press release.

CFPB Launches Searchable Credit Card Complaint Database

The CFPB will publically share the credit card complaints it receives from consumers. The CFPB issued its final policy statement on this subject simultaneously with a notice of proposed policy statement covering complaint data on other products and services. The final policy statement, effective June 19, 2012, lays out two methods for sharing credit card complaint information: (1) a searchable database that will be available to the public through the CFPB’s website, and (2) the publication of periodic reports. In the final policy statement, the CFPB disagreed with commenters that raised concerns that disclosing the credit card issuer’s name would cause substantial competitive harm to the credit card issuers, stating that credit card issuers’ names are not exempt “confidential commercial information” under the Freedom of Information Act. For the time being, the CFPB has decided not to include consumer narratives until it has had an opportunity to fully assess any related privacy risks. The CFPB also revealed its plan to extend its credit card data disclosure practices to complaints on other consumer financial products and services by the end of the year in its proposed policy statement. Click here for the related press release.

CFPB Publishes Consumer Response Report

The CFPB also issued its Consumer Response Report, which outlines its process of handling consumer complaints, statistics on the types of complaints received from July 2011 through June 2012, how companies responded to complaints, and consumers’ review of companies’ responses. The CFPB noted that it in some instances, complaints were referred to other regulatory agencies for further action. This is a follow-up to the report it published in March 2012 (see April 17, 2012 Alert).

CFPB Announces Leadership Changes

The CFPB announced a reorganization of its senior leadership as follows:
  • Steven Antonakes will serve as the Associate Director for Supervision, Enforcement, and Fair Lending. Mr. Antonakes previously served as the Assistant Director of Large Bank Supervision;
  • Paul Sanford will serve as the Acting Assistant Director of Large Bank Supervision. Mr. Sanford previously served as the Chief of Staff for Large Bank Supervision;
  • Meredith Fuchs will serve as the General Counsel. Ms. Fuchs previously served as the Chief of Staff to Director Richard Cordray;
  • Garry Reeder will serve as the Chief of Staff to the Director.  Mr. Reeder previously served as the Senior Advisor to the Deputy Director;
  • Len Kennedy will serve as the Senior Advisor and Counselor to Mr. Cordray. Mr. Kennedy previously served as the General Counsel and Associate Director;
  • Camille Busette will serve as the Assistant Director of the Office of Financial Education;
  • Clifford Rosenthal will serve as the Assistant Director of Financial Empowerment; and
  • Wendy Kamenshine will officially serve as the Ombudsman.

Interagency Guidance on Mortgage Service Practices for Servicemembers

In guidance issued jointly by the FRB, the CFPB, the FDIC, the NCUA and the OCC, mortgage servicers are advised to avoid practices that may pose risks to military servicemembers. This guidance focuses on regulations pertaining to servicemembers who have received permanent change of station orders, commonly known as “PCS Orders.” The guidance signals that these agencies will continue to pay particular attention to the conduct of mortgage servicers when dealing with servicemembers.

The agencies expressed concern about servicers’ alleged failure to provide servicemembers with PCS Orders with “clear and readily understandable information” regarding options for assistance with their mortgage loans. The guidance identifies a number of unlawful practices, including: asking servicemembers with PCS Orders to waive their rights under the Servicemembers Civil Relief Act, or any other law, as a condition to offering information regarding options for homeowner’s assistance, or advising servicemembers to intentionally skip payments on their loans to create the appearance of financial difficulties. The guidance notes that servicers found to have engaged in such practices, or otherwise failed to have complied with applicable regulations, will be subject to supervisory and enforcement actions to correct the unlawful practices. Both Director Richard Cordray and the Assistant Director for the Office of Servicemembers Affairs, Holly Petraeus issued public statements. Click here for the CFPB press release.

Federal Banking Agencies Release Financial Remediation Framework

The OCC and the FRB released the Financial Remediation Framework to be used by independent consultants making remediation recommendations to servicers in connection with independent foreclosure reviews, stemming from the April 2011 enforcement actions against the nation’s largest servicers. The agencies also extended the deadline for eligible borrowers to request a free review of their foreclosures until September 30, 2012.

Using the Framework, the independent consultants will make recommendations to the mortgage servicers regarding remediation, and servicers will prepare remediation plans for approval by the agencies. The Framework details 13 categories of errors and remedies, which are determined based on whether the foreclosure is in process or complete. The 13 error categories include: violations of the Servicemembers Civil Relief Act; foreclosing on borrowers who were not in default; various violations related to modifications, modification applications, and forbearance agreements; foreclosing on borrowers covered by bankruptcy stays; lack of standing; failure to provide legally sufficient notice; and other errors causing financial injury. Monetary remediation amounts vary by category from $500 to $125,000.  In connection with the Framework, the agencies also released FAQs. Click here for the OCC press release and here for the FRB announcement.

FHFA Releases Annual Examination Report to Congress

The FHFA released its 2011 Report to Congress, which presents the agency’s findings from the 2011 examinations of Fannie Mae and Freddie Mac, the 12 Federal Home Loan Banks, and the FHL Banks’ Office of Finance. The FHFA serves as regulator and conservator of Fannie Mae and Freddie Mac, while supervising and regulating the 12 FHL Banks and the Office of Finance to promote the supervised entities’ safety and soundness and fulfillment of their housing mission. The report provides individual assessments for Fannie Mae, Freddie Mac, each of the 12 FHL Banks, and the Office of Finance.

FHFA Establishes Additional Anti-Fraud Measures

The FHFA announced the Suspended Counterparty Program, an initiative to complement current fraud reporting by Fannie Mae, Freddie Mac, and the FHL Banks. The Suspended Counterparty Program will require Fannie Mae, Freddie Mac and the FHL Banks to notify FHFA whenever a party with whom they do business is adjudicated to have engaged in fraud or other financial misconduct. The FHFA will determine whether a party should be suspended from doing business with regulated entities as a threat to their safe and sound operations and affected parties will have an opportunity to show cause why they should not be suspended. In appropriate cases, the FHFA will issue orders directing the regulated entities to stop doing business with the party based on a history of fraud. The Suspended Counterparty Program becomes effective August 15, 2012.

Texas Bank Challenges Constitutionality of CFPB

A Texas federally-chartered bank and other advocacy groups have filed suit in the United States District Court for the District of Columbia challenging the constitutionality of the CFPB and the appointment of Richard Cordray as Director of the CFPB. The lawsuit also challenges the constitutionality of the Financial Stability Oversight Council created under the Dodd-Frank Act to respond to financial risks to the financial stability of the U.S. financial system. The lawsuit alleges that the CFPB and the Council violate the separation of powers doctrine under Article I, Section 1 of the Constitution. For example, plaintiffs argue that because Section 1031(a) of the Dodd-Frank Act, which permits the CFPB to take any action over unfair, deceptive and abusive practices in connection with the offering of a consumer financial product or service, does not define “unfair” or “deceptive” acts or practices, the CFPB essentially has “unbridled authority.” The lawsuit also alleges that Director Cordray’s appointment is unconstitutional because President Obama failed to obtain the “advise and consent” of the Senate, as required under Article II, Section 2 of the Constitution.

California Supreme Court Issues Ruling on National Bank Act Preemption of State Laws

The Supreme Court of California has ruled that the National Bank Act preempts those sections of the California Civil Code that require credit card issuers to provide additional disclosures for pre-printed checks to cardholders, because the disclosures are beyond those required by the Act. In a far-reaching and detailed opinion, the Court concluded that the Act preempts those sections of the Civil Code because the state law “stands as an obstacle to the broad grant of power given by the [National Bank Act] to national banks to conduct the business of banking.”

The California Supreme Court’s ruling followed a recent opinion by the United States Court of Appeals for the Ninth Circuit holding that the National Bank Act preempted the same state law; substantively, the California Supreme Court ruling presents the final, authoritative ruling on this issue. More broadly, the opinion stakes out a more specific and exacting showing that a plaintiff must meet to demonstrate that state laws governing the conduct of banks are not preempted by the Act when applied to national banks. Noting that the United States Supreme Court has admonished the various states to be mindful of acts that would subject national banks to a multitude of “limitations and restrictions as varied and numerous as the States,” the California Supreme Court held that its state laws that pose an obstacle to the Act’s purpose of creating standardized rules governing the conduct of national banks cannot stand, even if such laws do not discriminate between national and state chartered banks.

Federal Court Grants Injunction in Loan Modification Case

The United States District Court for the Central District of California has entered a preliminary injunction and temporary restraining order sought by the FTC against a pair of “mortgage modification advocates” and their principal officer, requiring that defendants cease operations, funds be frozen, and documents preserved pending investigation by an FTC-nominated receiver. The FTC alleged that defendants diverted borrowers away from legitimate, government-sponsored loan modification programs by marketing themselves as loan modification experts who would perform a “forensic loan analysis” to gain leverage in negotiations with lenders, while also advising borrowers to cease communication with their lenders, and, in some instances, to cease making payments.

The regulatory backdrop for the FTC’s action is the Mortgage Assistance Relief Services Rule, originally promulgated by the FTC, but now transferred to the CFPB. The FTC retains enforcement authority, and, by this action, has moved assertively to counter those who would defraud consumers under the guise of loan modification. The Court’s order states that defendants presumptively fall within the definition of a “mortgage assistance relief provider” under the Rule, while failing to make disclosures required of such providers under that Rule.  This action represents a clear effort by the FTC and CFPB to send the message that “mortgage modification advocates” must solicit customers subject to exacting disclosure requirements such that consumers who engage their services will knowingly do so at their own risk.

Massachusetts Supreme Court Rejects "Show Me the Note" Argument

The Massachusetts Supreme Judicial Court has rejected a plaintiff’s “show me the note” argument and vacated a preliminary injunction against the defendant.  Plaintiff sought a preliminary injunction against defendant, a mortgage servicer, challenging the foreclosure of her home and the subsequent eviction action on the grounds that defendant held only the mortgage and not the underlying note.

The lower court issued a preliminary injunction preventing defendant from proceeding with the eviction, holding that plaintiff’s argument—that for a valid foreclosure sale to occur under Massachusetts law, the foreclosing party must hold both the mortgage and the underlying note—would likely be successful. The Supreme Judicial Court rejected that argument. Construing the term “mortgagee” to mean the person holding the mortgage and either holding the underlying note or acting on behalf of the note holder, the Court held that physical possession of the mortgage note is not a condition precedent to effecting a valid foreclosure. The Court limited its decision to (1) the interpretation of “mortgagee”; (2)  foreclosures under the power of sale; and (3) to sales where the statutorily required notice of sale is provided after the date of the decision. The decision provides relief for mortgage servicers who initiate foreclosure proceedings on behalf of the holders of the note (i.e., lenders).

New York Attorney General Introduces Bill to Criminalize Robosigning

Pending legislation in New York would impose criminal penalties on individuals that engaged in robosigning and their managers that knowingly fail to prevent it. The Foreclosure Fraud Prevention Act of 2012, which was drafted by Attorney General Eric Schneiderman and passed the Assembly on June 21, would make it a class A misdemeanor for an agent of a residential mortgage business to authorize, prepare, execute, offer or present for filing false documents when the person knows or believes that the documents will be filed with a court or other public office. In addition, it would be a class E felony to do so in five or more foreclosure actions within a one-year period. Finally, a manager who fails to prevent residential mortgage fraud from continuing to occur would be guilty of a class E felony.