Consumer Financial Services Alert - July 10, 2012 July 10, 2012
In This Issue

CFPB Issues Proposed Rule on Combined TILA/RESPA Disclosures

The CFPB issued a proposed rule detailing two new mortgage loan disclosures - the Loan Estimate, which replaces the Good Faith Estimate and early Truth in Lending disclosure, and must be provided within 3 business days of an application, and the Closing Estimate, which replaces the HUD-1 Settlement Statement, and must be provided at least 3 business days before closing.  According to the CFPB’s press release, the disclosures were designed “to present the costs and risks of the loan in clearer terms.”  Key provisions of the rule include:  (1) a specific definition for what constitutes an application and a broader finance charge definition; (2) changes in the calculation of finance charges and annual percentage rates; and (3) a recommendation to delay compliance with certain disclosure requirements until after the January 21, 2013 mandated deadline.  The proposed rule also discusses six upcoming proposed rules that the CFPB is developing and finalizing related to:  the Home Ownership and Equity Protection Act (discussed below); servicing; loan originator compensation; appraisals; ability to repay; and escrows.  The CFPB is seeking comment on a number of issues, ranging from whether small businesses should be exempt from the electronic recordkeeping requirements, to whether lenders, as opposed to settlement agents, should be required to provide the new Closing Estimate.  Comments on the finance charge and APR calculations, and the delay of the effective date are due by September 7, 2012; comments for the remaining sections of the proposed rule are due by November 6, 2012.  Additional resources, including a detailed summary of the rule and a report on the CFPB’s discussions with small businesses, are available on the CFPB’s Know Before You Owe page.

CFPB Issues Proposed Rule on HOEPA

The CFPB also issued a proposed rule that would amend Regulation Z to implement changes to the Homeowner and Equity Protection Act made by the Dodd-Frank Act.  Loans subject to HOEPA have heightened disclosure requirements and restrictions on loan terms.  The Dodd-Frank Act expanded HOEPA to apply to additional types of mortgage transactions (e.g., purchase money mortgage loans and HELOCs).  The Dodd-Frank Act also added a prepayment penalty trigger and expanded other borrower protections on HOEPA loans.  Generally, the proposal is in line with the Dodd-Frank expansion of the types of loans covered by HOEPA, but excludes reverse mortgages. 

In addition, the proposal would require lenders to distribute a list of homeownership counselors or organizations to consumers within 3 business days after applying for a HEOPA loan and, for first-time borrowers, impose a homeownership counseling requirement prior to obtaining a negative amortization loan.  The proposal would also change the points and fees ceiling for coverage.  Comments must be received by September 7, 2012.  More information about the CFPB’s mortgage rules can be found on the mortgage rule fact sheet.

CFPB Adopts Final Rule on Privileged Information

The CFPB adopted a final rule on the confidential treatment of privileged information, which strengthens the January 2012 guidance bulletin on the issue (see February 21, 2012 Alert).  According to the CFPB’s press release, the rule offers additional assurances to supervised entities that submitting privileged information to the CFPB will not waive the privilege.  The rule also clarifies that the CFPB’s transfer of privileged information to federal regulators or state agencies does not waive the privilege.  The rule applies to attorney work product and other privileged information. 

The rule also addresses industry concerns with the CFPB’s interpretation of Section 1061(b) of the Dodd-Frank Act – that Dodd-Frank grants the CFPB a prudential regulator’s authority to obtain privileged information from banks without effecting a waiver.  In response, the CFPB noted that the validity of the rule is based on its general rulemaking authority under Section 1022(b)(1) of the Dodd-Frank Act, as opposed to its authority to compel the submission of privileged information.  On the strength of this argument, the CFPB further stated that while it supports a legislative fix, it does not think it is necessary.

CFPB Releases Report on Reverse Mortgages

The CFPB issued a press release highlighting key findings and concerns from its study on reverse mortgages.  The CFPB noted that while only a small number of eligible borrowers currently participate in the reverse mortgage market, market growth is likely as aging baby boomers continue to become eligible for reverse mortgages.  As a result of the study, the CFPB noted some areas of concern, mainly that consumers do not understand the product, (e.g., that consumers are responsible for property taxes and insurance), and that consumers are not using the product as originally intended (i.e., opting for a lump sum payment instead of using it as a stream of income or line of credit), which may leave them with insufficient resources later on.  This latter concern is compounded by the additional finding that many consumers are obtaining reverse mortgages earlier in life.  To address its concerns regarding the confusion about reverse mortgages, the CFPB has developed a fact sheet and consumer guide with information about reverse mortgages, as well as posted reverse mortgage Q&A’s to the Ask CFPB database.

In the study, the CFPB also outlined ways that it can address the issues raised in the report.  Specifically, the CFPB noted that it can issue regulations specifically addressing reverse mortgages, improve approaches in engaging consumers about reverse mortgages, monitor the reverse mortgage market for compliance with existing laws and for unfair, deceptive, or abusive practices, accept and work to resolve consumer complaints, and work with HUD to resolve issues noted in the report.  The CFPB issued a notice and request for information seeking feedback from the public to assist the CFPB in better understanding and evaluating potential consumer protection issues raised by reverse mortgages.  Specifically, the CFPB is seeking answers to a series of questions in the following areas: (1) factors influencing consumer decisions; (2) consumer use of reverse mortgage proceeds; (3) the longer-term outcomes of reverse mortgages; and (4) the difference in market dynamics and business practices among the broker, correspondent and retail channels.

CFPB Calls for Regulations on Mobile Payments

In a Statement for the Record before the House Financial Services Subcommittee on Financial Services and Consumer Credit, the CFPB’s Assistant Director of Card and Payment Markets, Marla Blow, announced that the CFPB is closely monitoring new developments and changes in the mobile payment marketplace.  The CFPB acknowledged that there are both opportunities and challenges that will come with the increasing use of mobile payments, and that the current regulations need to be examined to determine:  (1) if there are barriers to successful mobile payment systems and (2) whether regulations need to be updated to address new concerns.  Two of the main concerns are the extent to which technology companies will begin to play roles traditionally performed by banks and whether existing regulations apply to this changing environment.  The CFPB will continue to work with other state and federal agencies to create a common set of rules for the mobile payment market.

FTC Obtains Judgment Against Mortgage Loan Modification Companies

The FTC announced that it has successfully litigated another loan modification scam case.  (see June 26, 2012 Alert) The U.S. District Court for the Middle District of Florida entered permanent injunctions and monetary damages against defendants alleged to have violated the Federal Trade Commission Act and Telemarketing Sales Rule.  According to the FTC, defendants’ wrongful conduct included collecting large upfront fees; misleading consumers to believe that they had already qualified and received loan modifications, when they had not; overstating both the efficacy of the service and the involvement of the attorney; and deceptively claiming that the defendants were affiliated with the U.S. government.  The Court entered a $2.6 million judgment against defendants and banned them for 10 years from telemarketing financial products or services, and from selling mortgage modification, foreclosure rescue, and debt-relief products and services. Notably, the Court also ordered defendants to destroy any consumer information they collected within 30 days after the order takes effect.

FRB Releases OREO Q&As

Citing an increase in Other Real Estate Owned Assets, the FRB recently issued Questions and Answers clarifying its existing OREO policies.  The Q&As focus on six topics: (1) Transferring an Asset to OREO; (2) Reporting Treatment and Classification; (3) Appraisal Concepts; (4) Ongoing Property Management; (5) Operational and Legal Issues; and (6) Sale and Transfer of OREO.

GAO Pushes Agencies to Increase Efficiency of Current Loan Mitigation Efforts Through Increased Data Collection and Analysis

The GAO issued a report on foreclosure mitigation, finding that while nearly 1 million loans have been modified under the Home Affordable Modification Program between 2009 and 2011, and an additional 3 million loans modified under servicer-specific loan modification programs, the number of loans in foreclosure or facing likely foreclosure remains high.  The report recommends that agencies collect and analyze additional data to determine the effectiveness of their modification programs, including HAMP, as well as the likelihood of success of other mitigation efforts.  For example, the GAO report notes that its data suggests principal forgiveness may be an effective foreclosure mitigation tool; however, because the FHFA has not reached a decision regarding whether the enterprises will engage in HAMP principal forgiveness modifications, the effectiveness of this tool is unknown.  The GAO urged the FHFA to expeditiously reach a decision before the December 2013 deadline to enter into a permanent HAMP-modified loan.

GAO Issues Report on Federal Banking Regulators Foreclosure Review Notice

At the request of Congress, the GAO issued a report detailing its review of and findings on the design and implementation of communications sent to borrowers about the independent foreclosure review.  The review was part of two-step approach taken by federal regulators resulting from the April 2011 consent orders (see June 12, 2012 Alert for a discussion of the independent foreclosure review process).  The first step involved a lookback review by servicers, and the second step allowed borrowers to request an independent review of their loan.  The report found several flaws in the independent foreclosure review notice.  Specifically the GAO found that the notices were: (1) far beyond the readability level of average consumers, containing complex, technical language; (2) too general, failing to provide specific information about the independent review process; and (3) uniform in nature and not targeted towards specific groups of eligible borrowers.  Each was found to potentially hinder borrower participation in the independent foreclosure review.  To address each area of concern, the GAO recommended that the FRB and OCC: (1) enhance readability of the request for review form on the independent foreclosure review website; (2) require servicers to include a range of potential remediation amounts or categories in the communication materials and other outreach; and (3) require servicers to identify trends in borrowers who have or have not responded using factors such as zip code, servicer, and borrower characteristics.

Sixth Circuit Holds that Premature Foreclosure Filing May Be FDCPA Violation

The United States Court of Appeals for the Sixth Circuit has issued an opinion interpreting the federal Fair Debt Collection Practices Act to reach the conduct of a law firm that sent a notice of foreclosure to a defaulted borrower prior to execution of an assignment that actually transferred the borrower’s note and mortgage to its client, the foreclosing bank.  The Court reversed a ruling by the district court, dismissing the borrower’s FDCPA claim, holding that because the “clearly false” identification of a creditor’s name may constitute a “false representation…to collect or attempt or attempt to collect any debt” for purposes of stating a claim under the FDCPA, defendant-law firm conceivably violated the law when it named the foreclosing lender as the holder of the note and mortgage before execution of an assignment conveying such interest.

The Sixth Circuit took care to state that its opinion does not reach the merits of the borrower’s claim, but instead is limited to the minimum requirements for pleading a facially adequate claim under the FDCPA for purposes of a Rule 12 motion to dismiss analysis. Lenders and loan servicers should take note of the opinion, however, because it again underscores the importance of complying with state law procedural requirements to ensure a settled foreclosure process, in this case the need to confirm that the foreclosing entity can document its legal interest in the property prior to initiating foreclosure. 

Supreme Court Declines to Rule on RESPA Title Kickback Case

After granting certiorari and holding oral arguments, the United States Supreme Court refused to issue an opinion in a Ninth Circuit appeal case concerning whether a purchaser of settlement services has standing under the Real Estate Settlement Procedures Act to pursue an action in federal court without demonstrating that an alleged RESPA violation resulted in an overcharge.  The Ninth Circuit held that the RESPA violation in and of itself gave rise to an injury in fact, which satisfied the standing requirements of the Constitution.  The Supreme Court issued a single line slip opinion that stated “[t]he writ of certiorari is dismissed as improvidently granted.”   

Massachusetts Federal Court Upholds City Foreclosure Ordinances

The United States District Court for the District of Massachusetts, Springfield Division, rejected a challenge to two ordinances enacted by the city of Springfield, Massachusetts that require mediation prior to foreclosing on residential properties and require foreclosing lenders to maintain vacant properties, including posting a $10,000 bond to reimburse the city for any maintenance work that it may have to perform to keep the property in compliance with the local housing code while it remains in foreclosure. 

The Court found plaintiffs state and federal law challenges to the mediation ordinance unpersuasive, holding that no “sharp conflict” existed between Massachusetts foreclosure law and the mediation ordinances because the Massachusetts state foreclosure statute does not prohibit local municipalities from regulating the conduct of foreclosures. The Court rejected plaintiffs’ contract clause challenge on the grounds that  the city’s imposition of a mediation requirement did not unconstitutionally interfere with the terms of mortgage contracts between borrowers and lenders, noting that plaintiffs should have expected “the possibility of changes similar to those contained in the ordinances when entering into the mortgage contracts.”

The Court also dismissed the plaintiffs’ argument that the property maintenance ordinance violated Massachusetts law, finding that the posting of a bond was not an unlawful tax, but a legally permissible regulatory fee.  The Court also noted that widespread foreclosures are “an issue of serious public concern to municipalities,” holding that the city’s ordinance represented an appropriately measured effort that imposes “reasonable conditions” upon foreclosure practices.  If upheld or applied elsewhere, the Court’s ruling could open the door for other localities to impose additional requirements and limitations on the conduct of foreclosures. 

California Passes Homeowner Bill of Rights

Attorney General Kamala D. Harris announced that the California legislature passed the California Homeowner Bill of Rights, which provides consumer protections for homeowners and reforms to the mortgage and foreclosure process.  If signed into law by the Governor of California, the new legislation would become effective on January 1, 2013 and would apply to banks and other lenders.  The new legislation codifies many of the core protections from the nationwide settlement with five of the largest U.S. banks.  Key elements of the legislation are (1) restricting dual-track foreclosures, where lenders pursue foreclosure proceedings on a homeowner while also engaging in loan modification discussions with the homeowner; (2) requiring lenders to provide homeowners with a single point of contact at the lender who has knowledge of the homeowners loan and direct access to decision makers; (3) imposing civil penalties on robo-signing, where lenders repeatedly file foreclosure documents without verifying their accuracy; and (4) permitting homeowners to require lenders to document their right to foreclose. 

National Association of Insurance Commissioners to Hold Hearings on Force-Placed Insurance

The National Association of Insurance Commissioners announced it will hold a public hearing on force-placed insurance at its annual meeting in August 2012 to discuss the use of force-placed insurance and the effect of the practice on consumers.  State regulators have turned their attention to force-placed insurance recently.  For example, after an initial review, the New York Department of Financial Services announced it planned to continue investigating force-placed insurance carriers in New York and planned to hold hearings on whether the rates for force-placed insurance were excessive (see April 17, 2012 Alert).