Consumer Financial Services Alert - August 21, 2012 August 21, 2012
In This Issue

CFPB Proposes Mortgage Servicing Rules

The CFPB has proposed new mortgage servicing rules as amendments to Regulation Z and Regulation X, the implementing regulations of the Truth in Lending Act and the Real Estate Settlement Procedures Act, respectively. In announcing the proposals, Director Richard Cordray stated that the rules “arm consumers” with information needed to “avoid costly surprises” and “address the problem of consumers getting the runaround.” The proposals adopt four categories of the National Mortgage Settlement among the five largest servicers, the Federal government and state attorneys general: (1) foreclosure and bankruptcy information and documents, (2) loss mitigation, (3) servicing fees, and (4) force-placed insurance. Importantly, based upon the report of the Small Business Review Panel, the proposals would exempt small servicers—those that service 1,000 or fewer mortgage loans and exclusively service mortgage loans that they or an affiliate originate or was the entity to which the obligation was initially payable—from the requirement to provide periodic statements for certain loans.

Regulation Z

The proposal amending Regulation Z contains several significant changes to the regulation including periodic billing statements required by the Dodd-Frank Act’s amendments to TILA, limitations on force-placed insurance, requirements for adjustable rate mortgages, and prompt crediting of payments.

Adjustable-rate mortgages. Under the proposal, servicers must provide a notice six months prior to the initial rate adjustment for all hybrid adjustable rate mortgages and an additional notice 60 to 120 days prior to each interest rate adjustment that results in a corresponding change in payment. The proposal, however, does eliminate the annual notice requirement, where the adjustment does not result in an increase in the monthly payment.

Periodic billing statement. The proposal requires the creditor, assignee or servicer to provide a statement for each billing cycle, unless (1) the mortgage is fixed rate; and (2) a coupon book is provided containing substantially the same information as in the statement.

Prompt payment. Servicers must also promptly credit payments from borrowers—generally the day of receipt. For partial payments received, the servicer must hold these payments in a suspense account until the amount in the account equals a full payment (principal, interest and, if applicable, escrow) and credit the payment to the most delinquent outstanding payment.

Regulation X

The proposal amending Regulation X implements requirements mandated by the Dodd-Frank Act, and also creates new mortgage servicing standards under authority granted by Dodd-Frank.

Error resolution. The proposal contains error resolution procedures including failures related to borrower payments, such as failures to credit a payment to the borrower’s account as of the date of receipt that results in a charge to the borrower or negative information reported to a consumer reporting agency; failures to provide information to the borrower, such as failures to provide an accurate payoff balance upon request; and failure to suspend a scheduled foreclosure sale after receipt of a loss mitigation application. Servicers are required to acknowledge the notice of error within five days of receipt of the notice of error. Under the proposal, the servicer must correct or respond within 30-45 days. Finally, under the proposal, a servicer is generally not required to suspend the foreclosure proceedings to respond to a notice of error. A servicer is not required to comply with the error resolution procedures if a notice relates to something other than the list of covered errors.

Early intervention requirements. Citing servicers’ inconsistency in managing delinquencies to limit foreclosures, the proposal requires servicers to provide borrowers with two notices: (1) an oral notice of late payment and loss mitigation options when the account is 30 days delinquent, and (2) a written notice about the foreclosure process and loss mitigation options when the account is 40 days delinquent. Further, the proposal sets forth timelines for servicers’ loss mitigation programs. For example, under the proposal, servicers are required to evaluate the borrower for all available loss mitigation options within 30 days of receiving the borrower’s complete application.

Force-placed insurance. The proposal also places restrictions on the practice of force-placed insurance (see April 17, 2012 Alert) by prohibiting force-placed coverage unless the servicer has a reasonable basis to believe the borrower has not maintained hazard insurance and has provided the required notices. Force-placed insurance is defined to include “hazard insurance.” The notices are required to include disclosures reminding the borrower of the obligation to maintain hazard insurance and a statement of the procedures by which the borrower may demonstrate that s/he has insurance coverage among other things.

Loss mitigation requirements. The proposal sets forth three objectives for servicers who make loss mitigation options available to borrowers “in the ordinary course of business”: (1) that servicers provide loss mitigation information to borrowers and respond in a timely manner (e.g., within 30 days of receipt of the complete application), (2) that servicers are prohibited from proceeding with a foreclosure sale until the borrower and servicer have terminated discussions regarding loss mitigation options, and (3) timelines for the loss mitigation process so as not to interrupt or require the suspension of the foreclosure process by borrowers by the use of loss mitigation options to strategically extend the foreclosure process. Importantly, while the proposal prohibits servicers from proceeding with a foreclosure sale during loss mitigation negotiation, servicers would not be prohibited from taking other steps in the foreclosure process.

Information management. Under the proposal, servicers are generally required to establish policies and procedures for maintaining and managing information and documents related to the borrower’s account. A servicer meets this requirement if the policies and procedures are “reasonably designed” to achieve the objectives identified in the proposal such as providing accurate and timely disclosures to borrowers and facilitating compliance by third-party service providers. Further, under the proposal, servicers are required to maintain records that document actions taken by the servicer for one year after the loan is discharged or transferred and provide a copy of the servicing file on demand from the borrower. The proposal for information management was not contained in the Dodd-Frank Act amendments to Regulation X.

Continuity of Contact. Under the proposal, within five days after a servicer has notified the borrower (or made a good faith effort to notify the borrower) of payment delinquency, the servicer must assign someone within the organization to be available to the borrower by telephone. This individual serves four functions: (1) provides the borrower with accurate information about such things as loss mitigation options available, (2) provides access to such things as the borrower’s payment history and all the documents the borrower has submitted in connection with his/her loss mitigation application, (3) provides loss mitigation documents to assigned servicer personnel, and (4) provides the borrower with information upon requesting including information on how to file a notice of error or make an information request. The proposal carves out a safe harbor for servicers if the servicer’s personnel do not engage in a pattern or practice of failing to perform these functions.

Comments on the proposal are due October 9, 2012. In particular, the CFPB is seeking comment on the implementation period recognizing that the changes will require significant changes to the internal processes of servicers and creditors. The CFPB plans to finalize rules by January 2013. The CFPB also provided a summary of the proposals, factsheet and a summary of the findings on the development of the disclosures.

CFPB Urges Consumer Participation Through Cornell’s Regulation Room

In conjunction with the release of its proposed mortgage servicing rules, the CFPB announced a partnership with Cornell University to educate the public on the rule-making process and facilitate commenting on proposed rules. Cornell launched the Regulation Room to allow members of the public to comment on the CFPB’s mortgage servicing proposal in an accessible and easy-to-understand format, including blog discussions and overviews of the proposals.

CFPB and Federal Banking Agencies Propose Rule on Appraisals

The federal banking agencies announced the release of a proposed rule that would amend Regulation Z to establish appraisal requirements for higher-risk mortgage loans. As proposed, the rule requires a creditor that makes a higher-risk mortgage loan to obtain a written appraisal report, prepared by a licensed or certified appraiser, based on a physical inspection of the interior of the property. The proposal would also require a creditor to obtain an additional appraisal, at no charge to the consumer, when the seller seeks to resells the property, within 180 days after purchasing or acquiring the property,  at a price lower than the original purchase price.  The proposal requires a creditor to provide copies of appraisal reports to an applicant at least three business days prior to consummation and to make a mandatory disclosure to an applicant within three business days of receipt of an application.

The proposal provides two alternatives for determining when a loan is a “higher-risk mortgage loan.” Both alternatives define a higher-risk mortgage loan as a closed-end consumer credit transaction with a rate exceeding the prime offer rate for comparable transactions by a specified percentage, which varies depending on whether the loan is a conforming loan, a jumbo loan, or secured by a subordinate lien. Qualified mortgages, transactions secured solely by a residential structure, such as certain manufactured housing transactions, and reverse mortgage transactions would be excluded from the appraisal requirements. The comment period for the proposal ends October 15, 2012.

The CFPB also released a proposal to amend Regulation B to implement the changes made to the Equal Credit Opportunity Act by the Dodd-Frank Act. Specifically, the proposal would amend the requirement to provide copies of written appraisal reports to applicants upon request by requiring creditors to promptly provide applicants with copies of all written appraisal reports and valuations developed in connection with loans secured by first liens on dwellings, including manufactured homes and other residential structures not attached to real property. The proposal would require that a copy be provided at least three business days prior to consummation. While the three business day delivery requirement could be waived by the applicant, the applicant must receive a copy at or before consummation. In addition, the proposal would prohibit a creditor from charging applicants for a copy of the appraisal or valuation; however, creditors could still charge a reasonable fee for the expense of the appraisal or valuation. Finally, the proposal would require creditors to notify applicants of their right to receive a copy of all written appraisals and valuations within three business days of receipt of an application.

The comment period for this proposal ends October 15, 2012. The CFPB released a summary of this proposal. The federal banking agencies also released a summary.

CFPB, FTC and DOJ File Joint Amicus Brief Related to Debtor Actions Under FDCPA

The CFPB, DOJ and FTC filed a joint amicus brief urging the Supreme Court to overturn a Tenth Circuit appellate decision upholding an award of costs to the defendant under Federal Rule of Civil Procedure 54(d), despite not finding that the debtor’s Fair Debt Collection Practices Act claims were brought in bad faith or to harass. The lower court awarded costs to defendant as part of its dismissal order and also rejected debtor’s post-judgment motion objecting to the award of costs. In upholding the lower court opinion, the Tenth Circuit noting that neither the text nor the legislative history of the FDCPA reflects a clear congressional intent to displace the Federal Rules of Civil Procedure regarding the award of costs to the prevailing party.

The FDCPA’s cost-shifting provision authorizes a court to award attorney’s fees to a defendant upon a finding that the action “was brought in bad faith and for the purpose of harassment.” In their amicus brief, the FTC, DOJ and CFPB argue that Rule 54(d), which permits the award of costs to a prevailing party, does not supersede the FDCPA’s cost-shifting language, as evidenced by the text of the Rule, which only allows costs in the absence of a federal statute establishing a different cost-shifting standard. Moreover, the agencies argued that to interpret the Federal Rules of Civil Procedure otherwise would “upset the balance” between encouraging private enforcement and deterring abusive suits and “frustrate the [FDCPA’s] goal of discouraging and remedying abusive debt-collection practices."

CFPB Issues Notice of Intent to Make Preemption Determination on State Gift Card Laws

The CFPB issued a notice that it will consider whether the unclaimed property laws applicable to gift cards in Maine and Tennessee are preempted by the Electronic Funds Transfer Act and its implementing regulation, Regulation E. The EFTA preempts a state law to the extent that the state law is inconsistent with the EFTA and does not afford consumers greater protection than federal law.

Regulation E prohibits the sale or issuance of gift certificates, gift cards and prepaid cards in which the underlying funds have an expiration date that is not at least the later of: (1) five years after the date the card was issued or when funds were last loaded onto the card, or (2) the card’s expiration date. Under Maine’s Uniform Unclaimed Property Act, gift obligations or stored value cards are deemed abandoned the later of two years after December 31 of the year the obligation arose or two years after December 31 of the year the last transaction involving the obligation or card occurred. Under Tennessee’s Uniform Disposition of Unclaimed (Personal) Property Act, gift certificates with an expiration date are deemed abandoned on the earlier of the date the gift certificate expires or two years from the date of issuance. The CFPB is seeking public comment on the following: (1) whether the laws of Maine or Tennessee are inconsistent with the EFTA and Regulation E, (2) the nature of any inconsistency, (3) whether and how gift card issuers can comply with both state and federal law, and (4) whether the laws of Tennessee or Maine afford consumers greater protection than federal law. Comments are due on October 22, 2012.

CFPB Proposes Rules on Loan Originator Compensation

The CFPB announced the release of a proposal implementing the Dodd-Frank Act’s amendments to Regulation Z, the Truth in Lending Act’s implementing regulation, related to loan originator compensation. The proposal places restrictions on upfront points and/or fees, loan originator compensation, mandatory arbitration, and the financing of credit insurance premiums.

In particular, under the proposal, a creditor may offer a loan with or without upfront fees. If a loan is offered with upfront fees, then it must result in an interest rate reduction, and the creditor must also make available to the consumer “a comparable, alternative loan with no upfront discount points, origination points, or fees that are retained by the creditor [or] broker”—a “zero-zero alternative.” “Comparable alternative loan” is defined to mean “that the two loans for which quotes are provided must have the same terms and conditions, other than the interest rate, any terms that change solely as a result of the change in the interest rate, and the amount of any discount points and origination points and fees.” This requirement does not apply if the creditor or broker makes a good faith determination that the consumer is unlikely to qualify for such a loan. Citing the potential “manipulation of underwriting standards” to prevent consumers from qualifying for such a loan, the CFPB noted that it is considering safeguards to prohibit creditors from changing their qualification standards.  The CFPB further proposed that creditors maintain records “sufficient to evidence that the creditor has made available to the consumer the comparable, alternative loan that does not include discount points and originator points or fees”—the “zero-zero alternative”—or if such a loan is not available “a good faith determination that the consumer is unlikely to qualify for such a loan.”

Moreover, under the proposal, the record retention time period requirements would be extended from two to three years and the coverage of the record retention provisions would apply to all loan originators and not simply creditors. The CFPB is seeking comment on whether the record retention period should be extended to five years rather than three years. Further, under the proposal, “loan originator organizations” are required to obtain a criminal background check and credit report for those individual loan originators who are not required to be licensed under the SAFE Act and who are not licensed. This has a regulatory impact on depository institutions, including credit unions, whose loan originators generally are not subject to state licensing.

Despite the CFPB’s stress on the continuity of previous rulemakings and definitions, the proposed rule significantly changes the definition of important terms such as “loan originator” and “compensation,” presents newly defined terms such as “loan originator organization” and “individual loan originator,” and limits the exemptions for servicers.  For example, while noting the definition of “loan originator” under current law is consistent with the definition of “mortgage loan originator” as defined in the Dodd-Frank Act, the CFPB plans to interpret several terms within the definition of “loan originator” broadly, and add “takes an application” and “offers” to the definition of “loan originator.”

The CFPB also released an overview of the proposed rule. Comments are due October 16, 2012. The CFPB plans to finalize rules no later than January 2013.

Congress Members Request CFPB to Push Back Remittance Effective Date

Twenty-seven members of Congress sent a letter to Director Richard Cordray, urging the CFPB to delay the February 2013 effective date of its international remittance transfer rules (Regulation E) by two years. The Congress members also urged the CFPB to undertake a comprehensive study on the impact the rules will have. The Congress members are concerned that the rules’ disclosure requirements will require financial institutions to switch to a closed network model, exit the international funds transfer business, or limit their consumer offerings. The Congress members are also concerned that the rules will increase the risk on providers, which will result in increased prices being paid by consumers.

CFPB Issues Student Loan Advisory on School-Endorsed Debit Cards

The CFPB issued a consumer advisory to all students regarding the use of school-endorsed debit cards for the receipt of scholarship and student loan proceeds. Noting the recent FDIC consent order against a student debit card provider (see “FDIC Imposes Civil Money Penalties for FTC Violations Arising from Student Debit Cards” article below), the CFPB cautioned students against being forced to use the debit cards and/or using a certain financial institution with which the college or university has a relationship. According to the CFPB, federal law requires colleges and universities to provide students with an option to receive the scholarship and/or loan proceeds in paper check form or cash.

FinCEN Issues Advisory on SARs related to Mortgage Loan Fraud

In prepared remarks to the American Association of Mortgage Regulators, FinCEN Director, James H. Freis, Jr., announced that FinCEN issued an advisory to assist financial institutions—specifically non-bank residential mortgage lenders and originators—in filing more useful Suspicious Activity Reports related to mortgage loan fraud. Director Freis noted that FinCEN issued the advisory to facilitate compliance with FinCEN’s regulations requiring nonbank RMLOs to establish anti-money laundering programs and file SARs. The advisory identified the types of mortgage loan fraud generally reported in SARs to help financial institutions identify illicit activities. The types of mortgage loan fraud identified include:

  • Occupancy fraud
  • Income fraud
  • Appraisal fraud
  • Employment fraud
  • Liability fraud
  • Debt elimination schemes
  • Foreclosure rescue fraud
  • Identity theft
  • Home equity conversion loan fraud
The advisory also described potential red flag indicators of illicit activity such as language in a short sale contract permitting resale promptly and past misrepresentations.

FRB Imposes Civil Money Penalties for Failure to Properly Supervise Subsidiary’s Mortgage Servicing and Foreclosure Operations

The FRB issued monetary sanctions against a bank-holding company for its failure to adequately oversee its subsidiary bank’s mortgage loan servicing and foreclosure processing operations, which resulted in deficiencies affecting the safety and soundness of the bank. The bank-holding company was part of the April 2011 enforcement action involving 14 of the largest mortgage servicers. The assessment order, totaling $3.2 million, mirrors assessment orders issued by the FRB in February 2012 that imposed monetary sanctions against five other mortgage servicing organizations, which entered a settlement agreement with the state attorneys general and the DOJ. The February 2012 orders require the organizations to provide payments and designated types of monetary assistance and remediation to residential mortgage borrowers. The FRB contemplates the possibility of a similar settlement under which the bank agrees to provide borrower assistance or remediation.

Federal Reserve of Philadelphia Issues Report on Prepaid Cards

The Payment Cards Center of the Federal Reserve Bank of Philadelphia and the Center for Financial Services Innovation released a joint discussion paper, Consumers’ Use of Prepaid Cards: A Transaction-Based Analysis, on the use of open-loop prepaid cards. The study on which the report is based analyzed an anonymized data set of more than 280 million transactions made on more than 3 million cards issued by Meta Payment Systems. The report notes that although prepaid cards currently account for a small share of all consumer payments in the U.S., prepaid transactions are growing substantially faster than transactions on debit and credit cards. The report focuses on open-loop reloadable prepaid cards, accounting for 30 percent of prepaid transactions, which are prepaid cards that carry one of the major payment card network brands, can be used to make purchases at any merchant that accepts that card brand and can also be used to obtain cash at an ATM or as part of a PIN debit purchase at the point of sale.

Findings from the study include:

  • Prepaid cards are typically active for six months or less.
  • Typical issuer revenues and cardholder costs per active card month are at most $12 and even among the most actively used prepaid cards, issuer revenues and cardholder costs are generally less than $20 per month.
  • Prepaid cards with repeated value loads (e.g., direct deposits) remain active more than twice as long and have 10 times or more purchase and other activity than other cards in the same program category.
  • The majority of purchase transactions occur at grocery stores, fast food restaurants, and gas stations, suggesting that prepaid cards are used primarily to purchase nondurable goods. Additionally, many prepaid cards in the data set are also used to pay bills.
  • ATM surcharges account for about 15 to 40 percent of the cardholder costs.
The report concludes by noting the variety of limitations of the data used and provides suggestions for further research.

FTC Imposes Fine Against Employment Screening Company for FCRA Violations

The FTC announced it has entered into a stipulated final judgment and order with a consumer reporting agency that provided background screening (e.g., criminal history reports) to employers, for violations of the Fair Credit Reporting Act and the Federal Trade Commission Act. In its complaint, which was filed concurrently with the final judgment and order, the FTC alleged that the consumer reporting agency failed to follow reasonable procedures to assure maximum possible accuracy for the information contained in the consumer report (e.g., multiple entries in the consumer report for the same criminal offense), which led to denied employment, and failed to comply with the requirements under FCRA mandating that consumers be given access to their own information and the ability to dispute the information.

Under the stipulated final judgment and order, the consumer reporting agency must pay a $2.6 million penalty, is permanently enjoined from continuing the practices referenced in the complaint, and must submit to compliance monitoring.

FDIC Imposes Civil Money Penalties for FTC Violations Arising from Student Debit Cards

The FDIC announced settlements with a bank and its institution-affiliated party for alleged unsafe or unsound banking practices and unfair and deceptive practices in violation of Section 5 of the Federal Trade Commission Act. The consent orders were issued based on findings that the financial institutions were charging student account holders multiple nonsufficient fund fees from a single merchant transaction; allowing these accounts to remain in overdrawn status over long periods of time, thus allowing NSF fees to continue accruing; and collecting the fees from subsequent deposits to the students’ accounts, typically funds for tuition and other college expenses. As part of the settlements, both financial institutions have agreed to consent orders, providing for restitution of approximately $11 million to approximately 60,000 students; civil money penalties; and corrective measures, including changes to NSF fees practices. Moreover, although the bank did not operate the student debit card program, it was held responsible for its role in issuing the debit cards used in the program, and required to improve its compliance and auditing processes and terminate its relationship with its institution-affiliated party.

Washington Supreme Court Holds MERS not a Beneficiary Under State Law

In answering a certified question, the Washington Supreme Court determined that MERS is not a “beneficiary” within the meaning of Washington’s Deed of Trust Act because MERS does not hold the promissory notes securing its customers’ deeds of trust. As a result, MERS lacks the power to appoint a trustee to proceed with a non-judicial foreclosure. The court reached its conclusion based on the plain language of the statute, which defines a “‘beneficiary’ as ‘the holder of the instrument or document evidencing the obligations secured by the deed of trust, excluding persons holding the same as security for a different obligation.’” The court found the definition of “holder” in the Uniform Commercial Code persuasive, which would require the beneficiary to “actually possess the promissory note or be the payee.”

In reaching its conclusion, the court rejected several arguments made by MERS. First, the court rejected MERS’ argument that the language in the statute that provides “unless the context clearly requires otherwise,” dictated a different conclusion. The court also rejected the argument that MERS was a beneficiary because it held the deed of trust as the agent of the lenders. Finally, the court rejected MERS’ public policy arguments noting that “[t]he legislature . . . is in the best position to assess policy considerations” and the court’s decision did not prevent the parties from proceeding with judicial foreclosure.

While the court declined to answer the certified question as to the legal effect of MERS acting as an unlawful beneficiary, the court did note that MERS could not simply assign its legal interest in the deed of trust to the lender or holder. The court also concluded that a homeowner may have a cause of action under Washington’s Consumer Protection Act against MERS when MERS acts as an unlawful beneficiary under the Washington Deed of Trust Act.

Sixth Circuit Rejects TILA Rescission Claim, but Allows YSP Disclosure Claim

The Sixth Circuit held that the borrowers’ presentation of a copy of the closing package, which did not contain the required number of Notices of the Right to Cancel, along with affidavits swearing “that everything they received in the copy package they submitted into evidence,” was insufficient to overcome the presumption of receipt when the lender produced a signed copy of the disclosure. The court found that the affidavits submitted did “not rebut the presumption of receipt but instead swear only that their copy package is unaltered since closing.” The court further noted that a number of reasons could explain why the disclosures were missing from the package. As a result, the court concluded that the Truth in Lending Act placed the burden of showing non-receipt on the borrowers and the evidence presented did not meet that burden. Summary judgment in favor of the lender on the borrowers’ rescission claims was affirmed.  

The court did, however, allow a claim asserting a civil conspiracy under state law to hide broker fees to survive summary judgment. The borrowers alleged that the lender engaged in a conspiracy with a broker to improperly disclose the broker’s yield spread premium that resulted in the borrowers being unaware that they ultimately would be responsible for paying the YSP. The borrowers alleged that at no point in the mortgage origination process were they informed of the YSP and that,  although the lender did not attend the closing, it was on notice that the broker had failed to disclosure the YSP. The Sixth Circuit held that the borrowers had raised questions of fact regarding whether the lender did engage in a civil conspiracy based on:  (1) the lender had receipt of the broker’s fee disclosure prior to closing, which stated that fees would be disclosed at closing, (2) that the closing instructions provided specific language defining a YSP as a fee paid to the broker from the lender, and (3) that a juror could find the lender’s “conscious absence from the entire loan and application process . . . a decision designed to conceal the complete mortgage picture.”