Consumer Financial Services Alert - September 5, 2012 September 05, 2012
In This Issue

CFPB Announces Changes in Senior Leadership

The CFPB recently announced the following changes in senior leadership: Kelly Thompson Cochran, who previously served as the Deputy Assistant Director for Regulations, will replace Leonard Chanin as Acting Assistant Director for Regulations; Stephen Van Meter, who previously served as Assistant General Counsel for Policy, will now serve as Deputy General Counsel. Also joining the CFPB is: Chris Lipsett, Senior Counsel in the Office of the Director and Delicia Reynolds, Staff Director for the Consumer Advisory Board and Councils.

CFPB Releases Update of Private Student Loans Report

The CFPB released an updated report on private student loans and a summary of the updates. The revised report was issued after the CFPB received feedback from researchers and industry participants. The updated report refined results in two areas: (1) the extent to which private student loan borrowers have exhausted their federal loan options, and (2) the extent to which private student loans were originated without certification of the borrower’s need by the college or university. For example, the updated report shows that a higher percentage of students did not exhaust their federal loan eligibility. In particular, the percentage increased from 40% to 54.5% after the CFPB decided to include students who chose not to obtain Stafford loans. The updated report also includes a log of changes and the reasons for each change.

The release of the updated report coincided with remarks given by the CFPB’s Student Loan Ombudsman, Rohit Chopra, to the Congressional Forum on Student Loans. Mr. Chopra addressed the rising student loan debt and identified three lessons for the student loan market gleaned from the mortgage market crisis: (1) aligning incentives, (2) spurring refinance and (3) ensuring adequate servicing.

CFPB Seeks Comment on Information Collection of the Office of Intergovernmental Affairs Outreach Activities

The CFPB’s Office of Intergovernmental Affairs issued a notice and request for comment seeking to conduct outreach by collecting information from state, local and tribal governments related to the CFPB’s activities. Comments are due September 24, 2012.

CFPB Extends Comment Deadline for “All In” Finance Charge and High Cost Test Parts of RESPA/TILA Integration Proposal

The CFPB announced that it has extended the comment period on the proposals concerning the definition of finance charge and the high-cost mortgage coverage test in its mortgage loan disclosure integration rule (see July 10, 2012 Alert).  The original comment period was set to end on September 7, and now will end November 6, 2012.

The CFPB Issues Exam Procedures for the Consumer Reporting Market

The CFPB announced the release of Examination Procedures for larger participants of the consumer reporting market. The Examination Procedures set forth the procedures by which the CFPB will examine larger participants including their use and provision of accurate information, handling of consumer disputes, availability of disclosures to consumers, and prevention of fraud and identity theft. The CFPB finalized its rule defining larger participants for the consumer reporting market in July 2012 (see July 24, 2012 Alert).

FHFA Announces Short Sale Guidelines

The Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac issued new guidelines regarding short sales that go into effect on November 1, 2012. Under the new guidelines, homeowners with an eligible hardship will be able to sell their homes through a short sale, even if their mortgages are current. In addition, servicers can expedite processing without Fannie Mae or Freddie Mac’s approval for certain borrower hardships, including death of a borrower or co-borrower, divorce, disability or job relocation. Other key features include offering second lien holders up to $6,000 to expedite the processing of a short sale and evaluating whether a borrower has the financial capacity to cover shortfalls resulting from a short sale.

Federal Court Dismisses Class Action Alleging HELOC’s Payment Processing Terms Violated TILA

The United States District Court for the Southern District of Alabama granted summary judgment in favor of a bank, ruling that defendant’s policy of applying excess payments to accrued finance charges was not a violation of the Truth in Lending Act and its implementing regulation, Regulation Z, where the terms of the contract indicated that excess payments would be applied in that manner. Plaintiff alleged that defendant violated TILA by misapplying her payments and unilaterally changing the terms of the HELOC, which increased the price of credit in the form of additional interest. Defendant obtained plaintiff’s HELOC after the original lender was placed in receivership. Under the original lender’s policy, payments in excess of the minimum payment were applied to the principal. However, under defendant’s policy, any payment in excess of the minimum payment is first applied to all accrued finance charges.

The Court noted that TILA and Regulation Z generally prohibit creditors from unilaterally changing the material terms of an open-end consumer credit plan. However, the Court did not find defendant had acted unlawfully, noting that the terms of defendant’s policy clearly stated that excess payments would be applied to unpaid finance charges. In reaching its decision, the Court noted that the payment application provision did not “become ambiguous simply because [plaintiff’s original lender] applied the payment in a different manner.” Plaintiff also alleged that defendant’s principal reduction payments option (e.g., sending a separate payment by phone or mail) was a unilateral change to the terms of the HELOC and, as such, a violation of TILA and Regulation Z. The Court also rejected this argument, agreeing with defendant that the principal reduction payment option was a benefit to plaintiff, holding that the bank’s “principal-only payment method is simply a way to avoid having the extra payment applied to accrued interest and fees,” and therefore not in violation of TILA, which states that any change made to the terms of the loan is generally prohibited except a change that benefits the consumer.

Third Circuit Holds that Federal Arbitration Act Preempts State Law

The United States Court of Appeals for the Third Circuit held that the Federal Arbitration Act preempted the application of the New Jersey Supreme Court decision in Muhammad v. County Bank of Rehoboth Beach, 912 A.2d 88 (N.J. 2006), which required a finding that a class-arbitration waiver in a credit card agreement was unconscionable and unenforceable. Plaintiff-appellant sought to bring a putative class action, but the lower court dismissed the case and required individual arbitration based on the class-action arbitration waiver contained in the credit card agreement. The Third Circuit upheld the lower court’s ruling, finding that the district court did not err by reinstating its prior order compelling arbitration, even though the factual record established that plaintiff-appellant could not effectively vindicate his statutory rights under the arbitration agreement. The Court reasoned that under the FAA, individual arbitration was plaintiff-appellant’s only remedy. Specifically, the Court noted that the FAA was enacted due to judicial hostility toward arbitration agreements and that the Supreme Court’s decisions in AT&T Mobility LLC v. Concepcion, 130 S.Ct. 3322 (2010) and Stolt-Nielson S.A. v. Animal Feed International Corp., 130 S.Ct. 1758 (2010), preclude courts from compelling class-arbitration when the parties have not agreed to it. In the Court’s view, if plaintiff-appellant were successful on appeal, there “were two possible remedies: [o]rdering a class-arbitration or invalidating [the] arbitration agreement so that he could proceed in a judicial action.” Since Concepcion and Stolt-Nielson precluded an order for class-arbitration, the only remedy would be invalidation of the arbitration agreement, which would be inconsistent with the FAA.

Federal Court Rules State Consumer Protection Statute Applicable to Consumer-Facing Conduct Only

The United States District Court for the Eastern District of New York ruled in favor of a credit card processing company and bank, holding that New York’s consumer protection statute cannot be extended to businesses where the alleged deceptive and unlawful conduct is not consumer-oriented. Plaintiff, an online provider of prepaid calling cards, alleged violations of New York common law and New York’s consumer protection statute for an alleged non-contracted-for per item fee. The Court dismissed plaintiff’s claims under New York’s consumer protection statute, which prohibits as unlawful, deceptive acts or practices in the conduct of any business, trade or commerce, or in the furnishing of any service. The Court found that plaintiff failed to establish one of the prima facie factors necessary to prove a violation—that defendant’s deceptive acts were directed at consumers. In reaching its decision, the Court held that a business is not a consumer under the New York law, and that “where the alleged conduct is targeted only at businesses, and has no direct impact on consumers,” a claim under the New York consumer protection law is not allowed. Because defendant’s credit card processing services were, “by nature, a business product,” plaintiff’s claims under the New York consumer protection law failed.

DOJ Settles Fair Lending Suit Against Mortgage Firm

The Department of Justice announced that its investigation into fair lending violations, which commenced in 2007 with the Department of Housing and Urban Development, has concluded in a $3.5 million settlement. The DOJ alleged that the mortgage firm engaged in a pattern and practice of discrimination by pricing residential mortgage loans for qualified African American and Latino borrowers higher than similarly-qualified non-Hispanic white borrowers. In particular, African American and Hispanic borrowers were charged higher interest rates—ranging between 19 and 41 basis points higher for African Americans borrowers and 20 and 23 basis points higher for Hispanic borrowers. Under the terms of the settlement, borrowers are entitled to compensation and the mortgage firm is required to pay $55,000 in civil money penalties—the maximum under the Fair Housing Act. Moreover, the mortgage firm is required to develop and implement new policies that limit the pricing discretion of its loan officers, require documentation of loan pricing decisions, and monitor loan prices for race and national origin disparities. This settlement is part of the DOJ’s increasing focus on lending discrimination (see July 24, 2012 Alert).

Eighth Circuit Dismisses “Show Me the Note” Class Action

The United States Court of Appeals for the Eighth Circuit dismissed another class action premised upon the largely discredited “show me the note” theory of challenging foreclosures, affirming the district court’s dismissal of the action for failure to state a claim as a matter of law. Plaintiffs raised 16 separate causes of action, on behalf of a putative class of defaulted mortgage borrowers, all based on the argument that the foreclosures were invalid because the entity holding the mortgage did not also hold the note. Calling this argument “flawed” and “borderline frivolous,” the Eighth Circuit affirmed the district court’s dismissal on grounds that the plain language of the Minnesota foreclosure statute permits the record holder of title to the mortgage to foreclose upon a borrower’s failure to make payment.  While courts around the country have dismissed similar claims, the tone of the Eighth Circuit’s opinion may itself be of some significance. Addressing in several paragraphs and an extensive footnote the pattern of meritless and repetitive litigation filed by plaintiffs’ counsel, the Court pointedly reminded counsel of the requirements imposed by the Federal Rules of Civil Procedure – that the filing of a complaint implies a certification by counsel that the claims are “warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law.” The opinion suggests a growing impatience by courts with the still ongoing flood of mortgage litigation premised upon rejected or patently frivolous theories.

New Jersey Federal Court Rejects Class Action Alleging Home Refinancing Foreclosure Violations

The United States District Court for the District of New Jersey held that plaintiffs’ class claims arising out of an incorrect payoff notification were barred by New Jersey’s entire controversy doctrine. Plaintiffs alleged that the mortgage servicer sent them a payoff statement for an amount more than what was due. After a final foreclosure judgment was entered against plaintiffs, plaintiffs sought to refinance their mortgage and requested their payoff balance from their servicer. Plaintiffs claimed the payoff statement was for more than what plaintiffs owed. After paying the allegedly incorrect amount, plaintiffs filed a class action based on the overcharge.

The Court held that plaintiffs’ claims were barred by the entire controversy doctrine, which “‘compels the parties, when possible to bring all claims relevant to the underlying controversy in one legal action,’ including defenses and counterclaims.” The Court concluded that plaintiffs’ claims should have been raised in the foreclosure action and rejected plaintiffs’ argument that they did not have the opportunity to raise the claims in the foreclosure proceeding because a final judgment had already been issued.  In rejecting plaintiffs’ argument, the Court noted that the court in a foreclosure action “retains jurisdiction until either: (1) if the home is sold at the sheriff’s sale, the later of ten days after the sheriff’s sale or the delivery of the sheriff’s deed; or (2) if the sheriff’s sale is averted by payoff, until payment is made, the judgment is entered, and the case is dismissed.”

First Circuit Refuses to Extend the Scope of the Rescission Period

The Court of Appeals for the First Circuit affirmed a lower court ruling that a bank that foreclosed on plaintiff did not violate the Massachusetts Consumer Credit Disclosure Act, the state analog to the federal Truth in Lending Act. Plaintiff alleged defendant violated the Massachusetts law by providing her with only one disclosure statement and by under-disclosing the finance charge in the statement. As a result of these failures, plaintiff sought to assert her rescission rights under the Massachusetts law, which creates a four-year rescission period (unlike the three-year period in the federal TILA). Under the Massachusetts analog to TILA, a creditor is required to provide the borrower with two copies of the notice of the right to rescind.

The Court rejected plaintiff’s argument, holding that there is “nothing [in the statute] about the lack of multiple copies being a basis for rescission.” The Court also cited the purpose of the rescission statute which was to give a consumer the information needed to intelligently decide whether to cancel the loan. One copy, according to the Court, “performs this function as well as two.” Moreover, the First Circuit rejected plaintiff’s argument that finance charges were under-disclosed, agreeing instead with the lower court that fees for title insurance are not finance charges under Massachusetts law. Under the Massachusetts law, title insurance fees may qualify as finance charges if the fees are not bona fide or reasonable in amount. The Court noted that plaintiff failed to allege that the title insurance fees were either unreasonable or not bona fide.

Florida Federal Court Upholds Vicarious Liability under TILA

The United States District Court for the Southern District of Florida ruled that a creditor may be vicariously liable under the Truth in Lending Act for the actions of its loan servicer. In this case, plaintiffs requested that defendant’s loan servicer identify the owner of their note, including the owner or master servicer’s name, address, and telephone number. The loan servicer responded with only the name of the owner and the servicer’s address and contact information. Plaintiffs alleged that because the servicer, as an agent of defendant, did not provide the complete contact information of the owner, defendant was vicariously liable for the alleged TILA violations. Defendant moved to dismiss, arguing, among other things, that the statutory language of TILA did not support vicarious liability. In particular, defendant argued that TILA only imposes vicarious liability on creditors when the creditor both owns and services the loan. The Court disagreed. According to the Court, Congress created a cause of action under TILA, but at the same time, mandated that servicers would not be liable for a TILA violation. Citing a long line of cases, the Court concluded that “Congress intended the servicer’s agent to liable, otherwise, Congress created a cause of action with no one to sue for relief.”

The Ninth Circuit Affirms Retailer Credit Card Online Disclosures Comply with TILA

The Ninth Circuit affirmed a lower court’s ruling that a retailer’s online credit card disclosures complied with the Truth in Lending Act and, therefore, created a safe harbor for the retailer. Plaintiff filed a class action alleging, among other things, violations of California’s unfair competition law. Plaintiff completed a credit card application using defendant’s online credit application. Several times during the application process, plaintiff was directed to the retailer’s disclosures and checked the box that he had agreed to the terms—which included an annual fee. However, once he received his credit card, plaintiff “was surprised” to learn that the credit card had an annual fee. Plaintiff alleged that the retailer’s disclosures of the annual fee were inadequate and in violation of California unfair competition law. The retailer argued that because the annual fee disclosure complied with and was required by TILA and Regulation Z, its conduct fell within a “safe harbor” that was “impervious to [the state law violation].” The Ninth Circuit agreed. Citing the California Supreme Court in Cel-Tech Comms., Inc. v. Los Angeles Cellular Telephone Co., 973 P.2d 527, 541 (Cal. 1999), the Court held that under the safe harbor doctrine, “[t]o forestall an action under the [California] unfair competition law, another provision must actually ‘bar’ the action or clearly permit the conduct.” According to the Court, TILA and Regulation Z provide such a safe harbor for the retailer’s online disclosures.

Progress Report on National Mortgage Settlement Released

The monitor for the national mortgage settlement has issued his first progress report on the parties’ efforts to implement the terms of the consent judgments giving rise to the settlement. The consent judgments settled claims of alleged improper mortgage servicing practices by five major mortgage servicing organizations. The settlement establishes a series of approved mortgage servicing practices, referred to as “Mortgage Servicing Standards,” and provides for “consumer relief” in the form of specific dollar amounts devoted to loan modifications, facilitation of short sales, forbearance, and refinancing programs, among other remedies. This first progress report, which was not required by the terms of the settlement, focuses on the structure and controls in place to monitor the settlement; for example, the creation of the Office of Mortgage Settlement Oversight and the anticipated allocation of settlement funds to the various forms of servicer relief. The first official monitor’s report required by the terms of the settlement will be submitted to the District Court for the District of Columbia in the second quarter of 2013.

Massachusetts Attorney General Urges FHFA to Comply with State Mortgage Law

Martha Coakley, Attorney General for the Commonwealth of Massachusetts, sent a letter to the Acting Director of the FHFA, urging him to reconsider the FHFA’s “refusal to engage in principal reductions for struggling homeowners.” In the letter, Ms. Coakley discusses recent legislative developments in Massachusetts regarding the conduct of foreclosures, such as the “Act to Prevent Unnecessary and Unreasonable Foreclosures” passed by the Massachusetts legislature in August (see August 7, 2012 Alert). The Act requires certain creditors holding “certain types of loans” (e.g., interest-only, adjustable rate mortgages, and loans featuring short term introductory rates) to “make commercially reasonable efforts to achieve a commercially reasonable loan modification” and codifies recent developments in state case law addressing the requirements for execution of a valid foreclosure, among other specific requirements. Ms. Coakley’s letter reflects ongoing efforts by various entities within Massachusetts, including local governments, state courts, and the legislature, to keep the Commonwealth at the forefront of the debate surrounding practices for loan modification and foreclosure.

New York Limits Compensation on High-Interest Home Loans

The New York state legislature has amended the Banking Code to prohibit any person from providing, and any mortgage broker or lender from receiving “directly or indirectly, any compensation that is based on, or varies with, the terms of any home loan.” For example, yield spread premiums are expressly prohibited under the law. The law is effective immediately.

Illinois Amends Collection Agency Act to Include Debt Buyers

The Illinois legislature enacted a bill amending the Illinois Collection Agency Act to include debt buyers. A “debt buyer” means “a person or entity that is engaged in the business of purchasing delinquent or charged-off consumer loans or consumer credit accounts or other delinquent consumer debt for collection purposes, whether it collects the debt itself or hires a third-party for collection or an attorney-at-law for litigation in order to collect such debt.” Under the amended law, debt buyers must commence any legal action upon an obligation arising out of a consumer debt within the applicable limitations period, and must comply with all provisions of the law, except that debt buyers are not required to obtain a surety bond, maintain a trust account, obtain written authorization to refer an account to an attorney or adhere to the assignment for collection creditor under the Act. Moreover, the amendment subjects debt buyers to potential Attorney General enforcement actions under the Illinois Consumer Fraud and Deceptive Business Practices Act. The new law is effective January 1, 2013.