Consumer Financial Services Alert - January 22, 2013 January 22, 2013
In This Issue

CFPB Finalizes Mortgage Servicing Rules

The CFPB finalized its mortgage servicing rules amending Regulation Z, the implementing regulation for the Truth in Lending Act, and Regulation X, the implementing regulation for the Real Estate Settlement Procedures Act. The final rules mirror, for the most part, the proposed rules that were issued in August of last year (see August 21, 2012 Alert), and the CFPB has published a summary and factsheet on the amendments to Regulations X and Z. A few key differences are noted below:

General servicing obligations. The information request provisions only concern written requests for information, as opposed to the oral requests that were included in the proposed rule.

Interest-rate adjustment notices for adjustable-rate mortgages. The provisions governing interest rate adjustment notices do not apply to adjustments occurring in loan modifications for loss mitigation purposes, but do apply to any subsequent adjustments that occur as a result of a loan modification contract. Also, for ARMs without a prepayment penalty, the section on prepayment penalties can either be excluded or replaced with the word “None.”

Periodic billing statements. While consumers cannot opt of out receiving periodic billing statements, consumers who receive electronic notifications that their billing statements are ready for viewing can opt-out of receiving such notifications.

Error resolution. The final rules expand the definition of “error” to include “any other error relating to the servicing of the borrower’s mortgage loan.”

Force-placed insurance. The final rule decreases the amount of time servicers must wait to receive documentation that a borrower has had continuous hazard insurance in place from 45 days to 15 days.

Early intervention with delinquent borrowers. Servicers must establish or make a good faith effort to establish live contact, such as by telephone or meeting in-person, with the borrower by the 36th day of the borrower’s delinquency, as opposed to 30 days put forward in the proposed rules. In addition, within 45 days (compared to 40 days in the proposed rule) of a borrower’s delinquency, the servicer must provide the borrower with a written notice of loss mitigation options. Moreover, the final rules no longer require the written notice to include a statement regarding the foreclosure process.

Loss mitigation procedures. The final rule creates a private right of action, pursuant to 12 U.S.C. § 2605(f), which sets forth the damages for violations of the Real Estate Settlement Procedures Act, for failure to comply with the loss mitigation provisions.

Small servicers, servicers that service 5,000 or less mortgage loans and only service mortgage loans the servicer or an affiliate owns or originated, are exempt from certain requirements under the final rules; however, small servicers are prohibited from engaging in dual tracking. The final rules are effective January 10, 2014.

CFPB Finalizes TILA and ECOA Appraisal Rules

The CFPB announced that it and five other prudential regulators, the OCC, FHA, FRB, FDIC, and NCUA, finalized amendments to Regulation Z, the Truth in Lending Act’s implementing regulation, with regard to appraisals requirements for higher-priced mortgages (see August 21, 2012 Alert). The final rule narrows the definition of a higher-priced mortgage loan to only focus on the annual percentage rate, in contrast to the proposal which provided two alternative definitions focused on APR and the transaction cost.  Under the final rule, a higher-priced mortgage loan is defined as a closed-end consumer credit transaction secured by a principal dwelling with an APR that exceeds the average prime rate for a comparable transaction as of the date the interest is set by certain percentage points depending on the type of mortgage loan. Also, different than the proposed rule, the CFPB has presented more guidance to the requirement for an additional appraisal. Under the proposed rule, an additional appraisal was required if the seller sought to resell the property within 180 days of purchase or acquisition. The final rule provides that an additional appraisal is required where either (1) the seller acquires the property within 90 or less days and the price in the consumer agreement exceeds the seller’s acquisition price by 11% or more; or (2) the seller acquires the property within 91 to 180 days and the consumer’s purchase price exceeds the seller’s price by 21% or more. This requirement for an additional appraisal is intended to “effectuate the statute’s policy of requiring creditors to apply greater scrutiny to potentially flipped properties.” The CFPB also released a detailed summary and summary for consumers on the rule on appraisals for higher-priced mortgages. The rule is effective January 18, 2014.

CFPB Finalizes Rule on Escrow Requirements for “Higher-Priced” Mortgages

The CFPB also separately finalized the rule on escrow requirements for higher-priced mortgages. The rule changes the escrow maintenance provisions and now requires creditors to establish and maintain escrow accounts for at least 5 years after originating a higher-priced mortgage loan.

Importantly, the rule exempts small creditors that meet certain conditions, such as operating predominantly in a rural or underserved areas and originating 500 or fewer yearly first-lien mortgages, from the escrow requirement. The CFPB also released a detailed summary of the rule, which becomes effective June 1, 2013.

CFPB Finalizes Rule on Loan Originator Qualification and Compensation Practices

The CFPB announced it finalized its rule governing practices for the origination of consumer mortgage loans, including the qualification of mortgage originators and their compensation. On balance, the final rule attempts to place brokers, creditors and individual loan originators in a compensation-neutral position relative to the terms of a given loan, and to increase accountability for brokers, creditors and individual loan originators who are primarily responsible for originating loans that are later challenged as unlawful by requiring them to include their unique Nationwide Mortgage Licensing System and Registry identifiers on loan documents. Importantly, in the final rule, the CFPB did not adopt the proposed rule’s zero-zero alternative (see August 21, 2012 Alert). Under the zero-zero alternative, a creditor that chose to offer loans with upfront fees, would also have to 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.” The CFPB explained that the zero-zero alternative was not included in the final rule due to concerns that, as proposed, the alternative would not “facilitate consumer shopping and enhance consumer decision making,” but rather confuse consumers. The CFPB plans additional study and testing on the alternative and may adopt some variation of the zero-zero alternative in the future. The CFPB also released a detailed summary of the rule, which becomes effective January 10, 2014.

CFPB Seeks Public Comment on Information Collections

The CFPB solicited comments on a proposed information collection titled, “Generic Clearance for Qualitative Consumer Education and Engagement Information,” and designed to “identify strategies to help consumers make better-informed financial decisions” and to educate the CFPB on “effective financial education and empowerment strategies.” The information collection seeks public input on: (1) whether the collection of information is necessary for the performance of the CFPB’s functions; (2) whether the CFPB’s estimated burden of collecting information is accurate; (3) ways to enhance the information being collected; and (4) ways to minimize the burden on respondents. Comments are due by March 18, 2013.

FTC Settles First Mobile Application-Related Fair Credit Reporting Act Case

The FTC announced a settlement with companies that provided criminal background checks through a mobile application and failed to comply with the Fair Credit Reporting Act. The FTC's complaint alleged that the companies advertised that the mobile application could be used by employers to perform criminal background checks on prospective employees. In an apparent attempt to end-run their obligations under the FCRA, the companies used disclaimers that their products were not FCRA compliant; should not be used as screening tools; and that any person using the mobile application “assume[d] sole responsibility for compliance with the [FCRA] and all/any other applicable laws.”  Significantly, the FTC rejected the use of such disclaimers, noting that “these disclaimers are not enough to avoid liability under the FCRA because the company advertised and expected that its reports could be used for employment purposes.”

Pursuant to the consent order, the companies are prohibited from, among other things, (1) furnishing credit reports to any person that they do not believe has a permissible purpose under the FCRA; (2) failing to maintain reasonable procedures to assure the accuracy of the information concerning an individual to whom a consumer report relates and (3) failing to provide the required notices to users of consumer reports and furnishers of consumer report information. The consent order is open to public comment until February 11, 2013.

FTC Targets Debt Collector Allegedly Engaged in Violations of the FTC Act and the FDCPA

The FTC announced a settlement with a debt collection company for violations of the Federal Trade Commission Act and the federal Fair Debt Collection Practices Act on grounds that defendants subjected consumers to abusive debt collection practices and deceived their small business clients. The complaint alleged that, in violation of the FDCPA, which generally prohibits deceptive, abusive, and unfair debt collection practices, defendants subjected consumers to obscene and profane language, threatened physical harm, lawsuits and arrest and improperly disclosed consumers’ debts to employers and other third parties. Further, in violation of the FTC Act, defendants deceived their small business clients by advertising that they would work on a contingency basis, but instead kept all of the proceeds or more than they were entitled to and also sought and obtained additional fees (e.g., filing or processing fees) from clients, and “neither undertook the promised legal action to collect the debt nor refunded fees paid by the client. In addition, the FTC separately settled with related parties who received funds from the above mentioned debt collection practices.

Sixth Circuit Holds that a Mortgage Foreclosure Is Debt Collection under the FDCPA

The United States Court of Appeals for the Sixth Circuit held that filing a mortgage foreclosure action is “debt collection” within the meaning of the Fair Debt Collection Practices Act and a lawyer in such an action who meets the definition of a “debt collector” must comply with the FDCPA. Plaintiff brought an action against a mortgage servicer and its attorney, alleging defendants violated the FDCPA by “falsely stat[ing] in the foreclosure complaint that [servicer] owned the note and mortgage, improperly schedul[ing] a foreclosure sale, and refus[ing] to verify the debt upon request.” The lower court dismissed plaintiff’s claims by adopting the majority view—that is a mortgage foreclosure is the enforcement of a security interest, not debt collection.

The Court, finding support in Wilson v. Draper & Goldberg, PLLC, 443 F.3d 373 (4th Cir. 2005) and Piper v. Portnoff Law Assocs., Ltd., 396 F.3d 227 (3d Cir. 2005), determined that “any foreclosure action, even one not seeking a money judgment on the unpaid debt, is debt collection under the [FDCPA].” In making this determination, the Court noted “debt collection” is not defined; however, “debt” is defined with respect to the underlying transaction, not the transaction’s security. The Court also noted that “debt collection” is performed through “communication,” “conduct,” or “means,” suggesting a broad view of what is considered collection. Finally, the Court reasoned “every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt, either by persuasion (i.e., forcing a settlement) or compulsion (i.e., obtaining a judgment of foreclosure, selling the home at auction, and applying the proceeds from sale to pay down the outstanding debt).” As a result, the Court reversed the district court’s dismissal of plaintiff’s FDCPA claims against the law firm and remanded the case for further proceedings.

Eighth Circuit Rejects Borrowers’ Fraudulent Misrepresentation Suit over Loan Modification

The United States Court of Appeals for the Eighth Circuit affirmed a lower court’s dismissal of plaintiffs’ fraudulent misrepresentation and promissory estoppel claims arising out of an attempted loan modification under HAMP. Plaintiffs attempted to negotiate a loan modification under HAMP with defendant, their loan servicer. After plaintiffs received conflicting information regarding their eligibility for a modification and after believing they would be eligible for a modification, plaintiffs stopped making mortgage payments and defendant initiated a foreclosure proceeding. Plaintiffs then filed an action seeking injunctive relief alleging fraudulent misrepresentation and promissory estoppel. Specifically, plaintiffs alleged “[defendant’s] representatives insured [sic] plaintiffs that they would qualify for a modification and their mortgage would be modified upon receipt of requested documentation.” The lower court granted defendant’s motion to dismiss finding that defendant’s representations were insufficient to authorize a recovery for fraudulent misrepresentation. Similarly, defendant’s representation did not rise to the level of a promise to authorize a recovery for promissory estoppel.

The Eight Circuit affirmed. In doing so, the Court rejected plaintiffs’ argument that defendant’s “knowing[] misrepresent[ion] that it had authority to modify their loan” was a factor allowing the fraudulent misrepresentation claim to continue and declining to relax the Federal Rules of Civil Procedure which require that fraud claims be stated with particularity.

Massachusetts Division of Banks Proposes Amendments to Regulations to Implement New Foreclosure Law

The Massachusetts Division of Banks proposed amendments to current regulations to implement the “Act to Prevent Unnecessary and Unreasonable Foreclosures,” which went into effect November 1, 2012 (see August 7, 2012 Alert). The Act requires creditors holding “certain mortgage loans,” which are defined by features of the loan (e.g., interest-only or adjustable rate mortgages), to “take reasonable steps and a good faith effort to avoid foreclosure.” The proposed amendments set forth form notices to be used by servicers as required by the Act (i.e., Right to Request Modified Mortgage Loan Notice and Right to Cure Notice).

The proposed amendments also establish a safe harbor for compliance. Under the proposed regulations, a creditor that does not provide the required Right to Request a Modified Mortgage Loan Notice and written assessment satisfies the requirements under the Act if the creditor can demonstrate one of the following: (1) that any time within the previous 3 years preceding the delivery of the Right to Cure Notice, the borrower accepted a permanent loan modification of a “certain mortgage loan” that provided for an affordable monthly payment; (2) that at any time within the previous 3 years preceding the delivery of the Right to Cure Notice, the creditor notified the borrower of his or her ineligibility for a modified mortgage; or (3) the creditor attempted a good faith effort to resolve the default with the borrower, but was unable to do so and is eligible to shorten the cure period from 150 to 90 days as permitted by Massachusetts law.

The Division of Banks has also scheduled a February 6, 2013 hearing for public comments on the proposed amendments to the regulations.