Consumer Financial Services Alert - February 19, 2013 February 19, 2013
In This Issue

CFPB Announces Implementation Plan for Mortgage Rules

The CFPB announced its plan to implement the new mortgage rules that go into effect in January 2014, including the ability-to-repay rules and mortgage servicing rules (see January 9, 2013 Alert). Notably, the CFPB plans to publish plain language guides and videos in the spring; publish readiness guides this summer and revised examination procedures later in the year; and publish updates to its official interpretations to address important questions raised by industry, consumer groups, and other agencies throughout the year. The CFPB also plans to conduct a consumer education campaign, similar to the article regarding qualified mortgages posted on the CFPB’s blog.

CFPB Issues Guidance on Requirements for Transfer of Servicing Rights

The CFPB issued a bulletin addressing mortgage servicing transfers in response to the number of large servicing transfers that have taken place recently. The bulletin provides guidance to residential mortgage servicers and subservicers, and, according to Director Cordray, "directs all mortgage servicers, both banks and nonbanks, to follow the laws protecting borrowers from the risks of [servicing] transfers and makes clear that we will be monitoring them for compliance." Based on consumer complaints, the CFPB is primarily concerned that servicing transfers result in service interruptions, including instances where loan modifications are not honored because the transferor did not provide sufficient documentation or because the transferee failed to take adequate steps to identify loans subject to a trial loan modification.

The bulletin advises that the CFPB will expect servicers engaged in large servicing transfers to submit plans regarding how the servicers plan to manage related risks to consumers, and also warns that CFPB examiners will be closely reviewing servicing transfers for compliance with federal law, including, the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and their implementing regulations, as well as unfair, deceptive or abusive acts and practices. The bulletin also notes that CFPB examiners will focus on how transferors prepare for servicing transfers, how transferees handle transferred files, and the policies and procedures implemented with respect to loans with loss mitigation in process at the time of transfer. With respect to the latter, examiner focus will include a review of the policies and procedures in place to ensure, for example, that: the transferee has information regarding the loans that are in the loss mitigation process; payments are properly being applied in accordance with modification agreements; and the borrower is informed of the status of a loss mitigation application that is pending at the time of transfer.

The FHFA and the HUD both issued statements in support if the bulletin.

CFPB Announces Partnership with City to Connect Consumers with Office of Consumer Response

As a result of coordination efforts between the CFPB and Newark, N.J., Newark residents can reach the CFPB’s Office of Consumer Response by dialing 4311. The Office of Consumer Response screens complaints for completeness, jurisdiction, and non-duplication, before sending complaints to the company (bank or nonbank) for review and response. Newark residents can ask questions and file complaints about financial products and services, and can also log into the CFPB’s website to check the status of their complaint and to provide feedback about the company’s response.

Consumer Advisory Board to Meet to Discuss Financial Issues Facing Consumers

The Consumer Advisory Board will host a meeting on February 20, 2013 to discuss consumer-facing financial issues and to highlight the CPFB’s 2012 accomplishments. Agenda topics include new mortgage rules, credit reporting and debt collection, and mobile payments. Consumers are invited to join by sending an RSVP to the CFPB.

CFPB Partners with the Navajo Nation

The CFPB announced that it entered into a memorandum of understanding with the Navajo Nation Department of Justice in January; the MOU is the CFPB’s first with a tribal government. The purpose of the MOU is to establish a framework to preserve the confidentiality of information shared between the parties in connection with their efforts to enforce federal consumer finance laws. According the announcement, the MOU will further the CFPB’s efforts to "prevent harmful practices that target Native American consumers."

HUD Adopts Disparate Impact Rule

HUD has issued its final rule implementing the disparate impact standard for liability under the Fair Housing Act. The disparate impact theory posits an alternative basis for liability under the FHA, distinct from disparate treatment, which requires proof of intent to discriminate. Under the disparate impact theory, a housing practice violates the FHA if it results in an unjustified, discriminatory effect, regardless of whether there was an intent to discriminate. HUD has long taken the position in administrative and judicial proceedings that the FHA contemplates liability based on a showing of disparate impact upon protected classes of persons, and every federal court to have considered the issue has ruled that liability under the FHA may be established through proof of discriminatory effect. A housing practice has a discriminatory effect if it "actually or predictably results in a disparate impact on a group of persons on the basis of race, color, religion, sex, handicap, familial status, or national origin or has the effect of creating, perpetuating or increasing segregated housing patterns on the basis of race, color, religion, sex, handicap, familial status or national origin." Whether or not a given practice has a "discriminatory effect" will always be a fact-specific inquiry.

The disparate impact theory of housing discrimination operates under a burden shifting framework. To establish a prima facie case of discriminatory effects liability under the rule, the plaintiff must establish that members of a protected class are disproportionately burdened by the challenged action, or that the practice has a segregative effect. If the plaintiff proves a prima facie case, the burden shifts to the defendant to prove that the challenged practice is necessary to achieve one or more of its "substantial, legitimate, nondiscriminatory interests." HUD explains that the "substantial, legitimate, nondiscriminatory interests" standard is equivalent to the "business necessity" standard previously required under HUD policy in evaluating disparate impact claims, but the more general "interests" standard was drafted to be broader and thereby encompass the full range of conduct subject to regulation under the FHA. If the defendant satisfies this burden, the plaintiff must prove that the "substantial, legitimate, nondiscriminatory interest" could be served by a practice that has a less discriminatory effect.

HUD emphasizes that its adoption of this rule does not create any new law, but instead merely clarifies the legal standards for application of the burden shifting analysis under the disparate impact theory of liability. However, the adoption of the final rule is nonetheless significant, as it elevates the disparate impact theory of FHA liability to official HUD policy. Unresolved, however, is the interrelationship between the threshold for "substantial, legitimate, nondiscriminatory interests" sufficient to rebut disparate impact liability under the FHA, and enhanced prudential standards for lending and underwriting practices mandated by other aspects of financial industry reform under the Dodd-Frank Act, which in some circumstances would mandate more stringent lending standards in markets presenting higher credit risk. Such questions will likely be resolved on a "facts and circumstances" basis as issues arise in future proceedings.

FTC Settles with Mortgage Assistance Relief Company

The FTC announced that it has settled with defendants allegedly involved in a mortgage foreclosure audit scam. According to the FTC’s complaint, defendants—a company and its owner and two other related companies— charged consumers $1,995 to perform a forensic audit that allegedly would uncover defects (e.g., lost notes) that could invalidate the mortgage or assist in negotiating reduced mortgage terms or loan modifications. However, defendants allegedly either failed to follow up with or contact lenders, and also failed to return consumers’ calls and emails requesting an update on their loan modifications. Defendants are alleged to have violated the FTC Act and the Mortgage Assistance Relief Services Rule by misrepresenting that they could reduce mortgage payments, and that if their efforts failed, they would return the money.

The settlement order prohibits defendants from making misleading claims about financial products or services or any other type of product or service and from marketing mortgage assistance relief or other debt relief products or services. The order also imposed a $3.5 million judgment, which has been suspended because defendants are unable to pay.

FTC Releases Study on Accuracy of Credit Reports

In accordance with its obligations under the Fair and Accurate Credit Transactions Act, the FTC published its fifth interim report on its study of the U.S. credit reporting industry, specifically with respect to credit reporting accuracy. The study is the first major one of its kind to look at all the primary groups that participate in the credit reporting and scoring process: consumers; lenders/data furnishers (which include creditors, lenders, debt collection agencies, and the court system); the Fair Isaac Corporation, which develops FICO credit scores; and the national credit reporting agencies.

The FTC report notes that, among other things, the study concluded that 26% of participants found potentially material errors—defined as an alleged inaccuracy identified by the participants—on at least one of their three credit reports; that 13% of those with potentially material errors obtained a change in their credit score as a result of modifications made to correct the errors; and that the vast majority of errors were related to consumer accounts. The report also discusses the dispute processes participants completed to address errors and encourages consumers to regularly check their credit reports.

FTC Releases Annual Report on FDCPA Enforcement

The FTC published its annual letter to the CFPB summarizing its Fair Debt Collection Procedures Act enforcement efforts over the past year. The FTC noted that it takes a three-pronged approach to FDCPA enforcement: (1) legal enforcement; (2) consumer education; and (3) research. Over the past year, the FTC brought and/or resolved seven debt collection actions, covering areas such as debt collector misconduct, phantom debt collection—the attempt to collect non-existent debt or debt that is not owned by the collector, and submitting amicus briefs (see e.g., April 3, 2012 Alert). Under the second prong, the FTC created two consumer-based websites—, which provides articles and guidance on all aspects of debt collection, and, which was developed to provide basic information to consumers with low literacy levels. The letter also discussed the FTC’s research efforts, including its most recent report on the debt buyer industry (see February 5, 2013 Alert).

OCC Chairman Discusses Enforcement of Foreclosure Consent Orders

In remarks made before the Women in Housing and Finance, Thomas J. Curry, the Comptroller of the Currency, discussed developments in the enforcement of the foreclosure consent orders, which required that 97 separate corrective actions be taken by 14 of the largest servicers and the independent review of the mortgage servicers’ foreclosures begun or completed in 2009 and 2010. Mr. Curry noted that 93 percent of corrective actions, including employee training, establishing controls to prevent dual tracking, and improving communications with borrowers, had already been taken or "stood up." However, Mr. Curry acknowledged that similar progress had not been made with the Independent Foreclosure Review.

Mr. Curry noted that the IFR was designed to identify and compensate borrowers who suffered financial harm as a result of foreclosures that violated federal and state law. According to Mr. Curry, once it became clear that progress was slow, as evidenced by the $2 billion spent on the IFR by November 2012, without a single borrower being compensated, he, along with the FRB, determined to change course, resulting in modified consent orders that required $3.6 billion in direct payments to 4.2 million eligible borrowers and $5.7 billion in foreclosure prevention assistance. He noted that "the new approach will get more money to more people more quickly," with payouts expected to begin by the end of March. According to Mr. Curry, if the IFR continued, the process would have continued into 2014.

In discussing the amended consent orders, Mr. Curry noted that the $5.7 billion amount should be viewed along with the remainder of the consent orders, which address foreclosure prevention and loss mitigation activities. Mr. Curry also noted that the deficiencies in foreclosure practices served as justification for the new compensation approach, which has some concerned that compensation will go to borrowers that suffered no harm. Mr. Curry also stated that the amended consent orders are being finalized and will be made public soon.

HUD Settles Maternity Leave Discrimination Case

HUD announced that it has settled claims alleging a national bank violated the Fair Housing Act by requiring a home loan applicant on paid maternity leave to return to work before the lender would approve the application. Complainant, a borrower whose complaint prompted the investigation, was a US Navy veteran who applied for a Veterans’ Administration-guaranteed loan. The complaint alleged that complainant was forced to pay an additional $3,000 to the seller to delay the closing and thereby make use of all of her maternity leave. HUD investigated respondent’s practices for reviewing applications submitted by applicants on maternity leave and found that the bank’s requirement that applicants return to work before approving the loan violated the FHA, which prohibits discrimination in the sale, rental, or financing of housing based on familial status, among other things. The terms of the settlement require respondent to pay $15,000 to complainant, review its applications for VA-guaranteed loans within a number of states for the previous two years, and pay $7,500 to any other applicants who were subjected to similar requirements as a condition of loan approval. Respondent also agreed to revise its lending policies and provide fair lending training to loan originators, underwriters and processors.

Third Circuit Holds Notice, Not Suit, Triggers Right to Rescind Under TILA

Considering "what action an obligor must take to exercise the right of rescission" under the Truth in Lending Act, the United States Court of Appeals for the Third Circuit ruled that a letter providing notice of a borrower’s intent to rescind met 15 U.S.C. § 1635’s requirement, and that the statute does not require the filing of a lawsuit. At issue were two loans that had closed in August 2004. The borrowers wrote a letter in May 2007 claiming they never received notice of their right to rescind, and informing the lender they were thereby exercising their right to rescind. The borrowers did not file suit until November 2007, outside TILA’s three-year statute of repose. The lender argued that failure to sue within the three-year period waived the right of rescission; the district court agreed. The borrowers appealed and the CFPB filed an brief on their behalf (see April 17, 2012 Alert; see also April 3, 2012 Alert (discussing the CFPB’s 10th Circuit amicus brief)).

In reversing the district court’s opinion, the Court rejected the Ninth and Tenth Circuit’s rulings, holding that if rescission is disputed, written notice is not enough—the borrower must file suit within three years. The Court also rejected defendants’ arguments that Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), which held that (1) Supreme Court precedent requires filing suit within three years; (2) the right to rescind would have already vanished by the time suit was filed under the three-year statute of repose; and (3) allowing rescission through notice alone would present practical problems and unduly increase lending costs, was dispositive. Instead, agreeing with the Eleventh and Fourth Circuits, the Court observed that Section 1635 makes "no mention of filing a suit"; rather, the statute’s only two references to courts concern their ability to alter statutory procedures for rescission and to award damages in addition to rescission.

Federal Court Rejects Argument That the FDCPA Does Not Apply to State Collection Actions

The United States District Court for the Southern District of Alabama concluded that a debt collector that filed collection actions in state court with no knowledge of or ability to prove the debts’ validity may be liable under the Federal Debt Collection Practices Act. Plaintiff, whom the debt collector had unsuccessfully sued in a state court collection action, alleged that the debt collector’s lawsuit constituted a "false representation or deceptive means" of debt collection in violation of the FDCPA because defendant had no intent or ability to prove its claims

Citing Supreme Court and Eleventh Circuit precedent—that "initiation of legal proceedings by a creditor can constitute a debt collection activity" under the FDCPA—the Court distinguished between debt collectors that should have gathered "more of a paper trail" before filing suit, and those who deliberately fail to seek additional information because they know they will never be able to prove their claim, finding defendant fell within the latter group. The Court recognized a conflicting recent ruling within the same Division, Bandy v. Midland Funding, LLC, 2013 WL 210730 (S.D. Ala. 2013), but found Bandy’s reasoning unpersuasive.

Maine Supreme Court Rejects Show-Me-the-Note, but Requires Identification of Noteowner

Addressing the question of what proof a party must present "to prove ‘ownership’ of the mortgage note and mortgage for purposes of foreclosure," the Maine Supreme Court held that a foreclosure plaintiff must identify the "owner or economic beneficiary of the note," in addition to meeting other statutory requirements. In the underlying case, the loan servicer filed a foreclosure action on behalf of the note owner. The borrower contested the foreclosure, contending that only the economic beneficiary of the note could sue for foreclosure, and that the servicer was not the ultimate beneficiary (and thus not the proper party to sue).

The Maine Supreme Court noted that trial courts in Maine had come to different conclusions on what a plaintiff must do to "certify proof of ownership of the mortgage note," as required by Maine’s foreclosure statute. The Court ruled that this language did not require a foreclosure plaintiff to be the owner of the note, only to "indicate the basis for the plaintiff’s authority to enforce the note pursuant to Article 3-A of the UCC." Thus, the loan servicer had standing to bring a foreclosure action because it was uncontested that the servicer was the holder of the note and had authority to enforce the note on behalf of the loan’s beneficial owner.

First Circuit Holds that Massachusetts Mortgagors Have Standing to Challenge Mortgage Assignments

In a case of first impression for the United States Court of Appeals for the First Circuit, a three-judge panel, which included retired Supreme Court Justice David Souter, held that a mortgagor has standing to challenge a mortgage assignment even though the mortgagor is not a party or third-party beneficiary to the assignment. Plaintiff executed a note and mortgage, which named MERS as mortgagee as the nominee for the lender and the lender’s successors and assigns. The mortgage contained a power of sale, which allowed the mortgagee to foreclose without obtaining prior judicial authorization. The note was subsequently assigned to a trustee of a securitization trust, which engaged defendant as servicer. Subsequently, MERS assigned the mortgage to defendant and defendant began the process to foreclose by exercising the power of sale. Three days prior to the scheduled foreclosure, plaintiff initiated an action seeking injunctive relief and monetary damages. Defendant moved for summary judgment, with the inquiry focusing on whether MERS’ involvement in the chain of title impacted defendant’s ability to foreclose. The district court held that defendant had the authority to foreclose.

Plaintiff appealed and defendant argued that plaintiff did not have standing to challenge the assignment from MERS to defendant because plaintiff was not a party or a third-party beneficiary of the agreement between defendant and MERS. The Court held that plaintiff had standing to challenge the assignment because “a Massachusetts mortgagor has a legally cognizable right under state law to ensure any attempted foreclosure on his or her home is conducted lawfully” and when a mortgage contains a power of sale a mortgagee can foreclose without prior judicial authorization. The Court narrowed its holding by noting that a mortgagor only has standing "to challenge a mortgage assignment as invalid, ineffective, or void." Mortgagors do "not have standing to challenge shortcomings in an assignment that render it merely voidable at the election of one party but otherwise effective to pass legal title." The Court went on to hold that the assignment from MERS to defendant was valid and affirmed the decision of the lower court.

Illinois Passes Law to Streamline Foreclosures on Abandoned Properties

Illinois amended its foreclosure procedure to allow a mortgagee to make a motion for expedited judgment and sale with respect to abandoned residential property—defined as residential real estate that "is not occupied by the owner or lawful occupant as a principal residence" or "contains an incomplete structure if the real estate is zoned for residential development, where the structure is empty or otherwise uninhabited and is in need of maintenance, repair, or securing"—and statutorily-defined conditions are met that indicate abandonment. On the mortgagee’s motion, the court will hold a hearing within 15 days, but not earlier than the time to answer the foreclosure complaint. If the court finds the property is abandoned, it must immediately proceed to trial on the foreclosure. The court cannot grant a motion for expedited treatment if the mortgagor, unknown owner or lawful occupant appears in the action and demonstrates the property is not abandoned. Similarly, the court is required to vacate its judgment if a mortgagor or lawful occupant appears in the action and demonstrates that the property is not abandoned prior to confirmation of the sale. The bill sets forth statutory notices that must be posted on the subject property prior to the court’s hearing on the mortgagee’s motion and the court’s hearing to confirm the sale.

The bill is effective June 1, 2013 and is intended to alleviate the impact that foreclosures and abandoned homes have on Illinois’ residents under its current foreclosure process, which can take almost two years. In addition to providing an expedited procedure for abandoned residential property, the bill also amends Illinois’ foreclosure procedures by, among other things, requiring that a foreclosure notice be provided to the alderman of the district where a property is situated in cities with a population in excess of 2,000,000, and imposing extra filing fees based on the number of foreclosures filed in a calendar year. The bill also clarifies that a mortgage’s validity is not impacted if the mortgage is not in the form prescribed by 765 Ill. Comp. Stat. 5/11.