Consumer Financial Services Alert - March 5, 2013 March 05, 2013
In This Issue

CFPB to Focus on “Four Classes of Problems”

At the first bi-annual meeting with the Consumer Advisory Board to discuss consumer-facing financial issues (see February 19, 2013 Alert), Director Richard Cordray discussed “four classes of problems” that the CFPB intends to focus on, which include: (1) deceptive and misleading marketing of consumer financial services and products; (2) products that trigger a cycle of debt for consumers; (3) lack of consumers’ ability to choose their financial service providers (e.g., debt collection, loan servicing, and credit reporting); and (4) the “evil of discrimination.” The CFPB has already voiced its intention to pursue lending discrimination based on both intentional discrimination and the disparate impact theory in a guidance bulletin on compliance with fair lending requirements issued in May 2012 (see May 1, 2012 Alert).

CFPB Seeks Information on Initiative to Promote Student Loan Affordability

The CFPB announced that it is gathering information to develop options for policymakers to make private student loan repayment more manageable for struggling borrowers. The CFPB Student Loan Ombudsman previously released a report noting that student loan consumers were having limited success negotiating repayment plans with private lenders (see October 16, 2012 Alert). The CFPB is looking for ways that private student loan borrowers can have more flexible repayment options. The request asks specific questions on issues such as: (1) the scope of borrower hardship; (2) current options for borrowers with hardship; (3) past and existing loan modification programs for other types of debt; (4) servicing infrastructure; (5) consumer reporting and credit scoring; and (6) spillovers (e.g., how student loan payments impact access to mortgage credit). Comments must be received by April 8, 2013.

FHFA, CSBS and AARMR Support CFPB’s Mortgage Servicing Transfer Bulletin

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators issued a joint statement in support of the CFPB's Mortgage Servicing Transfer Bulletin. The CFPB's bulletin provided guidance to residential mortgage servicers and subservicers on the CFPB's expectations of servicers engaged in large servicing transfers (see February 19, 2013 Alert). The joint statement of the CSBS and AARMR commends the CFPB for identifying matters warranting particular supervisory attention and providing “clarity to the industry” on the CFPB's expectations for servicing transfers. The CSBS and AARMR have made similar findings of the potential for consumer harm resulting from transfers, such as transferee servicers failing to honor their predecessors' terms of trial modification due to relevant documents not being transferred or the transferee failing to take steps to identify mortgages subject to trial loan modifications. To mitigate the potential for consumer harm, CSBS and AARMR are encouraging state supervised servicers to familiarize themselves with state and federal requirements, and are expected to update state uniform servicing examination procedures to account for the new CFPB guidance.

The FHFA also released a statement in support of the CFPB’s bulletin citing its shared goal of improving servicing performance and the belief that it will result in better outcomes for both consumers and investors.

FRB and OCC Amend Foreclosure-Related Consent Orders Requiring Cash Payments

The OCC and the FRB announced amendments to their prior enforcement actions against mortgage servicers for deficient practices in mortgage loan servicing and foreclosure processing. The amendments memorialize agreements in principle with several large banks announced in January (see January 10, 2013 Alert) and will require the servicers to pay $3.6 billion in cash and $5.7 billion in other assistance to borrowers (e.g., loan modifications and forgiveness of deficiency judgments). The amendments will allow borrowers whose homes were in some stage of the foreclosure process in 2009 and 2010 and serviced by one of the banks subject to the amended consent orders to receive cash payments and other assistance. The mortgage servicers are expected to undertake loss mitigation efforts focused on foreclosure prevention and both OCC and FRB examiners will continue to monitor the servicers’ implementation of corrective actions required by the original enforcement actions. The amendments replace requirements related to the Independent Foreclosure Review for the mortgage servicers. For servicers that did not enter agreements with the OCC and FRB, the Independent Foreclosure Review process will continue.

Supreme Court Holds Debt Collectors Can Recover Costs Despite FDCPA

The United States Supreme Court has resolved a question that has divided various circuit courts of appeal—whether a prevailing defendant in a Fair Debt Collection Practices Act action may be awarded costs where the lawsuit was not "brought in bad faith and for the purpose of harassment." Initially brought in district court, the district court dismissed plaintiff’s suit alleging that defendant, a debt collector, had sent unlawful debt collection "communications" to plaintiff’s place of employment in violation of the FDCPA. Upon dismissal of the case, the district court awarded costs of suit—but not attorney’s fees—to the prevailing debt collector. 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." However, Rule 54(d) of the Federal Rules of Civil Procedure, provides, in relevant part, that unless a federal statute provides otherwise, costs—other than attorney’s fees—should be allowed to the prevailing party. On appeal, the Tenth Circuit Court affirmed, in part, the district court’s decision, interpreting the FDCPA as distinguishing the award of costs to a prevailing defendant from an award of attorney’s fees. The Tenth Circuit held that the latter requires a finding that the plaintiff filed suit "in bad faith," whereas costs could be awarded to a prevailing defendant regardless of the plaintiff’s motives in bringing suit. Plaintiff petitioned for a writ of certiorari.

The CFPB, FTC and the Department of Justice filed a joint amicus brief in support of plaintiff urging the Supreme Court to overturn the Tenth Circuit’s decision to award costs to defendant (see August 21, 2012 Alert). The CFPB, FTC and DOJ argued that Rule 54(d) does not supersede the FDCPA’s cost-shifting language, as evidenced by the text of the Rule and to interpret otherwise would "frustrate the [FDCPA’s] goal of discouraging and remedying abusive debt-collection practices."

The Supreme Court agreed with the Tenth Circuit’s holding that the FDCPA’s cost-shifting provision did not supersede Rule 54(d). Rejecting the arguments of both plaintiff and the amici curiae in support of plaintiff that any statute that specifically provides for costs displaces Rule 54(d) regardless of whether it is contrary to the Rule, the Supreme Court held that a federal statute "provides otherwise" if the statute is contrary to Rule 54(d). A statute is contrary to Rule 54(d) if it limits a court’s discretion. Rule 54(d), according to the Supreme Court, "codifies a venerable presumption that prevailing parties are entitled to costs." The FDCPA cost-shifting provision does not address situations in which the plaintiff brings the action in good faith and/or without the purpose of harassment, and "silence," according to the Supreme Court, "does not displace the background rule that a court has discretion to award costs."

The Supreme Court’s decision resolves a conflict among the circuit courts of appeals; namely the Ninth and Tenth Circuits. The Ninth Circuit held in Rouse v. Law Offices of Rory Clark, 603 F.3d 699, 701 (9th Cir. 2010) that a prevailing defendant cannot be awarded costs under the FDCPA’s cost-shifting provision unless the action was brought in bad faith and for the purpose of harassment. However, the Supreme Court did not address a secondary issue—whether the FDCPA’s limits on communications with third parties were applicable when the debt collection communication does not indicate the reason for the communication. In her complaint, plaintiff alleged that defendant violated the FDCPA’s that the subject facsimile was not a "communication" under the FDCPA because it did not "convey[] information ‘regarding a debt.’" In granting certiorari, the Supreme Court declined to address this issue.

First Circuit Rejects Borrower’s Claims Against Mortgage Lender for Violation of Consumer Protection Statute

The United States Court of Appeals for the First Circuit affirmed dismissal of two borrowers’ claims, raised five years after loan origination, that their mortgage lender violated Massachusetts’ consumer protection statute, which makes it unlawful to engage in unfair or deceptive practices in the conduct of any trade or commerce. The borrowers brought suit alleging that the mortgage lender failed to adequately disclose the terms of the loans prior to the borrowers signing the loan documents. In particular, the borrowers claimed the mortgage lender violated the Massachusetts consumer protection statute by (1) failing to provide a commitment letter, good-faith estimate, or other documentation required by the Real Estate Settlement Procedures Act; (2) providing "insufficient opportunity to review the terms of the loans;" and (3) because it "either ‘knew or should have known’" that the appraisal value was "too high." The mortgage lender moved to dismiss the claims as untimely and argued that the borrowers failed to allege any conduct that breached the covenant of good faith and fair dealing or violated the Massachusetts’ consumer protection statute. The lower court agreed and the borrowers appealed.

The First Circuit affirmed the lower court’s dismissal of the borrower’s state consumer protection statute claim as untimely given the four-year statute of limitations for such claims. The First Circuit was not persuaded by the borrowers’ argument that the statute of limitations should be tolled under the "discovery rule" or the "fraud exception." The First Circuit also rejected the borrowers’ claim of a breach of the implied covenant of good faith and fair dealing, holding that such a claim only governs the conduct of parties after they have entered into a contract and cannot create extra-contractual rights. The borrower’s complaint relied wholly on pre-contractual allegations that were superseded by the mortgage loan agreement.

New Jersey Law Prohibits Direct Marketing of Credit Cards on Campuses of Public Colleges and Universities

The New Jersey legislature has passed and the governor signed into law a bill banning any "public institution of higher education" (as well as affiliated agents and student organizations) from entering into "any agreement[] for the direct merchandising of credit cards to any students." According to the bill’s sponsor, the "measure attempts to remove the temptation of obtaining credit cards by restricting access at New Jersey’s colleges," arguing it was needed "because many young adults do not realize the long-term consequences of accumulating huge debt." The bill does not prevent New Jersey’s private universities from entering into direct merchandising agreements, nor, according to the Credit Union National Association, does it prevent a public college credit union from offering cards to students who are members.

The new law is part of a trend to prevent the targeting of young adults for credit, who often do not have the ability to pay the debt once accumulated. In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009, which, among other things, amended the Truth in Lending Act to require credit card issuers to consider the independent ability-to-pay of an applicant under the age of 21. The New Jersey law is slated to take effect on March 9, 2013.

Illinois Supreme Court Issues Rules Requiring Lenders to Prove Offer of Foreclosure Alternatives

The Illinois Supreme Court has issued new rules that impose requirements on mediation programs and the foreclosure process in general. The new rules require judicial circuits electing to establish mortgage foreclosure mediation programs to adopt local rules that address such issues as actions eligible for referral to mediation and scheduling of the mediation. In addition, the rules amend the Illinois Mortgage Foreclosure Law, which, among other things, imposes content requirements for the foreclosure complaint and requires that certain documents be filed with the complaint. For example, under the new rules, a copy of the note including all indorsements and allonges must be attached to the mortgage foreclosure complaint at the time of filing. Finally, the new rules impose notice requirements for default judgments and foreclosure sales (e.g., notice of the foreclosure sale must be sent at least 10 days before the sale) and require compliance with all loss mitigation programs that apply to a loan prior to moving for a judgment of foreclosure in cases where the mortgagor appears or files a responsive pleading. Such compliance must be documented with an affidavit, in the form prescribed by rule, setting forth the type of loss mitigation that applied to the loan, the steps that were taken to offer the loss mitigation and the status of any loss mitigation efforts. The rules were effective March 1, 2013.

New York Department of Financial Services Issues Warning Letter to Debt Collectors

The New York Department of Financial Services sent a warning letter to remind debt collectors operating in New York that they should not collect illegal, usurious loans made in New York, including payday loans made over the internet, by phone or by mail. The letter noted that usurious payday loans are void or unenforceable and attempts to collect such debt violate state and federal law. The DFS also warned that it “will continue to monitor lenders and debt collectors to protect consumers from usurious lending, including payday lending, through aggressive enforcement of law violations.” The CFPB is also focusing on payday lending. At the first bi-annual meeting with the Consumer Advisory Board, Director Richard Cordray called short-term credit products (e.g., payday lending) “debt traps” and noted that payday lending is “marketed as [a] short-term solution[] to an emergency need obscuring the risks inherent in terms that can make a tough situation even more difficult.”

Monitor Releases Report on Ongoing Implementation of National Mortgage Settlement

The monitor for the National Mortgage Settlement released his third voluntary progress report on the banks’ efforts to implement the terms of the consent judgments giving rise to the settlement. The report, "Ongoing Implementation: A Report from the Monitor of the National Mortgage Settlement," focuses on servicers’ summaries of reports including a report on the number of borrowers assisted and credit activities under the consumer relief requirements. For example, between October 1, 2012 and December 31, 2012, borrowers benefited from the consumer relief mandated in the settlement in the amount of $23.9 billion—an average of $86,465 per borrower—for relief ranging from first lien modification forgiveness, short sales, and refinancing. In addition, the monitor concluded that borrowers have received significant consumer relief and compliance infrastructures to measure servicing standards have been set up.