Consumer Financial Services Alert - February 18, 2014 February 18, 2014
In This Issue

CFPB Begins Process for Amending HMDA Reporting Requirements

As a first step in its process to amend the Home Mortgage Disclosure Act reporting requirements “to make it easier for mortgage lenders to provide better information,” and to “seek to assess whether there are opportunities to improve upon the data collected, reduce unnecessary burden on financial institutions, and, as appropriate, to modernize and streamline the manner in which [financial institution]s collect and report data,” the CFPB announced its plans to convene a Small Business Review Panel to seek early feedback from small lenders, including feedback on how data can be updated to better reflect what is happening in the market. HMDA and its implementing regulation, Regulation C, require mortgage lenders that meet certain threshold conditions to collect, report to Federal regulators, and disclose to the public certain data (e.g., loan amount and loan purpose) about applications for, and originations and purchases of, home purchase loans, home improvement loans, and refinancings for each calendar year.

Certain changes to the HMDA regulations are required by the Dodd-Frank Act (including that lenders report on the length of the loan, total points and fees, the length of any teaser or introductory interest rates, and the applicant or borrower’s age and credit score), but the CFPB plans to “use its discretionary authority to propose other new requirements that it believes will ensure that HMDA data continue to serve HMDA’s purposes.” To that end, the CFPB is considering proposals related to: which financial institutions are required to report HMDA data; the types of loans and applications that must be reported; the information required about each loan or application; and potential operational improvements in the HMDA compliance system. For instance, the CFPB would like financial institutions to include more underwriting and pricing information, such as the interest rate, the total origination charges, and the total discount points of the loan.

The CFPB is also considering proposals that would reduce the annual, ongoing operational costs that financial institutions currently incur in collecting and reporting HMDA data, including: restructuring the geocoding process and possibly shifting some of the burden to the government; creating an improved web-based HMDA data entry software; streamlining the submission and editing process to make it more efficient; and expanding and integrating HMDA help sources. The CFPB released the questions to be addressed by the Small Business Review panel and an outline of its proposals.

In conjunction with the announcement, the CFPB unveiled a new online tool that makes it easier to navigate the publicly available HMDA data.

CFPB Will Hold Consumer Advisory Board Meeting

The Consumer Advisory Board will host a meeting on February 26-27, 2014 to discuss strategies for improving consumer access to credit, information and financial resources. Agenda topics include trends and themes in the field and discussion of the CFPB’s proposals to amend the Home Mortgage Disclosure Act and its Advance Notice of Proposed Rulemaking on debt collection rules (see January 21, 2014 Alert).

FRB Proposes to Repeal Regulations P and DD and Amend Regulation V

The FRB issued a Notice of Proposed Rulemaking to repeal its regulation implementing the Truth in Savings Act, Regulation DD, and the regulation implementing the provisions of the Gramm-Leach Bliley Act protecting the privacy of consumer financial information, Regulation P. TISA and Regulation DD are intended to assist consumers in comparing deposit accounts offered by depository institutions by requiring disclosure of fees, the annual percentage yield, the interest rate, and other account terms. The relevant provisions of GLBA limit the circumstances in which a financial institution can disclose nonpublic personal information about a consumer to nonaffiliated third parties and require financial institutions to provide certain privacy notices to their customers who are consumers. The Dodd-Frank Act transferred rulemaking authority for Regulation DD and Regulation P from the FRB to the CFPB, and in December 2011, the CFPB issued interim final rules establishing its own Regulation DD and Regulation P that were substantially identical to the FRB’s regulations. Of note, under the Dodd-Frank Act, the FRB retained authority to issue regulations implementing the Truth in Savings Act for certain motor vehicle dealers. However, the FRB “is not aware” of any motor vehicle dealers that engage in activities subject to TISA. Comments to repeal Regulation P must be received by April 15, 2014.

The FRB also issued a Notice of Proposed Rulemaking to amend its Identity Theft Red Flags Rule, which implements the provisions of the Fair Credit Reporting Act that require, among other things, each financial institution and creditor that holds any consumer account or other account for which there is a reasonably foreseeable risk of identity theft, to develop and implement an identity theft prevention program in connection with new and existing accounts. The proposed rulemaking follows the enactment of the Red Flag Program Clarification Act of 2010, which added the definition of “creditor” that was specific to the Identity Theft Red Flags Rule. The Act narrowed the definition of “creditor” and excluded from the definition, creditors that advance funds on behalf of a person for expenses incidental to a service provided by the creditor to that person. The proposed rule would provide that “creditor” has the same meaning as in the Act.

OCC Issues Update to Mortgage Banking Booklet

The OCC issued an update to its Mortgage Banking booklet of the Comptroller’s Handbook, which was last updated in March 1996. The Mortgage Banking booklet generally provides guidance for bank examiners and bankers regarding mortgage banking activities. The updated Mortgage Banking booklet, among other things, addresses recent amendments to Regulation X and Regulation Z issued by the CFPB that became effective in January 2014. According to the OCC, the CFPB’s rulemaking is ongoing and bankers should ensure the standards they follow are current. The Mortgage Banking booklet also makes changes to mortgage servicing rights to “incorporate recent lessons learned and regulatory changes.” The OCC noted that strong oversight programs are required where critical business processes and technology are outsourced and warned that there will be increased costs associated with mortgage servicing rights because of the need for servicers to have “more robust” foreclosure policies and procedures, staffing, management of third-party service providers, and compliance with law, among other things.

As a result of the update to the Mortgage Banking booklet, the OCC rescinded or replaced: its March 1996 issue and the March 1998 examination procedures, Section 750 of the November 2008 OTS Examination Handbook, and OCC Bulletin 2011-29, Foreclosure Management: Supervisory Guidance.

Sixth Circuit Rules that PTFA Preempts Less Protective State Laws

The United States Court of Appeals for the Sixth Circuit reversed in part a district court’s order granting a motion to dismiss a complaint that included claims for wrongful eviction, denial of due process and outrageous infliction of emotional distress. The complaint cited defendant’s failure to comply with the Protecting Tenants at Foreclosure Act of 2009, which imposes certain requirements on successors in interest to foreclosed properties in order to protect tenants. Specifically, the PFTA requires successors in interest to foreclosed properties to provide bona fide tenants with 90 days’ notice to vacate and to allow them to occupy the premises until the end of their lease term unless certain conditions are met. In reversing in part the district court’s decision, the Court held that the PFTA does not create a private right of action, but does preempt state laws that provide less protection to tenants. The Court noted that “[t]he purpose of the PTFA could not be accomplished if it did not preempt state laws that set lower standards for successors in interest than the Act requires.” Thus, while tenants may not bring a federal cause of action for violations of the PTFA, they may use such violations to establish the elements of a state law cause of action. Although the defendant had complied with state law by obtaining a writ of possession in order to remove the tenants of a property after a foreclosure sale, they had not complied with the more protective PFTA requirements.

Ninth Circuit Holds Attempted Collection of Foreclosure Related Fees Violates SCRA

The United States Court of Appeals for the Ninth Circuit reversed a district court decision granting defendant’s motion to dismiss plaintiff’s claim that defendant violated section 533 of the Servicemembers Civil Relief Act by charging certain fees related to a rescinded notice of default while plaintiff was on active duty. Section 533 of SCRA requires a court order prior to proceeding with a foreclosure against a servicemember under certain conditions. The initial loan servicer initiated foreclosure proceedings against plaintiff, an active duty servicemember, by sending the statutorily required notice of default. The notice of default was rescinded and the servicing rights were transferred to defendant, the successor servicer. Although the notice of default was rescinded, the fees related to the foreclosure were not removed. Defendant attempted to collect upon foreclosure. Plaintiff filed suit alleging that defendant violated the SCRA when it did not remove the foreclosure fees. Defendant moved to dismiss the complaint for failure to state a claim for which relief could be granted, which the district court granted.

In rejecting defendant’s argument that the foreclosure proceedings were terminated prior to it assuming servicing rights, the Ninth Circuit started with the plain language of the statute. The Ninth Circuit first noted that the statute uses the term “‘proceedings,’ a term which generally means a process rather than a single act.” In addition, the statute barred a sale, foreclosure, or seizure of property, “thereby suggesting that foreclosure meant more than a sale or seizure.” The Ninth Circuit also looked to state law governing foreclosures noting that state definition of foreclosure “contemplate[d] the inclusion of specified fees as part of the foreclosure proceeding.” As such, the Ninth Circuit found that the attempted collection of the fees related to the foreclosure proceeding was a continuation of the foreclosure proceeding and a violation of the SCRA.

Eleventh Circuit Rules Lenders Can Demand Flood Insurance Coverage That Exceeds Loan Balance

Agreeing with the First Circuit’s recent en banc ruling in Kolbe v. BAC Home Loans Servicing LP, — F.3d —, 2013 WL 5394192 (1st Cir. Sept. 27, 2013), the United States Court of Appeals for the Eleventh Circuit ruled that the form language in mortgages requiring borrowers to purchase the FHA’s minimum required amount of flood insurance does not prevent lenders from demanding more insurance than the FHA requires. The Court affirmed dismissal of the claim for breach of contract, and also of the related claims for breach of the duty of good faith and fair dealing, and breach of fiduciary duty.

Noting a split of authority among district courts, in which many others have found the contract language to be ambiguous, the First Circuit recognized that interpretation of contract language required by federal law is subject to additional considerations than when interpreting the text of a standard private contract. First, courts must strive to interpret these contracts uniformly whenever they appear to promote the standardization that the federal law intended to achieve. The FHA required standardization of the flood insurance provision “with only such adaptation as may be necessary to conform to state or local requirements,” which weighed against finding any ambiguity in the provision. The Eleventh Circuit noted that it should adopt an approach that “ensures effective functioning of our financial markets, and begets stability.” Second, when contract language is required by law, it is legislative intent, not the parties’ intent, that guides a court’s interpretation. And here, the applicable FHA regulations made clear that lenders are allowed to require more than the FHA’s minimum, up to the value of the property, because “the lender’s exposure to the risk of loss can, and often does, extend to the replacement value of the home.” Further, the FHA only regulates flood insurance in certain areas, and for loans up to $250,000; viewing the FHA requirement as an absolute maximum would, irrationally, prevent lenders from requiring any flood insurance for other loans.

Of note, the United States filed an amicus brief supporting the lender’s position, on which the Court also relied. The Government argued that preventing lenders from requiring more than the FHA minimum would contravene federal housing policy in that it would lead to lenders not making loans in areas with “any significant flood risk.” For that reason, the United States has consistently interpreted the FHA mortgage insurance program as allowing lenders to require more coverage. The Court agreed with this interpretation, though it did not specify the level of deference granted to the government’s interpretation.

White House Issues Statement on House Bill to Alter CFPB

The White House issued a statement in opposition of the House of Representatives’ passage of H.R. 3193, the Consumer Financial Protection Safety and Soundness Improvement Act of 2013, citing that it would undermine critical Wall Street reforms and weaken important consumer protections by significantly lessening the independence of the CFPB. H.R. 3193 proposes to strengthen the review authority of the Financial Stability Oversight Council by amending the Consumer Financial Protection Act of 2010 to replace the CFPB and its Director with a five-member Financial Product Safety Commission, permit the FSOC to set aside FPSC rules, and subject the agency to appropriations funding. According to the White House, H.R. 3193 would “compromise the independence of the [CFPB] by imposing unwarranted restrictions on a regulatory process that is already subject to significant oversight,” undermine the ability of the CFPB to carry out its mandate to protect consumers “independent of political pressures,” and “seriously weaken” the CFPB’s decision-making power with the imposition of a five-member commission instead of a director, among other things. Finally, the statement noted that the President’s senior advisors would recommend that the President veto the bill.