Consumer Financial Services Alert - April 29, 2014 April 29, 2014
In This Issue

Goodwin Counsel, Margaret Crockett, Named Fellow of American College of Consumer Financial Services Lawyers

We are proud to announce that on April 12, 2014, Margaret Crockett, Counsel in Goodwin Procter’s Financial Institutions Group, was inducted as a Fellow into the American College of Consumer Financial Services Lawyers. Membership in the American College of Consumer Financial Services Lawyers is limited to those lawyers whose principal practice is in the field of consumer financial services law, who have achieved preeminence in the field of consumer financial services law and who have made repeated and substantial contributions to the promotion of learning and scholarship in consumer financial services law through teaching, lecturing and published writings.

Margaret, who has become a recognized expert in deposit account systems, electronic delivery of financial services and the development of mortgage products, focuses her practice on supporting financial institutions of all sizes throughout New England and across the United States. Margaret joins Goodwin Procter partners Lynne Barr, Chair of the Firm’s Banking and Consumer Financial Services Practice, and Tom Hefferon, Chair of its Consumer Financial Services Litigation Practice, as Fellows.

CFPB Proposes to Extend Temporary Exemption under Remittance Transfer Rule

The CFPB proposed revisions to its remittance transfer rule finalized and amended several times (see May 14, 2013 Alert). The proposal would amend the remittance rule to extend a temporary exemption and make additional clarifications to the rule. The Electronic Funds Transfer Act allows a remittance transfer provider to estimate certain third party fees and exchange rates associated with a remittance transfer if certain conditions are met: (1) the provider is an insured depository institution or credit union, (2) the transfer is sent from the sender’s account with the provider and (3) the provider cannot determine the exact amount for reasons outside of its control. Citing a need, which was determined after outreach to industry and consumer group stakeholders, to give insured depository institutions that offer remittance services additional time to develop processes by which to provide consumers with exact fees and exchange rates for all remittance disclosures, the proposal seeks to extend a temporary exemption under the EFTA for these institutions to allow them to estimate third-party fees and exchange rates when providing remittance transfers to their accountholders in the event that they are unable to determine the exact amounts. The Dodd-Frank Act permits this exemption until July 21, 2015. The proposal would extend the exemption until July 21, 2020.

The proposal also seeks comments on potential clarifications. In particular, the proposal seeks comment on, among other things: (1) whether the CFPB should clarify how U.S. military installations abroad are treated, (2) whether a transfer from an account is for personal, family or household purposes is determined by ascertaining the purpose for which the account is created and (3) what constitutes an “error” caused by delays related to fraud and related screening and to clarify the remedies for certain errors. Comments on the proposal are due by May 27, 2014.

CFPB Releases Report on Student Loan Complaints

In alignment with its recent focus on private student loans, the CFPB releasedreport describing the types of complaints it received related to “auto defaults”, the practice of placing private student loan borrowers in default despite the fact that their loans were current and in good standing. The report, which covers the period of October 1, 2013 to March 31, 2014, indicated that many of the complaints centered around industry participants automatically placing loans in default despite the fact that the borrower was paying off the loan as agreed upon. Estimating that approximately 90% of private student loans were co-signed in 2011, the CFPB noted that it has been receiving reports that borrowers are automatically put in default upon the death or bankruptcy of co-signers on the loan. In response to this, the report described several alternatives to such “auto-defaults”, including conducting an assessment of the borrower for co-signer release and maintaining the existing payment schedule, affording the borrower the opportunity to identify a new co-signer, or allowing the borrower time to refinance the loan.

CFPB Launches Pilot Program for Electronic Mortgage Closing Process

In conjunction with its field hearing on “key consumer ‘pain points’” (see April 15, 2014 Alert), the CFPB announced the release of a report that discusses consumer and lender frustrations with the current state of the residential real estate closing process, and proposed an “eClosing” pilot program to use technology to address some of the biggest problems. The report discusses a number of closing-related complaints, including that: (1) borrowers do not have enough time to review documents; (2) documents often contain errors; (3) too many documents during the closing process; and (4) language in closing documents is difficult to understand. The report also addresses potential barriers to an eClosing process, such as standardization across states and loan types, noting that adoption of eClosing solutions has been more prevalent among smaller lenders. Finally, the report noted gains made in the industry, while highlighting the barriers that have prevented broader adoption, such as industry hesitation to accept eNotes and electronically signed security instruments and the limited availability of eRecording security instruments in local land records.

To encourage the further adoption of eClosing across the industry, the CFPB launched a pilot program to examine how technology can make the closing process more efficient and consumer-friendly, as well as the extent to which eClosing is feasible and sensible, and how best to spur broader industry adoption of eClosing solutions. To participate in the pilot program, the CFPB’s guidelines provide that a lender must have an existing relationship with an eClosing vendor, or have developed an in-house eClosing solution, that meets certain criteria, such as a document and data management system allowing for access by consumers and transfer to downstream customers; secure technology platforms that allows consumers “not only to view documents, but also to interact with them”; and a system that allows for a clear audit trail, among other requirements.

Tribal Lenders File Opposition to CFPB’s Motion to Enforce Civil Investigative Demand

Resisting the CFPB’s enforcement petition filed in the United States District Court for the Central District of California, as they resisted the petition in proceedings before the CFPB (see October 1, 2013 Alert) , a group of tribally-affiliated lenders filed their opposition to the CFPB’s petition claiming exemption from CFPB jurisdiction under the Dodd-Frank Act (see April 15, 2014 Alert discussing CFPB’s petition). In their opposition memorandum, the lenders argued that the Dodd-Frank Act confers CFPB jurisdiction only to “persons”, not to sovereign tribes or tribal arms. Citing case law recognizing tribally-operated casinos as arms of a tribe, the lenders argued that they are likewise an extension of the tribe that operates them, and are therefore not “persons” under the Dodd-Frank Act, but rather are “sovereign co-regulators”. Challenging the CFPB’s argument that even tribal entities can be regulated by Congress when the law is of “general applicability”, the lenders argued that principle does not apply because the Dodd Frank Act specifically recognizes that the CFPB cannot regulate tribes. This is a similar argument made, and rejected by a Nevada federal court, by other lenders in an action brought by the FTC (see April 1, 2014 Alert). Finally, the tribally-affiliated lenders argued that sovereign immunity precluded the civil investigative demand, and that the civil investigative demand was vague and indefinite such that it failed to provide adequate notice.

Bank Settles Class Action Alleging UDAAP Violations for Credit Card Practices

Parties in a putative class action alleging that defendant, a bank, mislead consumers and failed to properly apply customer payments to its credit cardholders have reached a settlement. Plaintiffs alleged that defendant misled consumers about the way in which it applied credit card payments to promotional purchases. According to plaintiffs, defendant engaged in deceptive and unfair business practices by marketing promotional reward card purchases as “interest free”, but charged California credit cardholders interest and fees for those purchases. Plaintiff filed suit on behalf of a class of California credit cardholders alleging violation of the California Business and Professions Code, fraud, and unjust enrichment, among other allegations. The parties engaged in mediation and emerged with a tentative settlement. The terms of the settlement provide for $5.5 million in cash benefits to plaintiffs. On June 2, 2014, plaintiffs will move the court for preliminary approval of a settlement between defendant and plaintiffs.

Borrowers File Petition for Writ of Certiorari Related to Permanent Loan Modification Under HAMP

Citing a circuit split among the Seventh, Ninth and Eleventh circuits and the “great importance” of settling the question, the borrowers filed a petition writ of certiorari in the Supreme Court asking the Court to determine whether a private cause of action exists under HAMP for a servicer’s refusal to permanently modify a home loan when the borrowers have made all the required trial payments and have otherwise shown the continuing financial ability to make those same trial payments on a permanent monthly basis. Initially brought in district court, the district court granted summary judgment for defendant on the grounds that there was no private right of action under HAMP to challenge the denial of a permanent loan modification. On appeal, the Eleventh Circuit affirmed the district court’s decision on grounds that neither the Emergency Economic Stabilization Act of 2008 nor HAMP “expressly create a private right of action for borrowers against loan servicers.” The Eleventh Circuit also held that there was no implied right of action under HAMP, using the factors articulated in Hempispherx Biopharma, Inc. v. Johannesburg Consol. Inves., 553 F.3d 1351, 1362 n. 14 (11th Cir. 2008) (see May 1, 2012 Alert). The borrowers also asked the Supreme Court to determine whether a borrower who participates in HAMP, but fails to receive a written document from the lender memorializing the homeowners’ participation in the HAMP trial, is precluded from seeking relief under the doctrines of promissory estoppel and negligent misrepresentation.

Supreme Court Grants Certiorari on Notice of Rescission Under TILA

The United States Supreme Court indicated that it will review an opinion from the United States Court of Appeals for the Eighth Circuit involving whether notice alone was sufficient to effectuate a rescission under the Truth in Lending Act. In two separate opinions, the Eighth Circuit has ruled that mailing a notice of rescission within three years of consummating the loan was insufficient to preserve a borrower’s right to rescission when the borrower fails to file suit during the statute’s three-year rescission period.

The petitioners filed a petition for writ of certiorari asking the Supreme Court to decide whether a borrower exercises his right to rescind a transaction in satisfaction of the requirements of TILA by “notifying the creditor” in writing within three years of consummation of the transaction or must a borrower file a lawsuit within three years of consummation of the transaction. The case has important implications given the circuit split and the CFPB’s position on rescission rights under TILA. The Eighth Circuit rulings are a rejection of the CFPB’s interpretation of rescission rights under TILA. In amici briefs filed with the Tenth Circuit (see April 3, 2012 Alert) and three other circuits including the Third, Fourth and Eighth circuits, the CFPB argued that the rescission period under TILA only defines the time to notify the lender and not the time to sue the lender. Further, while the Eighth Circuit’s rulings align with rulings in the First, Sixth, Ninth and Tenth circuits, the Third, Fourth and Eleventh Circuits have held the opposition.

New York Department of Financial Services Takes Action Against Auto Lender for UDAAP Violations

Following an “unscheduled special examination” into the practices of a licensed auto lender, the New York Department of Financial Services filed a complaint in the United States District Court for the Southern District of New York against the lender alleging that the lender engaged in unfair, deceptive and abusive acts or practices in violation of the Dodd-Frank Act, as well as having made misrepresentations in violation of the New York Financial Services Law and the New York Banking Law. DFS alleged that the auto lender unlawfully retained customers’ positive credit balances, took “active steps to conceal such balances from the customers and regulators” and maintained a policy of refusing and failing to refund such balances to customers absent a specific request. In particular, according to DFS, the lender shut down customers’ access to loan accounts once the loans were repaid, even if there was a positive credit balance, and submitted falsified reports, or no reports at all, to regulators which represented that there were no unrefunded customer credit balances. The complaint also alleged that the lender endangered the security of its customers’ personally identifiable information by, among other things, leaving consumer loan files out in common areas and by failing to adopt policies, procedures and controls to ensure that information technology systems were secure. DFS is seeking to permanently enjoin the lender for continuing its operations, disgorgement or compensation of unjust enrichment, appointment of an equity receiver pursuant to the Dodd-Frank Act and refunds of all positive credit balances (greater than $1.00). This is the first such action by a state regulator using authority under Section 1042 of the Dodd-Frank Act, which allows state regulators to bring civil actions for violations of the Dodd-Frank Act’s prohibition on unfair, deceptive or deceptive acts or practices.

Congress Members Urge Department of Education to Amend Rules Governing Banking Practices on College Campuses

In a continued effort by federal and state legislators to curb alleged abuse by financial institutions on college campuses (see March 5, 2013 Alert), several members of Congress sent a letter to the Department of Education expressing their support for changes to the Department of Education’s Title IV cash management rules. Citing reports by the Government Accountability Office addressing high fees charged by some financial institutions and financial institutions paying multi-million dollar kickbacks to some colleges for exclusive marketing access, the letter called for the Department of Education to use its rulemaking authority to mandate contract transparency, prohibit aggressive marketing and ban high fees when colleges partner with banks to sponsor financial products. In particular, the letter asked that the Department of Education adopt rules that would (1) ban colleges from entering into preferred relationships with financial institutions for financial products that charge fees associated with disbursements and use of Title IV aid, as well as ban revenue sharing deals with financial institutions, (2) ensure students receive neutral information and require colleges to post agreements with financial institutions on their websites and report them to the government and (3) ensure students can easily deposit federal financial aid into their personal accounts without delay or penalty.