Consumer Financial Protection Bureau Reporter

CFPB Finalizes CARD Act Revision
The Consumer Financial Protection Bureau adopted a final rule that revises a Federal Reserve Board rule on credit card fees. The bureau’s final rule amends provisions of Reg. Z—Truth in Lending (12 CFR 1026) and the official interpretation that relate to the Credit Card Accountability Responsibility and Disclosure Act of 2009. Reg. Z generally limits the total amount of fees that a credit card issuer may require a consumer to pay with respect to an account, limiting fees to 25 percent of the credit limit in effect when the account is opened. Reg. Z previously provided that the limitation applies prior to account opening and during the first year after account opening. The rule revises Section 1026.52(a) to provide that the limitation applies only during the first year of after account opening. The rule is at ¶300-126.

CFPB Amends Reg. E. ATM Provisions
The Consumer Financial Protection Bureau adopted a final rule that amends Reg. E—Electronic Fund Transfers (12 CFR 1005) to implement legislation passed in December 2012 that eliminates the requirement that a fee notice be posted on or at automated teller machines but leaves in place the requirement for a specific fee disclosure to appear on the screen of that machine or on paper issued from the machine. The rule is at ¶300-125.

Supervision of Nonbank Student Loan Servicers Proposed
The Consumer Financial Protection Bureau has proposed a regulation amendment that would define which nonbank student loan servicers are "larger participants" in their market and thus subject to bureau supervision. The amendment would be an exercise of the CFPB’s authority under the Dodd-Frank Act to supervise larger participants in markets for consumer financial products or services beyond residential mortgage loans, private education loans and payday loans. Rules on supervising larger participants in the consumer reporting and consumer debt collection market were adopted in 2012. The proposal is at ¶300-124. A press release, speech and factsheet are at ¶200-192.

CFPB Guides on ECOA Compliance for Indirect Auto Lenders
The Consumer Financial Protection Bureau has issued guidance intended to assist indirect auto lenders with Equal Credit Opportunity Act compliance. The guidance is directed toward auto lenders that permit dealers to increase consumer interest rates and compensate dealers with a share of the increased interest revenues. The guidance applies to both depository and nonbank institutions. CFPB Bulletin 2013-02 is at ¶1531.

Senate Panel Advances Cordray’s CFPB Nomination
The Senate Banking Committee has voted along party lines to send Richard Cordray’s nomination as Director of the Consumer Financial Protection Bureau to the full Senate. All Republicans voted against the nomination, citing their ongoing concerns with the structure of the new agency. President Barack Obama re-nominated Cordray to lead the CFPB in January 2013. Cordray’s 2012 recess appointment to head the bureau is facing a legal challenge. The story is in Report 81, March 25, 2013.

Federal Banking Law Reporter

Fed Offers Rule on Financial Market Utility FRBank Accounts
The Federal Reserve Board has proposed amendments to Reg. HH—Designated Financial Market Utilities (12 CFR 234) that would allow covered financial market utilities to establish interest-bearing accounts at Federal Reserve Banks. Covered companies would be payment systems, central securities depositories, central counterparties and similar entities that the Financial Stability Oversight Council has determined are systemically important, meaning that their failure or a disruption in their services could create or increase the risk of significant liquidity or credit problems that threaten the stability of the U.S. financial system. The notice is at ¶152-293.

Fed Considering Effect of Basel III Rules on Insurance Sector
Federal Reserve Board Chairman Ben Bernanke told Congress the Fed is discussing the feasibility of a quantitative impact study to examine the effect of proposed Basel III capital standards rules on the insurance sector. During questioning at a Feb. 27, 2013, hearing of the House Financial Services Committee, Bernanke said "we recognize that there are important differences between banks and insurance companies…we have also heard from Congress about this insurance banking distinction, and we’re looking at it very seriously." This story is in Report No. 2509, March 7, 2013.

Foreclosure Agreements Amended
The Office of the Comptroller of the Currency and Federal Reserve Board have released amendments to their enforcement actions against 13 mortgage servicers for deficient practices in mortgage loan servicing and foreclosure processing. The amendments require the servicers to provide $9.3 billion in payments and other assistance to borrowers. The servicers participating in the settlement include Aurora, Bank of America, Citibank, Goldman Sachs, HSBC, JPMorgan Chase, MetLife Bank, Morgan Stanley, PNC, Sovereign, SunTrust, U.S. Bank and Wells Fargo. The agencies assert that the servicers are expected to undertake well-structured loss mitigation efforts focused on foreclosure prevention with preference given to activities designed to keep borrowers in their homes through affordable, sustainable and meaningful home preservation actions. Agency examiners continue to monitor the servicers’ implementation of corrective actions to address unsafe and unsound mortgage servicing and foreclosure practices. The agencies also have provided information regarding the settlement in the form of Frequently Asked Questions. The release and FAQs are at ¶152-297.

Leveraged Lending Guidance Updated
To address the increased use of leveraged lending by financial institutions following the financial crisis, the Office of the Comptroller of the Currency, Federal Reserve Board, and Federal Deposit Insurance Corp. have updated their supervisory guidance that was issued in April 2001. The agencies said they are taking this action because prudential underwriting practices have deteriorated, citing limits to lenders’ recourse in the event of weakened borrower performance as one reason for the update. They also noted that management information systems at some institutions have proven less than satisfactory in accurately aggregating exposures on a timely basis as another reason. SR 13-3 and OCC 2013-9 are at ¶63-793.

Recovery Denied for Insurance Payout on Loan Securitization
An insurance company has lost its effort to recover from the Federal Deposit Insurance Corp. the money it paid on claims arising from the failure of three mortgage loan securitizations it had insured. According to the U.S. Court of Appeals for the District of Columbia Circuit, the insurance company’s claims properly were treated as general claims rather than as administrative expenses that would have had a higher priority when payments were made. The court also affirmed other aspects of how the FDIC had resolved the insolvent thrift that securitized the loans. MBIA Insurance Corp. v. FDIC (DCCir) is at ¶101-393.

OCC Sets Procedures for Short-Term Investment Fund Reports
The Office of the Comptroller of the Currency has created a secure file transfer protocol website that banks and thrifts offering short-term investment funds are to use to make required monthly reports. Under a rule adopted in October 2012, these institutions are required to report information about funds and their portfolios to the OCC within five business days after the end of each month, effective July 1, 2013. A short-term investment fund is a collective investment fund that permits a bank to value the fund's assets on an amortized cost basis rather than at mark-to-market value for purposes of admissions and withdrawals. According to the OCC, this is an exception to the general rule of mark-to-market valuation. OCC 2013-8 is at ¶70-124.

Fed Updates Interchange Fee Limit FAQs
The Federal Reserve Board has updated its Frequently Asked Questions on Reg. II—Debit Card Interchange Fees and Routing (12 CFR 235), which are intended to help financial institutions comply with the swipe fee limits and other debit card rules set by the "Durbin Amendment" to the Dodd-Frank Act. Most of the updates apply to the general use prepaid card exemption from the limits on interchange fees. The Fed’s FAQs are at ¶49-993.

Fed Asks Two BHCs to Submit New Capital Plans
The Federal Reserve Board has released the results of its third annual Comprehensive Capital Analysis and Review, which is an intensive assessment of the capital adequacy of the 18 largest U.S. bank holding companies and of the practices these BHCs use to manage their capital. From these results, the Fed either approves or objects to the BHCs’ capital plans, which, in turn, determines whether a BHC can freely make capital distributions to its shareholders. The Fed release is at ¶152-319.

Consumer Credit Guide

Collection Letter Overshadowed, Contradicted FDCPA Validation Notice
The U.S. Court of Appeals for the Third Circuit decided that since a debt collector’s letter overshadowed and contradicted the letter’s validation notice as a matter of law, the letter did not comply with the requirements of the federal Fair Debt Collection Practices Act. Among other things, the letter indicated that if the debtor had any questions or felt as if he did not owe the specified amount, to "please call" a toll-free number "or write us at the above address." While the "please call" language and telephone number were prominently placed on the front of the letter, the FDCPA validation notice—setting forth the debtor’s rights—appeared on the back of the letter. The Third Circuit determined that, viewed from the perspective of "the least sophisticated debtor," the collection letter could be confusing; a debtor could reasonably believe that he or she could effectively dispute the validity of the debt by making a telephone call, even though such disputes were required to be made in writing to be effective under the FDCPA. The Third Circuit also decided that the letter could be deemed a "false representation or deceptive means to collect" a debt in violation of the FDCPA. Caprio v. Healthcare Revenue Recovery Group, LLC (3dCir) is at ¶52,477.

FDCPA Class Action Settlement Reversed as Unfair
A trial court’s approval of the settlement of several class actions under the federal Fair Debt Collection Practices Act and state laws was recently reversed by the U.S. Court of Appeals for the Sixth Circuit as unfair to the ordinary class members. The Sixth Circuit rejected both the class certification to settle the claims and the approval of the settlement itself. In reaching a tentative settlement of the FDCPA litigation, the debt collectors and named representatives of the classes in three consolidated cases reached agreement for a small amount of monetary relief for the ordinary class members, which eventually amounted to $17.38 each, as well as a total of $8,000 in individual awards to the four named plaintiffs. While the debts of the named class representatives were cancelled, the debts of the ordinary class members were not affected. The debt collectors agreed to an injunction against their alleged practices in the future. In reversing the approval of the settlement by the trial court, the Sixth Circuit determined that the settlement was unfair because it disproportionately benefitted the named representatives over the interests of the ordinary class members. Vassalle v. Midland Funding LLC (6thCir) is at ¶52,478.

Utah Claim Against Mortgage Loan Servicer Dismissed
The U.S. Court of Appeals for the Tenth Circuit ruled that a federal trial court properly dismissed a consumer’s state claim against a mortgage loan servicer for alleged violations of the Utah Consumer Sales Practices Act (UCSPA) because the conduct complained about was governed by more specific Utah law. Among other things, the consumer alleged that the loan servicer incorrectly billed her for certain charges and fees in connection with her mortgage loan transaction. The Tenth Circuit emphasized it did not need to precisely rule on whether the UCSPA did or did not apply to mortgage loan servicing. Rather, the consumer’s UCSPA claim was barred because the UCSPA did not explicitly include or exclude mortgage loan transactions, and the alleged wrongful conduct was highly regulated by other Utah law, namely the Utah Mortgage Lending and Servicing Act and Utah law on trust deeds. Berneike v. CitiMortgage, Inc. (10thCir) is at ¶52,476.

Civil Penalties, Attorney’s Fees Under West Virginia Law Addressed
In reviewing various provisions of the West Virginia Consumer Credit and Protection Act (West Virginia Act), the West Virginia Supreme Court of Appeals upheld the awarding of civil penalties and attorney’s fees to a consumer, even though no actual damages were awarded at the jury trial below. The consumer claimed that a loan servicer violated the West Virginia Act by its collection efforts related to her defaulted loan. The West Virginia high court determined that the trial court did not abuse its discretion in awarding the amount of civil penalties because the purposes stated in the West Virginia Act were advanced, it was the intent of the West Virginia legislature to reach that result, court interpretations of the federal Fair Debt Collection Practices Act permitted civil penalties without an accompanying award of actual damages, the civil penalties were reasonable, and due process and constitutional concerns were satisfied. The court further ruled that the trial court did not abuse its discretion in awarding attorney’s fees to the consumer because the consumer was not required to prevail on the majority of her claims to obtain attorney’s fees, and the trial court carefully and reasonably addressed each factor in a 12-part test before awarding $30,000 in attorney’s fees—approximately $18,852 less than what the consumer requested. Vanderbilt Mortgage and Finance, Inc. v. Cole (WVaSCtApp) is at  ¶52,479.

State Law Update

Idaho: Amendments to the Idaho Credit Code clarify that a license is required to advertise or solicit the making of consumer loans in Idaho. The law is at Idaho ¶5021.

Montana: Numerous changes to the Montana Retail Installment Sales Act enacted at the request of the Department of Administration revise various provisions governing licensing, contract requirements, fees, enforcement and administration.  Analysis appears in Report No. 1163, March 19, 2013.

Virginia: Expanded protections against payments made with insufficient funds provide that if an electronic funds transfer is rejected because of insufficient funds or the placement of a fraudulent stop-payment order, the payee of the funds transfer may recover in a civil action in the same manner as an action to recover for a bad check. The law is reflected beginning at Virginia ¶6121.

Secured Transactions Guide

Creditor’s Interest Unenforceable Without Security Agreement
A bank that entered into a subordination agreement with a prior creditor, in order to step into the shoes of the prior creditor, did not have a superior interest in the proceeds of the secured collateral, because the bank could not produce the original security agreement between the creditor and the debtor. Without the security agreement, the creditor’s subordinated interest was not enforceable. The collateral secured three loans—the original loan from the prior creditor, a second loan from a third party financing company, and the bank’s most recent loan. By virtue of a subordination agreement, the bank would have swapped priorities with the prior creditor, entitling it to a first priority security interest in the debtor’s equipment. However, a security interest is not enforceable unless the debtor has authenticated a security agreement that provides a description of the collateral. Without evidence of a security agreement, the third party’s security interest was superior to the bank’s interest. Caterpillar Financial Services Corp. v. Peoples National Bank, N.A. (7thCir) is at ¶56,307.

Termination Statement Ineffective Without Authorization
A UCC-3 termination statement that mistakenly referenced a UCC-1 initial financing statement that secured an unrelated obligation was not effective to terminate the lien securing the unrelated obligation. Unbeknownst to the debtor or secured party, a batch of UCC-3 termination statements mistakenly included a UCC-3 referenced the 8-digit filing number of the unrelated UCC-1 financing statement. A termination is ineffective unless it has been authorized by the secured party. Accordingly, when an agent acts on behalf of a secured lender to terminate an initial financing statement, the termination must be authorized by the secured lender in order to be effective. The agent must reasonably believe that the secured lender intended for the agent to terminate the initial financing statement for that particular financing. Because the debtor knew that it was only authorized to terminate the liens unrelated to the term loan, the court could not find that the lender authorized the termination of the lien securing its term loan. In re Motors Liquidations Co.; Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A. (BankrSDNY) is at ¶56,308

State Update

Arkansas: Arkansas has adopted the Article 9 revisions that were released by the Uniform Laws Commission (ULC) and the American Law Institute (ALI) in 2010. The amendments are in substantially the same form as proposed by the ULC and ALI. The law begins at Arkansas ¶R702.

Arkansas has also amended its self-service storage facility lien procedures. An operator of a self-service storage facility may now send the notice of default to the occupant by e-mail if the occupant provided an e-mail address and gave permission to the storage facility to use the e-mail address as a legal notification for the occupant’s last known address. The law is at Arkansas ¶430.

Kentucky: The amendments to Revised Article 9 enacted April 11, 2012, and effective July 12, 2012, have been corrected to provide that the amendments will not be effective until July 1, 2013. The former law, as amended by Ky. Acts, Ch. 132, provided that only the Part 8 transition provisions would be effective July 1, 2013. A discussion is in Report No. 1117, Apr. 24, 2012.

The new law clarifies that all of the Revised Article 9 amendments will now take effect on the uniform effective date, July 1, 2013. A story about the law is in Report No. 1140, March 26, 2013.

Financial Privacy Law Guide

Subpoena for Bank Records Satisfied RFPA Requirements
A subpoena issued by the Department of Defense satisfied the requirements of the Right to Financial Privacy Act (RFPA) because the government established a reasonable belief that the financial records at issue were relevant to a law enforcement inquiry. The individual received a copy of a proposed subpoena to be issued to his bank by the DOD and was informed that the financial records were being sought to refute or support allegations that the individual fraudulently claimed that his wife was residing in New York City and improperly received a larger housing allowance than to which he was entitled.

According to the court, the government established "demonstrable reason to believe that the law enforcement inquiry underlying the issuance of the subpoena is legitimate and a reasonable belief that the financial records at issue are relevant to that law enforcement inquiry." The financial records could help determine whether the individual or his wife were residing in New York by establishing where ATM transactions took place, where the family claimed mailing addresses, and where they paid rent and other living expense Goudreau v. Department of Defense (WDTex) is at ¶100-629.

Actual Damages Not Required for FACT Act Claim
An individual need not plead actual damages in order to maintain an action against a retailer for a violation of the credit card truncation requirements of the Fair and Accurate Credit Transactions (FACT) Act, according to the U.S District Court for the Northern District of Alabama. The invasion of the individual’s legally protected interest was enough to establish an injury-in-fact. The individual alleged that Kangaroo Express, an operator of more than 1,650 convenience store locations, willfully violated the FACT Act by printing more than the last five digits of customers’ credit and debit card numbers on receipts that the stores provided to customers. The court found that the individual demonstrated the constitutional standing required to maintain the action, stating that “A statutorily created right can give rise to a legally protected interest.” The FACT Act creates a substantive right to have one's financial information protected through truncation and also provides a procedural right to enforce that right. In addition, the injury was concrete and particularized because the injury had already occurred. A story on Amason v. Kangaroo Express (NDAla) appears in Privacy Extra, March 29, 2013.

FTC Issues Decision Against Equifax
The Federal Trade Commission has approved a final decision and order against Equifax for improperly selling lists of millions of consumers who were late on their mortgages in violation of the Fair Credit Reporting Act and Section 5 of the Federal Trade Commission Act. The information sold was used in a marketing campaign to target consumers in financial distress for loan modification, debt relief, and foreclosure relief services. Equifax failed to maintain reasonable procedures to ensure that "prescreened lists" would only be used for permissible purposes. This story appears in Privacy Extra, March 29, 2013.

Individual Retirement Plans Guide

Rollover Waiver Denied for Short-Term Loan from IRA for Kitchen Remodeling
The IRS denied a waiver of the 60-day rollover requirement for a taxpayer whose failure to timely roll over funds from one IRA to another IRA was due to issues surrounding her kitchen remodeling, which impaired her ability to accomplish a timely rollover. The taxpayer had made a short-term loan to herself when she withdrew the amount from her IRA in anticipation of additional costs from her kitchen remodeling project. Although she had the intent to redeposit the amount into IRA prior to the expiration of the 60-day rollover period, she assumed the risk that the amount might not be returned to her in a timely manner. IRS Letter Ruling 201309020 is at ¶6409.