Consumer Financial Protection Bureau Reporter

CFPB Rules on Mortgage Loan Originator Practices
The Consumer Financial Protection Bureau has finalized a rule intended to prevent mortgage lenders from steering borrowers into risky and high-cost loans. The rule operates through compensation restrictions and character and fitness standards for loan originators. It also generally prohibits the use of mandatory arbitration clauses in both mortgage and home equity loan agreements. The final rule is at ¶300-120. The summary of the final rule is at ¶200-179.

CFPB Adopts Mortgage Underwriting Rule
The Consumer Financial Protection Bureau has adopted amendments to Reg. Z—Truth in Lending (12 CFR 1026) that are intended to protect consumers from entering into mortgages they cannot reasonably afford to repay. The new rules, required by the Dodd-Frank Act, specify factors that mortgage lenders are expected to consider when deciding whether a consumer qualifies for a loan and creates two categories of "qualified mortgages"—mortgage loans that are presumed to meet the ability-to-repay standards and thus permit only limited subsequent challenges by borrowers.

When the CFPB announced the new rule it simultaneously proposed amendments it said would "address potential adverse consequences of certain narrowly-defined categories of lending programs." One amendment would exempt from the rule some non-profit lenders, homeownership stabilization programs and federal or government-sponsored enterprise refinancing programs that already are subject to their own specialized underwriting criteria.

The second proposed amendment would establish a category of qualified mortgages for loans without balloon payments that are originated and held by small lenders. The final rule is at ¶300-113, the proposals are at ¶300-115 and a fact sheet and summary of the ability-to-repay proposal is at ¶200-174.

Mortgage Servicer Consumer Protection Rules Adopted
The Consumer Financial Protection Bureau has adopted new rules that are intended to protect consumers from mortgage servicer practices the bureau deems abusive or detrimental. The provisions are contained in amendments to Reg. Z—Truth in Lending (12 CFR 1026) and Reg. X—Real Estate Settlement Procedures (12 CFR 1024). The CFPB said that the rules include reduced duties for companies that service 5,000 or fewer mortgages that they or an affiliate originated or own, which is intended to reduce the compliance burden for community banks and credit unions. The rules cover nine general topics relating to mortgage servicing. Six of these have broad applicability, while the other three focus specifically on how servicers are to deal with consumers who are in default. The rules are at ¶300-117 and ¶300-118. A fact sheet and summary is at ¶200-178.

New CFPB Rule Protects High-Cost Mortgage Borrowers
A rule implementing expansions to the coverage of the Home Ownership and Equity Protection Act has been adopted by the Consumer Financial Protection Bureau. HOEPA, enacted in 1994, was amended by the Dodd-Frank Act to cover more loans and protect homeowners from certain loan features the bureau referred to as "risky." The rule also is intended to encourage, and in some cases require, consumers to obtain homeownership counseling. The rule is at ¶300-114.

CFPB Adopts Equal Credit Opportunity Act Appraisal Rule
The Consumer Financial Protection Bureau has finalized a rule covering all mortgages that are secured by a first lien on a dwelling. The CFPB rule implements amendments to the Equal Credit Opportunity Act. The rule is at ¶300-121, and a summary is at ¶200-180.

Legislation Protects Information Given to CFPB
Legislation passed by Congress and signed by President Barack Obama (introduced as H.R. 4014 and now Public Law 112-215) provides confidentiality for information shared by financial institutions with the Consumer Financial Protection Bureau. According to H. Rept. 112-417, the new law addresses the concerns raised by many CFPB-supervised institutions that providing the bureau with privileged information could waive the institutions' privilege with respect to third parties. The amendments and the text of H. Rept. 112-417 is at ¶408-105.

Federal Banking Law Reporter

FFIEC Proposes Social Media Guidance
The Federal Financial Institutions Examination Council has proposed risk management guidance on the applicability of the federal consumer financial protection laws and regulations to social media activities of financial institutions. The proposed guidance, entitled "Social Media: Consumer Compliance Risk Management Guidance," also would apply to nonbank entities supervised by the Consumer Financial Protection Bureau. The guidance would define social media as "a form of interactive online communication in which users can generate and share content through text, images, audio, and/or video." This would include not just Facebook and Twitter but also video sites such as YouTube, professional networking sites and even social games, the proposal said. The FFIEC notes that financial institutions may use social media in a variety of ways, including marketing, providing incentives, facilitating applications for new accounts, inviting feedback from the public and engaging with existing and potential customers. The council stresses that this form of customer interaction presents unique challenges because it tends to be informal and occurs in a less secure environment. This story is in Report No. 2503, Jan. 25, 2013.

Appraisal Requirements for Higher-Risk Mortgages Finalized
The federal financial regulatory agencies will adopt amendments to several of their real estate lending consumer compliance regulations that implement appraisal requirements for higher-risk mortgages mandated by the Dodd-Frank Act. The amendments principally will affect Reg. Z—Truth in Lending (12 CFR 1026), but also will apply to the agencies’ other real estate appraisal rules. The notice is at ¶152-217.

Agreement Reached on Foreclosure Processing Deficiencies
Ten mortgage servicing companies subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing have reached an agreement in principle with the Office of the Comptroller of the Currency and Federal Reserve Board to pay more than $8.5 billion in cash payments and other assistance to help borrowers. The sum includes $3.3 billion in direct payments to eligible borrowers and $5.2 billion in other assistance, such as loan modifications and forgiveness of deficiency judgments. The payments involve mortgage servicers operating under enforcement actions issued in April 2011 by the OCC, Fed and Office of Thrift Supervision. According to the agencies, the agreement—which includes Aurora, Bank of America, Citibank, JPMorgan Chase, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank and Wells Fargo—is intended to ensure that more than 3.8 million borrowers whose homes were in foreclosure in 2009 and 2010 with the participating servicers will receive compensation in a timely manner. The release is at ¶151-976.

GAO Examines Bank Failures
Failures of small and medium-size banks in the 10 states with 10 or more failures between 2008 and 2011 were largely associated with high concentrations of commercial real estate loans and with the inadequate management of the risks associated with these loans, a new Government Accountability Office report finds. The growth of commercial real estate portfolios "resulted in concentrations that exceeded regulatory thresholds for heightened scrutiny and increased the banks’ exposure to the sustained real estate and economic downturn that began in 2007," the GAO said. The report also noted that failed banks often pursued aggressive growth strategies using nontraditional, riskier funding sources and exhibited weak underwriting and credit administration practices. Large bank failures in the same 10 states were associated with some of the same factors. GAO-13-71 is at ¶151-972.

Fed Creates New Supervision Regime for Largest Institutions
The Federal Reserve Board has announced a revised framework for the consolidated supervision of large financial institutions. The Fed said the new framework has two primary objectives: enhancing the resiliency of these firms in order to reduce the possibility that they could fail or become unable to act as financial intermediaries; and reducing the harm that a failure or material weakness of such a firm could have on the financial system or the economy. SR 12-17/CA 12-14 is at ¶37-749.

Consumer Credit Guide

Mortgage Foreclosure Deemed “Debt Collection”
In a case of first impression, the U.S. Court of Appeals for the Sixth Circuit recently held that mortgage foreclosure is "debt collection" under the Fair Debt Collection Practices Act. Consequently, lawyers who meet the definition of a "debt collector" must comply with the FDCPA when engaged in mortgage foreclosure. A law firm contended it was not subject to the FDCPA because it was merely enforcing a security interest, and its involvement in state mortgage foreclosure proceedings was not tantamount to "debt collection." In rejecting the law firm’s argument, the Sixth Circuit asserted, "There can be no serious doubt that the ultimate purpose of foreclosure is the payment of money." The federal appellate court permitted the consumer’s FDCPA claim against the law firm to proceed. The consumer also claimed that a bank mortgage servicer that hired the law firm to foreclose on the property was subject to liability under the FDCPA as well. In affirming the dismissal of the FDCPA claim against the bank, the Sixth Circuit ruled that the bank could not be considered a "debt collector" under the FDCPA because the bank began servicing the mortgage loan before the debt was in default. Glazer v. Chase Home Finance LLC (6thCir) is at ¶52,469.

Management Company Not a “Debt Collector”
In connection with the federal Fair Debt Collection Practices Act, the U.S. Court of Appeals for the Eleventh Circuit recently decided that since a property management company’s collection of unpaid assessments on behalf of a homeowners association was not central to the company’s fiduciary obligations, the company was not a "debt collector" subject to the FDCPA. In the Eleventh Circuit’s view, the company did much more than just collect assessments for the homeowners association; the company contracted for maintenance of the community’s common areas, obtained utilities, purchased insurance, investigated claims, made reports to insurance companies, maintained ledgers and bank accounts, deposited money, wrote checks, reconciled bank statements, and assisted with tax filings. The Eleventh Circuit also held that the company’s collection of unpaid assessments did not violate the Georgia Fair Business Practices Act as a matter of law. Harris v. Liberty Community Management, Inc. (11thCir) is at ¶52,466.

No Private Right of Action for Alleged FCRA Violations
In affirming a federal trial court’s dismissal of a consumer’s claims against a bank for willful noncompliance with the federal Fair Credit Reporting Act, the U.S. Court of Appeals for the Second Circuit ruled that there is no private cause of action for alleged violations of the FCRA. The consumer’s lawsuit against the bank claimed the bank violated the FCRA because the bank knew its statements to credit reporting agencies were false, failed to correct those statements and failed to perform a reasonable investigation after the consumer notified the bank that its reporting was inaccurate. The Second Circuit noted that when a consumer’s dispute is directed only toward the furnisher of information—the bank in this case—and not the consumer reporting agency, then the furnisher only has a limited duty to investigate in certain circumstances established by federal regulation. Moreover, the Second Circuit determined that the FCRA plainly restricted enforcement of the provision to federal and state authorities, not private individuals. Longman v. Wachovia Bank, N.A. (2dCir) is at ¶52,464.

FTC Proposes Increasing Threshold Amount for Coverage on “Cooling Off Rule”
As part of its systematic regulatory review process, the Federal Trade Commission recently announced that it is retaining its "Cooling Off Rule" and is proposing an increase to the threshold amount for triggering its coverage. Generally, the rule, more formally known as the “Trade Regulation Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations,” provides that it is unfair and deceptive for sellers engaged in "door-to-door" sales valued at more than $25 to fail to provide consumers with disclosures regarding their right to cancel the sales contract within three business days of the transaction. Under the FTC’s proposed amendment, the exclusionary limit would be increased from $25 to $130 to reflect cumulative inflation since the FTC originally adopted the "Cooling Off Rule" in the early 1970s. This story is in Report No. 1159, Jan. 22, 2013.

State Law Update

Delaware: The State Bank Commissioner recently adopted a new regulation governing short-term consumer loans, commonly known as payday loans, that implements legislation enacted last year. The regulation establishes standards for administration and enforcement including, among other things, the applicability of new statutory requirements for payday loans, new procedures for making payday loans and the use of a new database for tracking payday loans. The regulation is at Delaware ¶8210.

Illinois: Rulemaking by the Department of Financial and Professional Regulation requires payday lenders to comply with Section 670 of the John Warner National Defense Authorization Act for Fiscal Year 2007 when making loans to military servicemembers. The requirements established by the rulemaking, among other things, cap the interest rate on consumer loans to members of the military at 36 percent. The regulation is at Illinois ¶8529.

Michigan: Amendments to the Rental-Purchase Agreement Act limit late fees and enact consumer friendly provisions governing the reinstatement of an agreement following default. The law begins at Michigan ¶6157.

Ohio: The Department of Commerce, Division of Financial Institutions announced the loan prepayment penalty adjustment for residential mortgage loans as mandated by statute. Effective Jan. 1, 2013, no penalties may be imposed on the prepayment or refinancing of a first lien residential mortgage loan of less than $85,080 that is made or arranged by a mortgage broker, loan officer or non-bank mortgage lender. The adjusted amount is noted at Ohio ¶6401A.

Texas: The Finance Commission of Texas, Office of Consumer Credit Commissioner has amended its rules governing reporting requirements for access credit businesses by allowing for the collection of certain data on an annual basis. The amendments also establish provisions relating to annual reports and the confidentiality of all data reports submitted by credit access businesses. The rule is at Texas ¶8551.

Smart Charts Highlights

Some of the latest changes reflected in Consumer Credit Smart Charts include:

• The Consumer Credit Topics Smart Charts. The Interest-Usury Topics Smart Chart reflects the current monthly, quarterly, semiannual and annual state interest rates for 2013.

Secured Transactions Guide

Houseboat Was Not a “Vessel” for Maritime Lien Law
The U.S. Supreme Court has overturned a decision by the U.S. Court of Appeals for the Eleventh Circuit that held a disabled houseboat was a "vessel" as used by federal maritime lien law. The houseboat was not a vessel, the Court determined, because the houseboat was not capable of transportation over water. Despite the fact that it floated, nothing about the houseboat suggested "that it was designed to any practical degree to transport persons or things over water." As a result, a city that owned and operated a marina where the houseboat was docked could not claim a maritime lien for unpaid dockage fees. Lozman v. City of Riviera Beach, Florida (SCt) is at ¶56,304.

Bank Free to Pursue Deficiency Judgment After Improper Notice
A bank was free to pursue a deficiency judgment against a debtor, despite the fact that the bank failed to address the notice of the disposition of collateral to the debtor, because there was no evidence to suggest that had the bank provided notice to the debtor, the sale of the collateral would have resulted in greater proceeds. Article 9 of the California UCC provides that if a secured party is able to rebut the presumption that, had the secured party complied with the enforcement requirements, the secured party would have garnered a resale amount equal to the debtor's obligation, it is entitled to a deficiency judgment. There was no evidence the debtor would have taken any additional or alternative action had she received the notice. Thus, the bank was free to pursue the deficiency judgment against the debtor. Bank of America, N.A. v. Sea-Ya Enterprises, LLC (DDel) is at ¶56,301.

State Law Update

Michigan: Michigan has amended its certificate of title provisions relating to surety bond requirements, late transfer fees and written agreements with inventory lenders. The law is at Michigan ¶1060, ¶1082, ¶1082A.

New York: New York has added new procedures for the issuance of a certificate of a title to a motor vehicle dealer that has satisfied a lien on the vehicle. The law is at New York ¶1201.

Ohio: The procedures for requesting and issuing a certificate of title to a salvage motor vehicle have been amended to add new provisions for requesting a certificate of title when the requestor is unable to obtain the original certificate of title to the vehicle. The law is at Ohio ¶1032.

Ohio has increased the amount of a person’s interest in one parcel or item of real or personal property used as the person’s residence that may be exempt a judgment lien from $20,200 to $125,000. The law is at Ohio ¶1063, ¶1064.

Financial Privacy Law Guide

Federal Law Trumped State Law in Federal Court TCPA Actions
A private action commenced in federal court to enforce the requirements of the Telephone Consumer Protection Act is not conditioned on the substantive or procedural rules of the state in which the court resides, the U.S. District Court for the Eastern District of Michigan has held. As a result, Michigan law was not a bar to the action. The court concluded that, in light of the Supreme Court’s decision in Mims v. Arrow Financial Services, Inc. (See ¶100-567), Michigan statutory law cannot control the outcome of a TCPA claim, noting that "there is nothing in the text of TCPA §227(b)(3) that supplants the supremacy of federal courts enforcing federal law." Similarly, Michigan’s three-year statute of limitations was not a bar to the action. The court stated that a private action to enforce the TCPA is subject to the federal four-year statute of limitations. This story on Bridging Communities, Inc. v. Top Flite Financial, Inc. (EDMich) appears in Privacy Extra, Jan. 31, 2013.

Class Action Certification Granted in Fax Solicitation Suit
A class of persons who received a facsimile from a floor mat company was entitled to certification, according to the U.S. District Court for the District of Massachusetts. The court determined that common issued predominated any individual issues and class action treatment was superior to other available methods of adjudication because individual claimants were unlikely to press their claim. The faxes were sent on behalf of the company by a fax advertising business that made 8,416 successful transmissions to unique fax numbers selected from a general business database purchased from a third party. Each member of the class was alleged to have suffered the same injury from receiving an unwanted fax ad in one of three mass transmissions. All class members allegedly received the same fax. The fact that the faxes were sent to numbers culled from a general business database raised a strong inference that the recipients did not consent to receipt of the defendant’s faxes. There was no evidence that any recipient had provided express permission for fax ads to be sent to it, and there was no evidence that any recipient had an established business relationship with the defendant. This story on Sparkle Hill, Inc. v. Interstate Mat Corporation (DMass) appears in Privacy Extra, Jan. 31, 2013.

ATM Fee Disclosure Requirements Amended
The enactment of Public Law 112-216 has eliminated the requirement, found in Section 904 of the Electronic Fund Transfer Act, that fee notices must be affixed to or displayed on automated teller machines. The law will now allow the fee disclosure notice requirement to be met if the notice appears only on the ATM screen. This story appears in Report No. 139, Jan. 16, 2013.

Individual Retirement Plans Guide

IRA Charitable Rollover Extended
The American Taxpayer’s Relief Act of 2012 (P.L. 112-240) extends the exclusion from gross income for qualified charitable distributions from individual retirement accounts for two years to apply to distributions made in 2012 and 2013. The 2012 Taxpayer Relief Act also provides special relief for taxpayers who did not make a qualified charitable distribution for 2012 due to Congressional delay in passing the extension.. This story is in Report No. 377, Jan. 17, 2013.

State Banking Law Reporter

New Limits Placed on Derivative Transactions by State Banks
A number of states have issued rules to comply with Section 611 of the Dodd-Frank Act, which prohibits state banks from engaging in derivative transactions unless the law in the state in which the bank is chartered takes into consideration credit exposure to derivative transactions. A derivative transaction is any transaction that is a contract or agreement that is based on the value of, or an interest in, one or more commodities, securities or other assets. In order to engage in a derivative transaction, a state chartered bank must now consider the credit exposure of these transactions when calculating the legal lending limit. The regulations lay out the methods in which a state should calculate credit exposure to a counter party as a result of a derivative transaction. Additional limits on derivative transactions are also laid out in the regulations. These stories are in Report No. 140, Jan. 30, 2013.