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February 2014

From the editors of CCH’s Banking and Finance publications, this update describes significant developments covered in our products in recent reports, as well as product enhancements

Past issues of the Banking and Finance Update can be viewed here.

If you have questions or comments concerning the information provided below, please contact the Banking and Finance Update editor.

Banking & Finance Law Daily

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Consumer Financial Protection Bureau Reporter

CFPB moves to supervise large nonbank remittance transfer service providers
The Consumer Financial Protection Bureau is proposing a rule that would allow it to supervise large nonbank international remittance transfer service providers. Under the proposal, nonbank companies that carry out more than 1 million transfers annually would be subject to bureau oversight, on-site examinations, and enforcement actions. The bureau estimates that about 340 nonbank companies provide international remittance transfer services and that about 25 companies would meet the one million-transaction threshold. However, the rule also would allow the CFPB to supervise a smaller company that poses a risk to consumers. The CFPB’s proposed rule and a corresponding factsheet are at ¶300-186.

New mortgage rules go into effect
Many of the Consumer Financial Protection Bureau's long-awaited new mortgage rules, that are intended to create a safer, simpler process, where the consumer gets a fairer deal, went into effect on Jan. 10, 2014. In this article, Timothy Karcher of Proskauer Rose LLP provides an overview of the new Ability-to-Repay Rule and Qualified Mortgage requirements. This article (“New mortgage rules go into effect”) was originally published in the January 2014 issue of CFPB WATCH—Ferrara & Karcher. The article is reproduced in CFPB Report 124, Feb. 3, 2014.

Organization, authority of CFPB not unconstitutional

The Consumer Financial Protection Bureau survived the first constitutional challenge to its creation, funding, and enforcement authority when a federal district court denied a debt relief agency’s request to dismiss a bureau enforcement action. According to the U.S. District Court for the Central District of California, the Dodd-Frank Act provisions creating the CFPB did not violate the U.S. Constitution’s separation of powers principals. The court also said that the debt relief agency’s practices could have violated both the Telemarketing Sales Rule and the Consumer Financial Protection Act ban on abusive practices. CFPB v. Morgan Drexen Inc. (CD Cal.) is at ¶100-116.

CFPB charges lenders for mortgage kickback schemes
The Consumer Financial Protection Bureau entered a consent order against a Missouri mortgage lender for funneling illegal kickbacks to a bank in exchange for real estate referrals. The order took effect as of the date of entry, Jan. 15, 2014. Referring to the order, CFPB Director Richard Cordray said in a press release that “Kickbacks harm consumers by hampering fair market competition and by unnecessarily increasing the costs of getting a mortgage.” Cordray stressed that the bureau “will continue to take action against schemes that steer consumers to lenders through unscrupulous and illegal business practices.” The consent order is at ¶200-336.

Bureau provides mortgage exam procedures as rules take effect

The Consumer Financial Protection Bureau has published mortgage origination and servicing examination procedures for the 2013 mortgage rules that took effect on Jan. 10, 2014. The mortgage origination exam procedures consist of eight modules that cover various elements of the mortgage origination process. Each module identifies specific matters for review by examiners in examinations of mortgage lenders and brokers. The bureau’s mortgage servicing exam procedures, like the origination exam procedures, contain a number of modules that, depending on the scope of the exam, will be covered. These modules are grouped by similar requirements. The loan origination exam procedures are at ¶24-019, and the servicing exam procedures are at ¶24-020.

CFPB offers fact vs. fiction guidance on ATR/QM rule
The Consumer Financial Protection Bureau has provided new guidance on the Ability-to-Repay (ATR)/Qualified Mortgages (QM) rule that became effective on Jan. 10, 2014. The rule, mandated by the Dodd-Frank Act, is intended to protect consumers from debt traps by requiring mortgage lenders to evaluate whether borrowers can afford to pay back the mortgage before signing them up. The new guidance, a “fact v. fiction guide,” was issued by the bureau “to help dispel some of the most common misconceptions about what this new rule actually means for consumers,” according to a CFPB blog post. The CFPB’s blog post and ATR/QM guidance is at ¶200-330.

Federal Banking Law Reporter

Tort punitive damage limits do not apply to contract claims
Credit card companies would not violate the U.S. Constitution by charging consumers late fees and over-the-limit fees that were disproportionate to the harm the companies suffered, the U.S. Court of Appeals for the Ninth Circuit has decided. The substantive due process requirements of the Constitution that limited punitive damages in tort cases were not applicable to contract-mandated penalties, the court said. Piñon v. Bank of America (9thCir) is at ¶101-469.

OCC proposes guidelines for large bank risk governance

The Office of the Comptroller of the Currency is seeking comments on proposed guidelines, to be issued as Appendix D to 12 CFR Part 30, that would establish minimum standards for the design and implementation of a risk governance framework for large insured national banks, insured federal savings associations, and insured federal branches of foreign banks with average total consolidated assets of $50 billion or more and minimum standards for a board of directors in overseeing the framework’s design and implementation. The proposed guidelines would implement a set of five “heightened expectations” that the OCC communicated to large complex national banks following the financial crisis that are intended to enhance the agency’s supervision and strengthen the governance and risk management practices of large national banks The OCC’s notice is at ¶152-980.

Regulators offer relief from Volcker Rule CDO provisions
The federal bank, thrift, and commodities regulators have adopted an interim final rule responding to financial industry complaints about the effect the Volcker Rule regulations will have on investments in collateralized debt obligations (CDOs) that are backed by trust preferred securities. The interim rule will permit banking entities to retain some investments made before Dec. 10, 2013, the date the final Volcker Rule was issued. It will not permit additional investments to be made. The agencies’ notice is at ¶69-953; the interim final rule is at ¶152-976.

Consumer Credit Guide

Using Reg. Z model forms isn’t always enough, court says
A mortgage lender that used a model form supplied by the federal government to notify husband and wife borrowers of their right to rescind the transaction did not satisfy the requirements of the federal Truth in Lending Act and its implementing regulation (Regulation Z), a U.S. District Court Judge decided. Using Model Form H-8 was not adequate to give the borrowers clear and conspicuous notice of their rescission rights because, contrary to ordinary understanding, the form included Saturdays within the meaning of “business days.” Simmons v. CitiMortgage Inc. (D. Utah) is at ¶52,560.

Demanding verification of debt constitutes contesting the debt under FDCPA
Debt collectors that did not precisely quote the federal Fair Debt Collection Practices Act in their notices that consumers could demand that debts be validated did not violate the law, the U.S. Court of Appeals for the Seventh Circuit decided. An unsophisticated consumer would not be led by the notice to exercise an incorrect right, according to the court. A claim by one consumer that the use of the term "just debt" overshadowed the notice of rights also was rejected. This story about the Gruber v. Creditors' Protection Service, Inc. (7thCir) decision appears in Report 1185 (Feb. 5, 2014).

Percentage-based collection fee could violate FDCPA
A collection agency that assessed a percentage-based collection fee to a debtor’s account prior to any attempt to collect the debt—without the debtor’s express agreement to pay the fee—violated the federal Fair Debt Collection Practices Act, the U.S. Court of Appeals for the Eleventh Circuit held. The debtor’s agreement with his service provider stated that he would pay “all costs of collection,” not a percentage-based collection fee unrelated to the collection agency’s actual costs. Bradley v. Franklin Collection Service, Inc. (11thCir) is at ¶52,557

State Law Update

Michigan: The Michigan legislature has passed a law that creates the Security Freeze Act, which generally requires that a consumer reporting agency place or remove a security freeze on a consumer's credit report at his or her request, or at the request of a protected consumer's authorized representative, if the request meets certain conditions. The law is at Michigan ¶6351.

Washington: The Department of Financial Institutions (DFI) has amended its rules implementing the Consumer Loan Act. The amendments implement changes made by legislation enacted during the 2013 legislative session that became effective July 28, 2013. The rules are at Washington ¶8010.

Secured Transactions Guide

Floating oil rig was not a “vessel” subject to maritime liens
Creditors that provided materials and services to a floating oil and gas production facility could not assert maritime liens against the facility for the unpaid services because the facility was not subject to federal maritime lien law, the U.S. Court of Appeals for the Fifth Circuit has held. In an unpublished opinion, the court concluded that because the facility was not practicably capable of transportation over water, it could not be considered a “vessel” subject to the law. Under the Maritime Lien Act a "vessel" includes "every description of watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water." The definition includes “any watercraft practically capable of maritime transportation, regardless of its primary purpose or state of transit at a particular moment.” The facility was moored to the ocean floor by 12 chain mooring lines connected to 12 anchor piles, each weighing 170 tons and each embedded over 200 feet into the seafloor, and by an oil and gas production infrastructure. It had not been moved since it was constructed and installed. Warrior Energy Services Corporation v. ATP TITAN M/V (5thCir) is at ¶56,347.

Article 9 class action subject to six-year statute of limitations
A debtor’s class action filed against a creditor for its alleged failure to provide a proper notice of repossession or deficiency, as required by Article 9 of the Pennsylvania UCC, was not subject to Pennsylvania’s two-year statute of limitations period for civil penalties. The Superior Court of Pennsylvania concluded that the action was subject to Pennsylvania’s default six-year statute of limitations period and the action, filed 2.5 years after the debtor received the notices, was not untimely. The creditor argued the debtor’s action fell under the two-year limitations period that governs actions “upon a statute for a civil penalty or forfeiture.” However, the court determined that the plain language of section 9-625 revealed that it is a remedial statute intended to compensate aggrieved debtors for their losses not a punitive statute intended to punish creditors. Cubler v. TruMark Financial Credit Union (Pa. Super.) is at ¶56,344.

Lender’s inaction was not a waiver of its rights
Funds that were garnished from a debtor’s accounts receivable by a judgment creditor were subject to a lender’s prior perfected security interest. Adopting the “trace and recapture” approach, an Oregon appellate court concluded that the judgment creditor was obligated to return the garnished funds to the lender after the lender demanded the funds. When the judgment creditor failed to do so, he converted the collected funds, entitling the lender to the amount of the garnished accounts receivable. Because the security agreement provide that any delay in exercising rights provided in the security agreement would not be deemed a waiver, the issue was whether waiver nevertheless occurred by operation of law. Under the “trace and recapture” approach, until a secured party declares default and acts on its rights to collateral, a garnishor is entitled to take the collateral subject to the secured party’s interest. “The ‘trace and recapture’ approach is consistent with the UCC determination of priority, continuation of a security interest, and tracing the identifiable proceeds of collateral,” the court concluded. Davis v. F.W. Financial Services, Inc. (Or. App.) is at ¶56,345.

State Update

Texas: Texas has adopted final regulations relating to definitions, acceptance and refusal of documents, the UCC information management system, filing and data entry procedures, and UCC search requests and reports, in order to reflect changes in UCC filing requirements included in the amendments to Revised Article 9 that were effective July 1, 2013. The regulations begin at Texas, ¶1351.

Financial Privacy Law Guide

Consumer fails to allege injury from theft of laptop

A consumer could not go forward with claims for violation of a New Jersey state law requiring notification of breaches of data security against a provider of automated medication dispensing services (Omnicell) and against the hospitals and healthcare providers that used Omnicell’s services, the federal district court in New Jersey has decided. According to the complaining consumer, a laptop computer owned by Omnicell was stolen, and that computer contained the unencrypted personal confidential information (PCI) of the consumer, as well as of thousands of other individuals. This information had been provided to the defending healthcare providers during the course of seeking treatment, and it allegedly had been turned over to Omnicell by the providers. The consumer failed to adequately allege an injury-in-fact: the consumer did not allege that her PCI was misused or even that she was at increased risk of such misuse. Instead, she argued that she was suing in order to prevent any further dissemination of her information and to force Omnicell to purge its files of her sensitive information or to secure it going forward. These allegations were not sufficient to establish a cognizable injury. Polanco v. Omnicell, Inc. (D.N.J.) is at ¶100-648.

State Law Update

Wisconsin: Recently enacted legislation expands Wisconsin’s identity theft freeze protections by allowing representatives to obtain security freezes on behalf of protected consumers. The measure defines a “protected consumer” as an individual: (1) who is under 16 years old; or (2) for whom a guardian or conservator has been appointed. A “representative” is a person who provides “sufficient proof of authority” to act on behalf of a protected consumer, including: (1) a court order; (2) a power of attorney; or (3) a notarized statement that describes the authority to act on behalf of a protected consumer. The law is at ¶79-463.