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January 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

American Express to pay $59.5 million to consumers for illegal credit card practices
The Consumer Financial Protection Bureau ordered American Express to refund an estimated $59.5 million to more than 335,000 consumers for illegal credit card practices. These practices included unfair billing tactics and deceptive marketing with respect to credit card “add-on products” such as payment protection and credit monitoring. American Express will pay an additional $9.6 million in civil penalties to the CFPB. The bureau worked with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency to identify and address the issues included in this action. Related documents are at ¶200-325.

Ally agrees to pay nearly $100 million to settle indirect auto loan discrimination charges
Ally Financial Inc. and Ally Bank (Ally) have together agreed to pay $98 million to settle charges that they did not try hard enough to ensure that their auto loan pricing structure did not allow illegal discrimination on the basis of race or national origin. According to the Consumer Financial Protection Bureau, the result was that more than 235,000 African-American, Hispanic, and Asian and Pacific Island borrowers paid excessive interest rates on loans purchased by Ally between April 2011 and December 2013. The payment includes $80 million in damages to consumers who were harmed and an $18 million payment to the CFPB’s Civil Penalty Fund. The consent order and stipulation are reported at ¶200-319.

CFPB releases updated version of 2013 mortgage rules compliance guide

The Consumer Financial Protection Bureau has published a new version of a guide intended to help financial institutions come into and maintain compliance with the new mortgage rules that are set to become effective in January 2014. The guide, 2013 CFPB Dodd-Frank Mortgage Rules Readiness Guide, Version 2.0, has been designed for use by institutions of all sizes. The guide summarizes the mortgage rules finalized by the CFPB in 2013, but it is not intended to be a substitute for the rules. The rules and their official interpretations provide complete and definitive information regarding their requirements. The guidance is reproduced at ¶1538.

Bureau, states sue online loan servicer over debt collection practices

The Consumer Financial Protection Bureau has filed suit against CashCall Inc., WS Funding, LLC, Delbert Services Corporation, and their owner J. Paul Reddam, alleging that the companies and individual engaged in debt collection practices that violated the Dodd-Frank Act ban on unfair, deceptive, or abusive acts and practices. According to the CFPB’s complaint, filed in the U.S. District Court for the District of Massachusetts, the defendants violated the laws of as many as eight states while collecting high-cost, high-interest loans that originally were extended by the online lender Western Sky Financial, LLC. A statement by the CFPB noted this was the bureau’s first enforcement action against an online loan servicer. The complaint is reproduced at ¶200-313.

Agencies adopt final rule on exceptions from higher-risk mortgage appraisal requirements
Amendments to mortgage regulations that will provide exceptions to the appraisal requirements to creditors making some higher-risk mortgage loans have been adopted by the federal banking agencies. The joint CFPB, Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, and Federal Housing Finance Agency amendments will apply to three types of transactions: loans secured by existing manufactured homes but not land; some streamlined refinancings; and loans of no more than $25,000. The joint final rule is at ¶300-180.

CFPB takes action against deceptive health care credit card practices

The Consumer Financial Protection Bureau has ordered GE Capital Retail Bank and its subsidiary, CareCredit, to refund up to $34.1 million to potentially more than 1 million consumers who were victims of deceptive credit card enrollment tactics. "Medical debt is already a big problem for many Americans. Poor credit card transparency should not be making the problem even worse,” said CFPB Director Richard Cordray in a bureau release. “Deferred-interest products can be risky for consumers in the best of circumstances, and today’s action ensures that CareCredit will no longer profit from consumer confusion. The Bureau will not tolerate financial companies that take advantage of patients and their loved ones." The consent order is at ¶200-310.

Updated CFPB exam procedures include 2013 TILA/RESPA rules

The Consumer Financial Protection Bureau has published updated examination procedures to encompass the bureau’s mortgage rules adopted in 2013 and effective in January 2014. The examination updates are intended to provide financial institutions and other industry participants with guidance on how the CFPB will conduct examinations for compliance with the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA). The updated exam procedures are at ¶19-523 and ¶24-005.

CFPB turns focus on student loan servicers

The Consumer Financial Protection Bureau is expanding its regulatory oversight to certain nonbank student loan servicers. The CFPB currently oversees student loan servicing at the largest banks. Under a newly-issued rule, the bureau now will supervise any nonbank student loan servicer that handles more than one million borrower accounts, regardless of whether they service federal or private loans. The final rule can be found at ¶300-179.

Federal Banking Law Reporter

Regulators respond to worries over Volcker Rule effects
According to the Financial Services Roundtable, a provision in the Volcker Rule finalized by regulators last week will result in negative, unintended consequences, requiring some banks to experience significant losses, which could reduce new lending. FSR sent a letter to the regulators—Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Securities and Exchange Commission, and Commodity Futures Trading Commission— asking them to take immediate action to remedy this provision. The Fed, FDIC, and OCC subsequently issued brief guidance that attempts to help banks determine how to handle the potential problem with trust preferred securities—hybrid securities that have some characteristics of preferred stock and some characteristics of subordinated debt. The concern is that investments in collateralized debt obligations backed by trust preferred securities are covered funds under the Volcker Rule. This story appears in Report 2550, Jan. 3, 2014.

Fed clarifies capital adequacy risk transfer considerations
The Federal Reserve Board has issued guidance on how certain risk transfer transactions affect assessments of capital adequacy at large financial institutions covered by the Fed's Consolidated Supervision Framework for Large Financial Institutions. The Fed advised these firms to carefully evaluate transactions intended to reduce risk to ensure that, if risks are shifted to a thinly capitalized counterparty or affiliated entity of the firm, any residual risk is effectively captured in the firm's internal capital adequacy assessment. Examiners will closely consider such transactions, and potential residual risks, when evaluating an institution's capital adequacy, the Fed said. This story appears in Report 2550, Jan. 3, 2014.

FFIEC guides on consumer protection, social media
The Federal Financial Institutions Examination Council has developed supervisory guidance entitled “Social Media: Consumer Compliance Risk Management Guidance.” The Consumer Financial Protection Bureau, prudential regulators, and National Credit Union Administration will use it as supervisory guidance for the institutions that they supervise, and the State Liaison Committee of the FFIEC is encouraging state regulators to adopt the guidance. In a Financial Institution Letter addressing the guidance, the Federal Deposit Insurance Corporation explains that the guidance is intended to clarify that existing consumer protection and compliance laws and regulations apply to activities conducted by financial institutions via social media as they would to activities conducted through other channels. This story appears in Report 2550, Jan. 3, 2014.

Banking agencies approve Volcker Rule regulations

The Federal Deposit Insurance Corporation and Federal Reserve Board have unanimously approved regulations implementing Section 619 of the Dodd-Frank Act (12 U.S.C. §1851). At the FDIC’s Dec. 10, 2013, board meeting, Comptroller of the Currency Thomas J. Curry stated he would be signing on to the regulations on behalf of the Office of the Comptroller of the Currency as well. Although the preamble to the final rule provides an April 1, 2014, effective date, the Fed has extended the conformance period until July 21, 2015. The purpose of the statutory Volcker Rule is to limit the type and amount of speculative risk that can be undertaken by banking entities that are supported by the public safety net. The final rule accomplishes this goal by generally prohibiting banking entities from: (1) engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account; and (2) owning, sponsoring, or having certain relationships with hedge funds or private equity funds, referred to as “covered funds.” The joint rule and related documents appear at ¶152-771, ¶152-772, and ¶152-776¶152-779.

Fed advises banks on potential risk of service providers

The Federal Reserve Board is reminding financial institutions it supervises to exercise appropriate risk management and oversight when using service providers. In its guidance, the Fed describes the factors financial institutions should consider when choosing a service provider and how service providers should be overseen. The guidance is applicable to state-chartered banks that are members of the Federal Reserve System, bank and savings and loan holding companies and their nonbank subsidiaries, and U.S. operations of foreign banking organizations. This story appears in Report 2550, Jan. 3, 2014.

Consumer Credit Guide

No TILA liability for loan servicer’s failure to identify current loan owner

A mortgage loan servicer had no civil liability for failing to satisfy the borrower’s demand for the identity of the loan’s owner despite the federal Truth in Lending Act’s clear requirement that the information be supplied, the U.S. Court of Appeals for the Sixth Circuit has decided. The Sixth Circuit determined that TILA imposes liability only on creditors and assignees, and a “mere servicer” was neither. However, the dismissal of the borrower’s claim under the federal Real Estate Settlement Procedures Act was reversed, permitting her to assert that the loan servicer did not properly respond to a qualified written request for information. Marais v. Chase Home Finance LLC (6th Cir.), ¶52,551.

Lender’s failure to secure federal loan guarantee was “adverse action” under ECOA

A mortgage lender’s failure to secure a borrower’s home financing with a United States Department of Agriculture (USDA) guaranteed Rural Development (RD) loan, as requested by the borrower, constituted an "adverse action" under the federal Equal Credit Opportunity Act (ECOA) and triggered the lender’s duty to provide notification to the borrower of the adverse action, the U.S. District Court for the Eastern District of Virginia has ruled. In reaching its decision, the federal court determined that the party charged with providing the ECOA notice need not be the party primarily responsible for the adverse action, and, because the federal loan guarantee constituted a material part of the borrower’s home loan, the lender’s failure to obtain the requested USDA-RD loan guarantee was a “refusal to grant credit … on substantially the terms requested” under ECOA. Cross v. Prospect Mortgage, LLC (E.D. Va.), ¶52,552.

Service members Civil Relief Act pertains to prepaid amounts on car lease
In connection with a class action brought by two service members under the Service members Civil Relief Act (SCRA) concerning their vehicle leases, the U.S. District Court for the District of New Jersey determined that the service members’ respective capitalized cost reduction (CCR) payments constituted prepaid lease amounts. In reaching its decision, the federal trial court ruled that since the CCR lease payments were “lease amounts paid in advance” under the SCRA, the CCR payments were subject to a prorated refund upon lease termination. This story about the Venneman v. BMW Financial Services NA, LLC (D.N.J.) decision appears in Report No. 1183, Jan. 7, 2014.

State Law Update

Oregon: Stricter debt collection oversight prohibits a debt collector from using the seal or letterhead of a public official or agency while collecting or attempting to collect a debt. A violation constitutes an unlawful collection practice. The law is at Oregon ¶6271.

Smart Charts Highlights

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

  • Consumer Credit Topics Smart Charts. The Interest-Usury Topics Smart Chart reflects the current monthly, quarterly, semiannual and annual state interest rate modifications for January 2014.

Secured Transactions Guide

Bank that failed to immediately file release was not in contempt
A bank that failed to file a financing statement releasing its lien in encumbered cattle and crops as soon as the statement was received could not be held in contempt for violating a stipulation agreement that required that the bank release its lien. Even though, as a result, the debtors were unable to finance their future crops, the U.S. Bankruptcy Appellate Panel for the Eighth Circuit concluded that contempt was not an available remedy. To hold a party in civil contempt, a court must find that the offending party violated a specific order of which it was aware, and the order provided only that the stipulation was approved; it did not recite or incorporate the terms of the stipulation. In re Fischer; Fischer v. Great Western Bank (B.A.P. 8th Cir.), ¶56,340.

More facts needed for no notice-no deficiency rule

Because material issues of fact remained as to whether a loan for the purchase of a mobile home and equipment used for a bird-dog business was a secured consumer transaction subject to Missouri’s no notice-no deficiency rule, a federal district court should not have awarded summary judgment to the co-signer of the loan. The U.S. Court of Appeals for the Eighth Circuit concluded that, in accordance with Missouri law, additional facts were necessary to determine the ownership of the collateral and the primary purpose of the loan. The debtor and his wife executed a promissory note, co-signed by Stanley Wint. After the debtor defaulted, the creditor sold the secured collateral without notice to Wint. The district court held that the note was a secured consumer loan, and as such, Missouri’s no-notice, no-deficiency rule applied. The Eighth Circuit, however, determined that a reasonable fact-finder could conclude that the primary purpose of the loan was non-consumer, requiring additional facts and barring summary judgment.Crozier v. Wint (8th Cir.), ¶56,341.

Creditor must prove sale was commercially reasonable

The U.S. District Court for the Northern District of Iowa could not determine whether, or to what extent, a creditor was entitled to a deficiency judgment as a result of a debtor’s breach of the parties’ agreement, because material issues of fact remained as to whether the creditor’s sale of leased equipment was commercially reasonable. The burden of proving commercial reasonableness is on the secured party, and if the secured party fails to meet its burden, the liability of a debtor for a deficiency may be limited. Although the creditor offered the affidavit of its bookkeeper, at the summary judgment stage, “[a]n affidavit or declaration used to support or oppose a motion must be made on personal knowledge,” and the bookkeeper’s affidavit did not state how he had personal knowledge of the sale. Thus, the court could not determine whether the equipment was sold in a commercially reasonable manner or calculate any damages that may be due the creditor. General Electric Capital Corporation v. FPL Service Corp. (N.D. Iowa), ¶56,342.

State Update

New York:
New York has enacted new legislation that will provide greater protections for state and local officers against false filings. The law also amends section 9-518 of the New York Uniform Commercial Code to add procedures for redacting or expunging a falsely filed financing statement. The law appears at New York ¶R828 and ¶1148.

Financial Privacy Law Guide

Federal Rule of Civil Procedure 23 governs whether TCPA suit proceeds as class action

Federal law, rather than New York law, governs when a federal Telephone Consumer Protection Act (TCPA) suit may proceed as a class action, the United States Court of Appeals for the Second Circuit has held. The court decided that a federal district court erred in dismissing a class action complaint brought pursuant to the TCPA (47 U.S.C. §227) for lack of subject matter jurisdiction, based on its application of New York Civil Practice Law and Rules section 901(b), which prohibits class-action suits for statutory damages. The court determined that Federal Rule of Civil Procedure 23 governs when a federal TCPA suit may proceed as a class action. The lower court’s decision was vacated and remanded for further proceedings. Bank v. Independence Energy Group LLC, et al. (2nd Cir.) at ¶100-647.

FTC approves new COPPA verifiable parental consent method

The Federal Trade Commission has approved a new method—knowledge-based authentication—for companies to get parents’ consent for their children to access online services covered by the Children’s Online Privacy Protection Act (COPPA) Rule. Based on an application submitted by Imperium, Inc., the FTC has approved the use of knowledge-based authentication as a method to verify that the person providing consent for a child to use an online service is in fact the child’s parent. Knowledge-based identification is a way to verify the identity of a user by asking a series of challenge questions, typically questions that rely on so-called “out-of-wallet” information—that is, information that cannot be determined by looking at an individual’s wallet and is difficult for someone other than the individual to provide. This authentication method has been used by financial institutions and credit bureaus for a number of years and has been acknowledged by the FTC and other government agencies as effective for that purpose. This story appears in Privacy Extra, Dec. 31, 2013.

FTC’s Do Not Call report shows increased robocalling
The Federal Trade Commission’s biennial Do Not Call Registry report to Congress highlights how the agency is responding to new technologies that have increased the number of illegal robocalls made to phone numbers on the Registry. To combat the increase in illegal robocalls, the FTC hosted a robocall summit, sponsored a public challenge to develop technological solutions, and produced new resources for consumers. As of September 2013, more than 223 million active numbers were registered for Do Not Call, an increase of more than 5.8 million registrations from the previous fiscal year. During fiscal year 2013, a total of 2,875 businesses and other entities paid more than $14 million to access the Do Not Call Registry. Another 27,626 entities were provided access, but are exempt from paying fees (because they access five or fewer area codes free of charge or are a charity). This story appears in Privacy Extra, Dec. 31, 2013.