Consumer Financial Protection Bureau Reporter

CFPB Adopts Rule on Supervising Nonbanks That Pose Risks to Consumers
The Consumer Financial Protection Bureau has established the procedures it will use when it believes that a nonbank company offering consumer financial products or services presents risks to consumers. According to the CFPB, the rule will cover companies that provide consumer products or services but do not have a bank, thrift, or credit union charter. The Dodd-Frank Act gives the bureau the authority to take steps to supervise such a company if it has reasonable cause to conclude the company has engaged in or is engaging in conduct that poses risks to consumers. This story appears in Report 95, July 1, 2013.

CFPB Finalizes Ability-to-Repay Amendments
The Consumer Financial Protection Bureau has finalized amendments to its January 2013 ability-to-repay (ATR) rule that create exemptions and modifications to the ATR rule for small creditors, community development lenders, and housing stabilization programs. The rule is at ¶300-162.

CFPB Updates Exam Procedures for Mortgage Rules
The Consumer Financial Protection Bureau has updated its examination procedures for the mortgage regulations adopted in January 2013, providing the banking industry with advance notice of the bureau’s exam expectations. The January mortgage regulations, many of which were mandated by the Dodd-Frank Act, include rules on appraisals, escrow accounts, and compensation and qualifications for loan originators. The CFPB has updated the applicable sections of the exam procedure manuals for the Truth in Lending Act and Regulation Z (12 CFR 1026) and the Equal Credit Opportunity Act and Regulation B (12 CFR 1002). These are the first round of updates for “what will likely be multiple updates,” the CFPB said in its announcement. The Equal Credit exam procedures are at ¶9525, and the Truth in Lending exam procedures are at ¶24-005.

CFPB Takes Action Against Illegal Debt-Relief Practices
The Consumer Financial Protection Bureau has filed a complaint in the Federal District Court for the Southern District of Florida against a Florida debt-relief company. The complaint was the result of a CFPB investigation that found that American Debt Settlement Solutions, Inc., and its owner Michael DiPanni routinely charged consumers illegal upfront fees for debt-relief services that rarely, if ever, materialized. The CFPB complaint and proposed consent order are at ¶200-237.

Proposal Would Clarify CFPB’s Mortgage Rules
The Consumer Financial Protection Bureau has issued proposed clarifications and narrow revisions to its January 2013 mortgage rules to resolve questions that were identified during the implementation process and would help the rules deliver their intended value for consumers. The proposal also would revise the effective dates of the bureau’s loan originator rule and ban on financing of credit insurance. Currently, the 2013 Loan Originator Compensation Final Rule is scheduled to take effect on Jan. 10, 2014. The CFPB is seeking comment on whether to change the effective date to Jan. 1, 2014, for portions of the loan originator rule. This story appears in Report 95, July 1, 2013.

CFPB Delays Credit Insurance Premiums Rule
The Consumer Financial Protection Bureau has issued a final rule delaying the effective date of a provision in its loan originator compensation requirements rule, issued in January 2013 that prohibited creditors from financing certain credit insurance premiums in connection with certain mortgage loans. The credit insurance premiums provision would have taken effect on June 1, but on May 10, 2013, the CFPB issued a proposal to suspend the June 1 effective date while it sought comment on clarifications to how the Dodd-Frank Act prohibition applies to credit insurance products with certain periodic payment features. The rule is at ¶300-163.

CFPB Issues “Small Entity Compliance Guides”
The Consumer Financial Protection Bureau has issued a “Small Entity Compliance Guide” for its 2013 rules governing loan originators and for its 2013 rules governing mortgage servicing. Each of the two Guides is set forth in a straightforward question-and-answer format to provide an “easy-to-use summary” of the respective CFPB rules on loan origination and mortgage servicing that take effect in January 2014. The loan originator compliance guide is at ¶24-015; the mortgage servicing compliance guide is at ¶24-016.

Federal Banking Law Reporter

Contract Clause Not Invalidated by Small Possible Recovery

The fact that a plaintiff’s cost to arbitrate a claim individually would exceed the potential recovery does not permit a court to invalidate a class arbitration contractual waiver, a five-member majority of the U.S. Supreme Court has determined. As a result, merchants alleging antitrust law violations by a charge card company and its subsidiary will be required to arbitrate their claims on an individual basis. The merchants claimed that the companies used their monopoly in the charge card market to force them to accept the companies’ credit cards, which imposed fees 30 percent higher than those of competing credit cards. (Credit cards permit a user to carry a balance over from one month to the next if interest is paid; charge cards require the balance to be paid in full each month.) According to the merchants, this was a tying arrangement that violated the Sherman Act. American Express Co. v. Italian Colors Restaurant (U.S. Sup. Ct.) is at ¶101-413.

Swaps Transition Period Requests Granted
In January 2013, the Office of the Comptroller of the Currency provided guidance on requests for a transition period pursuant to section 716(f) of the Dodd-Frank Act, which prohibits providing federal assistance to swaps entities. Based on requests it received, the agency has granted 24-month transition periods to Bank of America, N.A., Citibank, N.A., HSBC Bank USA, N.A., JPMorgan Chase Bank, N.A., Morgan Stanley Bank, N.A., U.S. Bank N.A., and Wells Fargo Bank, N.A. In each case, the OCC found that a significantly shorter or no transition period could result in disorderly termination or divestiture of swaps activities and considerable disruption to swaps markets and financial markets that could weaken lending and harm job creation and capital formation. The responses are at ¶152-477.

Swaps Push-Out Rule Eligibility Established
The Federal Reserve Board has adopted interim Reg. KK—Prohibition Against Federal Assistance to Swaps Entities (12 CFR 237) providing that, for purposes of the swaps push-out rule, uninsured U.S. foreign branches and agencies of foreign banks are to be treated as insured depository institutions. This will permit them to request transition periods before they comply with the Dodd-Frank Act ban on certain types of federal assistance, such as discount window lending and deposit insurance, to swaps entities. The rule also establishes the procedures to be used by these institutions and by state member banks when applying for a transition period. The notice is at ¶152-460.

Appraisal Policy Statements Amended
To enhance guidance for states as they implement changes required by the Dodd-Frank Act, the Federal Financial Institutions Examination Council’s Appraisal Subcommittee has revised policy statements providing guidance for state appraiser regulatory programs. The policy statements are intended to ensure states maintain their programs in compliance with Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The FFIEC notice is at ¶63-970.

Consumer Credit Guide

Supreme Court Says Waiver of Class Arbitration Not Invalidated by Recovery Prospects
The fact that a plaintiff’s cost to arbitrate a claim individually would exceed the potential recovery does not permit a court to require class arbitration in derogation of a contractual waiver, a five-member majority of the United States Supreme Court has determined. As a result, merchants alleging antitrust law violations by a charge card company and its subsidiary will be required to arbitrate their claims on an individual basis. Writing for the majority, Justice Scalia emphasized that arbitration agreements are to be enforced according to their terms unless there is a contrary congressional mandate, and there was no applicable contrary congressional command present in the case requiring the Court to reject the waiver of class arbitration. While the Court recognized an exception to the Federal Arbitration Act when an arbitration agreement would interfere with a person’s right to pursue a claim under federal law, the Court determined that the fact that it would not be worth the expense involved in proving a statutory remedy did “not constitute the elimination of the right to pursue that remedy.” The story on the U.S. Supreme Court’s opinion in American Express Company v. Italian Colors Restaurant appeared in Report No. 1170, June 25, 2013.

FDCPA Does Not Require Consumer to Dispute Debt in Writing
While many of a consumer’s rights under the federal Fair Debt Collection Practices Act (FDCPA) can be invoked only in writing, the U.S. Court of Appeals for the Second Circuit ruled that a consumer’s basic right to dispute a debt may be invoked orally. In recognizing that the FDCPA provision governing notice of consumer rights explicitly allows a debt collector to require written notification for some rights that may be invoked by consumers, the court determined that a law firm could be found to have violated the provision because the FDCPA does not explicitly require that a consumer’s dispute of a debt’s validity be in writing. In the court’s view, since the right to dispute a debt is “the most fundamental” of the rights about which a consumer was to be informed, it was a reasonable interpretation of the FDCPA to allow that right to be exercised orally by consumers who might find it more difficult to timely raise any disagreement about the debt in writing. Hooks v. Forman, Holt, Eliades & Ravin, LLC (2dCir) ¶52,497.

Incomplete Offer of Judgment Does Not “Moot” FDCPA Class Action
Debt collectors and their law firm were unable to end a consumer’s proposed federal Fair Debt Collection Practices Act class action by offering a judgment that did not satisfy all of the consumer’s demands, according to the U.S. Court of Appeals for the Sixth Circuit. For an offer of judgment to moot a case, it had to offer all of the relief the consumer sought and could be entitled to, not just what could result from claims the defendants thought had merit, the federal appellate court determined. The Sixth Circuit noted that the consumer had the right to win or lose his suit, and the court had the jurisdiction to decide the merits of his claims at the proper time. Hrivnak v. NCO Portfolio Management, Inc. (6thCir) ¶52,501.

Consumers Required to Arbitrate State Claims Against Auto Finance Company
In addressing a consolidated appeal in which an auto finance company’s request to compel arbitration of consumers’ claims against it was denied by the state trial court, the Supreme Court of Appeals of West Virginia determined that the lower court erred by concluding that the arbitration agreements were unconscionable and unenforceable based upon the unavailability of one of the arbitration forums and upon the consumers’ waiver of their respective rights to a jury trial in the agreements. As a result, the Virginia high court reversed the respective rulings by the state trial court and remanded the matters for entry of an order compelling arbitration of the consumers’ claims against the auto finance company. At the same time, in acknowledging the thorny issues surrounding unconscionability and enforcement of a contract’s arbitration clause when an arbitration forum later becomes unavailable, the court also held that “where an arbitration agreement names a forum for arbitration that is unavailable or has failed for some reason, a court may appoint a substitute forum pursuant to … the Federal Arbitration Act … only if the choice of forum is an ancillary logistical concern. Where the choice of forum is an integral part of the agreement to arbitrate, the failure of the chosen forum will render the arbitration agreement unenforceable.” The story of the court’s decision in Credit Acceptance Corp. v. Front appeared in Report No. 1170, June 25, 2013.

State Law Update

Florida: Recipients of worthless checks and other payment instruments will be able to attempt collection without sending a demand letter and without filing a civil action as currently required under Florida law. The law is at Florida ¶6321.

Louisiana: Amendments to the credit agreements law establish criteria for the assertion of defenses by a debtor in a creditor action. The law is at Louisiana ¶6272A.

Maine: Legislation updating Maine’s Fair Credit Reporting Act makes the Act consistent with federal law in addition to reorganizing various provisions. Analysis appears in Report No. 1170, June 25, 2013.

North Carolina: Amendments to the North Carolina Consumer Finance Act (NCCFA) eliminate the 36-percent interest rate cap for small loans of up to $3,000 and establish a single, tiered rate structure for loans of up to $15,000. Analysis appears in Report No. 1170, June 25, 2013.

Oklahoma: Oklahoma has added 17 new sections to Article 3 (Loans) of the Oklahoma Uniform Consumer Credit Code to establish coverage of "consumer litigation funding agreements." Analysis appears in Report No. 1169, June 11, 2013.

Texas: Legislation aimed at promoting competition and flexibility in the consumer lending market allows the Finance Commission of Texas to set the maximum amount of the administrative fee and acquisition charge for consumer loans. Separate legislation amends the commercial transaction provisions of the Texas Finance Code to authorize the use of alternative interest computation methods for lenders making commercial loans. Analysis appears in Report No. 1170, June 25, 2013.

Smart Charts Highlights

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

• The Legislative Developments Smart Charts are updated regularly as legislation is enacted allowing users to keep up to date without waiting for a scheduled Report. Links to legislative summaries and to full text of laws amended, repealed or added are provided. Recent updates include:
• Florida: Consumer Finance Act—Maximum Interest Rates.
• Hawaii: Financial Institutions Law Modernization.
• Texas: Debit, Stored Value Card Surcharges.

Secured Transactions Guide

Lender Failed to Follow Kentucky Law, Lien Unperfected
A lender that failed to file the required application for a notation of a lien on a debtor’s manufactured home in the debtor’s county of residence did not have a perfected security interest in the debtor’s home, the U.S. Court of Appeals for the Sixth Circuit has held. As a result, the bankruptcy trustee could avoid the lender’s security interest. To secure a loan to the debtor, the lender filed an application for first title and an application for a title lien statement in the lender’s county of residence. The court determined the lender was required to file the application for the certificate of title and lien notation in the debtor’s county of residence. The Kentucky Supreme Court has held that the notation of a lien on the property’s certificate of title is the sole means of perfecting a security interest in property requiring a certificate of title. Section 186A.190 of the Kentucky Revised Statutes, which governs the perfection of security interests in manufactured homes, states, “The notation of security interests relating to property required to be titled in Kentucky through the county clerk shall be done in the office of the county clerk of the county in which the debtor resides. Vanderbilt Mortgage and Finance, Inc. v. Westenhoefer (6thCir) ¶56,320.

Lender’s State Law Claim Preempted by Food Security Act
A lender could not maintain a state common law claim for conversion against a buyer that purchased crops encumbered by the lender’s perfected security interest. The lender’s claim was preempted by the Food Security Act (FSA), which provides that a buyer that purchases a farm product in the ordinary course of business from a seller engaged in farming operations takes the farm product free of a security interest created by the seller. Article 9 of the Tennessee UCC also recognizes that a buyer in ordinary course of business buying farm products from a person engaged in farming operations purchases the products free of a security interest as provided in the FSA. The court concluded the lender’s state law conversion claim was preempted by the FSA. The lender alleged that the buyer, with knowledge of the lender’s perfected security interests, purchased and sold the debtors’ crops without paying the lender the value of its liens. The New London Tobacco Market, Inc. v. Philip Morris USA, Inc. (EDTenn) ¶56,319.

State Law Update

Colorado: Colorado has revised the text of Revised Article 9 that relates to claims concerning inaccurate or wrongfully filed records to conform to the uniform law amendments as promulgated by the Uniform Law Commission. The law also allows for the use of a debtor’s name as provided on an unexpired, state-issued identification card on a financing statement. The law appears at Colorado, ¶R813 and ¶R828.

Colorado has also amended its motor vehicle certificate of title provisions to add “off-highway vehicles” to the law and allow for the creation of an electronic titling system for motor vehicles. An “off-highway vehicle” is “a self-propelled vehicle that is: (1) designed to travel on wheels or tracks in contact with the ground; (2) designed primarily for use off of the public highways; and (3) generally and commonly used to transport persons for recreational purposes.” The certificate of title provisions will apply to an off-highway vehicle, unless the off-highway vehicle is first sold or transferred prior to July 1, 2014, or the off-highway vehicle is used exclusively for agricultural purposes on private land. The law begins at Colorado ¶1046.

Indiana: According to a new section of Indiana’s certificate of title provisions, before a person sells a vehicle to, gives a vehicle to, or disposes of a vehicle with an automobile scrapyard, the person must now give the automobile scrapyard: a certificate of authority for the vehicle that authorizes the scrapping or dismantling of the vehicle; or a certificate of title for the vehicle. The law appears at Indiana ¶1161A and ¶1161B.

Maine: A person may not file a recordable instrument against the real or personal property of a public employee or a public official in Maine if the person knows it is without a legal basis or was filed with the intent that the instrument be used to harass the employee or official. A person who violates the law is liable to each employee or official for $10,000 or the amount of the recordable instrument, whichever is greater, in addition to court costs, reasonable attorney’s fees, related expenses for bringing the action, and punitive damages. The law appears at Maine ¶200 and ¶205.

Maryland: Maryland has added new penalties for filing false liens against another. A person may not file a lien or encumbrance against the real or personal property of another if the person knows that the lien or encumbrance is false or contains or is based on a materially false, fictitious, or fraudulent statement or representation. A person who violates the law is guilty of a misdemeanor and is subject to up to one year imprisonment or a fine up to $10,000, or both. For second and subsequent offenses, the person is subject to up to five years imprisonment or a fine up to $10,000, or both. The law appears at Maryland ¶200 and ¶205.

Product Enhancements

Amendments to Revised Article 9 Reflected
The amendments to Revised Article 9 released by the Uniform Laws Commission and the American Law Institute in 2010 took effect July 1, 2013. The amendments revised definitions, rules of perfections and priority, the form and contents of financing statements, and the effectiveness of certain filings, while adding a new Part 8 to address the transition period for the new amendments. Although not all of the states have enacted the amendments, the majority of states have approved the changes, adopting the uniform effective date of July 1, 2013.

The amendments have been reflected in the following jurisdictions: Arkansas; Colorado; Connecticut; Delaware; District of Columbia; Florida; Georgia; Hawaii; Idaho; Illinois; Indiana; Iowa; Kansas; Kentucky; Louisiana; Maryland; Michigan; Minnesota; Mississippi; Montana; Nebraska; Nevada; New Hampshire; New Jersey; New Mexico; North Carolina; North Dakota; Ohio; Oregon; Puerto Rico; Rhode Island; South Carolina; South Dakota; Tennessee; Texas; Utah; Virginia; Washington; West Virginia; Wisconsin; and Wyoming. The explanations in the Secured Transactions Explained division have also been updated to reflect the amended uniform law.

Financial Privacy Law Guide

FTC Revises Guidance for Identity Theft Red Flags Rule
The Federal Trade Commission has issued a revised guide for businesses subject to the FTC’s Red Flags Rule. The rule requires businesses with covered accounts to implement a written identity theft prevention program. The guide, Fighting Identity Theft with the Red Flags Rule: A How-To Guide for Businesses, provides tips for determining whether a business is required to comply with the rule and how to implement an appropriate program. This story appears in Report No. 144, June 14, 2013.

State Law Negligence Claim Not Hinged on GLBA
A privacy-related negligence claim against Wells Fargo Bank was not recognized under Georgia law under the theory that it is hinged on a privacy provision of the Gramm-Leach-Bliley Act (GLBA), the Georgia Supreme Court has decided, reversing the judgment of the Court of Appeals. The lower court misread an “aspirational statement” of Congressional policy that financial institutions are obligated to respect customer privacy as establishing a legal duty giving rise to a cause of action for negligence under state law. The story on Wells Fargo Bank, N.A. v. Jenkins appears in Report No. 144, June 14, 2013.
TSR Amendments Would Ban Scammers’ Payment Methods

Proposed amendments to the Telemarking Sales Rule (TSR) (16 CFR Part 310) bars sellers and telemarketers from accepting remotely created checks, remotely created payment orders, cash-to-cash money transfers, and cash reload mechanisms as payment in inbound or outbound telemarketing transactions. The Federal Trade Commission is seeking public comment on its proposals to curtail the use of these four payment methods that it stated are “favored by con artists and scammers.” This story appears in Privacy Extra, June 28, 2013.

State Law Update

Delaware: Delaware Governor Jack Markell has signed legislation allowing parents and guardians to “freeze” their children’s credit with credit agencies at any time until they turn 16. The law also allows for credit to be frozen for an incapacitated person by their guardian. The law is intended to protect minor children and incapacitated persons (protected consumers) from identity theft. The story on Ch. 43 appears in Privacy Extra, June 28, 2013.

Oregon: Recent legislation expanded the Oregon Consumer Identity Theft Protection Act to allow parents or guardians to freeze the credit reports of minors and protected persons. In the event that a protected person does not have a credit report, the measure requires credit reporting agencies (CRAs) to make a protective record for the individual and place a freeze on that record. Protected persons are not older than 16 years old, or incapacitated or for whom a court has appointed a guardian or conservator. The story on S.B. 574 appears in Privacy Extra, June 28, 2013.

Washington: A new regulation requires that the Washington Insurance Commissioner be notified within two business days of a licensee determining that notification regarding a security breach of personal health or private information must be made to consumers or customers. Failure to comply will be considered an unfair practice. The story on WAC 284-04 appears in Report No. 144, June 14, 2013.