Consumer Financial Protection Bureau Reporter

CFPB Proposes Rule on Supervision of Nonbanks
The Consumer Financial Protection Bureau has proposed a rule that would govern the process by which a nonbank company would become subject to the supervisory authority of the bureau. The Dodd-Frank Act gives the bureau the authority to supervise such companies in addition to supervising mortgage lenders, mortgage servicers, payday lenders, consumer reporting agencies, debt collectors and money services companies generally. The process would begin with the issuance of a "Notice of Reasonable Cause" informing the company that the CFPB has reason to believe the conditions for assuming supervision exist. The company would have two opportunities to respond to the notice, first in writing and later orally. In order to allow a respondent to inform the bureau of actions taken and progress made to reduce the risks to consumers after the issuance of an order, the respondent would be permitted, after two years and no more than annually thereafter, to petition the CFPB director for the termination of an order. The notice is at ¶300-046.

CFPB Considers Mortgage Originator Compensation Rules
The Consumer Financial Protection Bureau has previewed proposed rules it is considering that would attempt to simplify mortgage points and fees and bring greater transparency to the mortgage loan origination market. The bureau said it intends to propose rules this summer and adopt final rules by January 2013. The proposal would address discount points and origination fees in the context of loan originator compensation. It also would impose additional loan originator qualification requirements. The notice is at ¶200-080.

CFPB Issues Interim Final Rule on Standards of Ethical Conduct for Employees
The Consumer Financial Protection Bureau has issued an interim final rule on the standards of ethical conduct for bureau employees. The rule supplements the Standards of Ethical Conduct for Employees of the Executive Branch (OGE Standards) issued by the OGE published on Aug. 7, 1992, and codified at 5 CFR 2635. The OGE Standards established uniform standards of ethical conduct that apply to all executive branch personnel. The CFPB has determined that supplemental regulations are necessary because of the bureau’s "unique" programs and operations. The notice is at ¶300-043.

CFPB Moves Toward Prepaid Card Rules
The Consumer Financial Protection Bureau has issued an Advance Notice of Proposed Rulemaking as a first step in drafting regulations for general purpose reloadable cards, also referred to as prepaid cards. According to the bureau, the rules will be intended to ensure that consumers’ funds are protected and that card fees and terms are clear. The ANPR applies to access methods beyond actual cards, such as cell phone applications, but not to payroll cards, non-reloadable cards, gift cards, cards linked to bank accounts or other similar access devices. The notice is at ¶300-045.

GAO Reports on CFPB Internal Controls, Accounting Procedures
The Government Accountability Office has released a report discussing the Consumer Financial Protection Bureau’s internal controls and accounting procedures. During the GAO’s audit of the CFPB’s fiscal year 2011 financial statements, seven internal control issues were identified that the GAO believes could adversely affect the CFPB’s ability to meet its internal control objectives. While the GAO stresses that the issues do not "represent material weaknesses or significant deficiencies," in relation to the CFPB’s financial statements, they do warrant management’s attention and action. The GAO report is at ¶200-084.

Federal Banking Law Reporter

RESPA Unearned Fee Ban Applies Only to Fee Splitting
Consumers attempting to show a violation of the Real Estate Settlement Procedures Act ban on unearned fees for settlement services were required to show that the fee in question was divided among at least two persons, the U.S. Supreme Court has decided. The Court unanimously rejected consumer claims that RESPA banned a single settlement service provider from accepting a fee for which no service had been performed. The RESPA provision at issue says "[n]o person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service…other than for services actually performed." The consumers claimed that "any portion, split, or percentage" included 100 percent and cited a Department of Housing and Urban Development policy statement as partial support for their argument. However, the Court vigorously rejected HUD’s policy statement, saying that RESPA "unambiguously covers only a settlement-service provider’s splitting of a fee with one or more other persons; it cannot be understood to reach a single provider’s retention of an unearned fee." Freeman v. Quicken Loans, Inc. (SCt) is reported at ¶101-331.

Examinations Prompt Lending Concerns, ABA Study Shows
Bankers are concerned that the post-financial crisis examination regime could permanently chill lending, either by making it more expensive or by leading banks to deny loans that could face regulatory criticism, a new survey from the American Bankers Association reveals. "We find that in dangerous ways distance has developed between the bank supervisory program and its value-added mission," the study, Value-Added Bank Supervision: A Framework for Safely Fostering Economic Growth, says. This story is in Report No. 2467, May 7, 2012.

Rescission Time Limit Satisfied by Notice
Consumers who notified the owner of their mortgage loan that they were rescinding the transaction within the three-year time limit were not required to file a suit within that limit, according to the U.S. Court of Appeals for the Fourth Circuit. Noting the existence of a split in opinion as to whether a suit to enforce the rescission must be filed, the court came down on the consumer-friendly side of the split and reversed a lower court opinion that had dismissed the suit as untimely. Gilbert v. Residential Funding LLC (4thCir) is reported at ¶101-326.

Agencies Adopt Joint Stress Test Guidance
The Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. have adopted interagency guidance on stress test requirements for large banking organizations—those with $10 billion or more in total consolidated assets. At the same time, the agencies issued a statement intended to allay fears of community banks that they would be subject to comparable requirements. The guidance does not implement the Dodd-Frank Act’s stress test requirement, nor does it fall under the Fed’s capital plan rule that applies to holding companies with consolidated assets of $50 billion or more, the agencies said. Separate proposals will apply to those provisions. However, institutions subject to stress test requirements under those two provisions should follow the guidance issued May 14, 2012, in complying with those provisions. Related documents begin at ¶47-741.

Operational Risk “High and Increasing,” Comptroller Says
Comptroller of the Currency Thomas Curry said operational risk within the banking system is "high and increasing" and currently tops the list of safety and soundness issues for institutions supervised by the OCC. "No issues loom larger today than operational risk in all its dimensions, the manner in which all risks interact, and the importance of managing those risks in an integrated fashion across the entire enterprise," Curry said in remarks prepared for the Exchequer Club on May 16, 2012. Operational risk encompasses losses due to failures of people, processes, systems and external events, and it is embedded in every activity and product of an institution, he explained. Curry noted that seasoned supervisors have told him that this is the first time they have seen operational risk eclipse credit risk as a safety and soundness challenge. "Rising operational risk concerns them, it concerns me, and it should concern you," Curry warned. This story is in Report No. 2470, May 24, 2012.

FHFA Interprets “Principal Place of Business”
The fact that a non-depository institution has been organized under the laws of a particular state is not sufficient, by itself, to establish that state as the institution's principal place of business, according to a new Federal Housing Finance Agency regulatory interpretation. When such an institution applies for membership in a Federal Home Loan Bank, the location of its "principal place of business" is largely a question of fact that the FHLBank should resolve by identifying the location at which the institution actually conducts its principal business operations. Under the Federal Home Loan Bank Act, an institution can be a member only of the FHLBank for the region in which the institution’s principal place of business is located. 2012-RI-02 is at ¶151-348.

Consumer Credit Guide

CFPB Initiates Study of Arbitration Clauses
The Consumer Financial Protection Bureau recently took the first step into investigating arbitration agreements in consumer financial contracts by asking for public comments on the scope, methods and data sources that should be used for a study required by the Dodd-Frank Act. The Dodd-Frank Act gives the CFPB the authority to adopt regulations governing the use of pre-dispute arbitration agreements, even to the extent of banning them, but it first requires the CFPB to carry out a study and report the study results to Congress. The CFPB’s current request for public comments does not ask for comments on what regulation, if any, the CFPB should adopt; rather, the request is targeted and limited to the nature and structure of the required study. The release is at ¶30,228.

Law Firm Was Collecting Debt, Not Just Enforcing Lender’s Security Interest
The U.S. Court of Appeals for the Eleventh Circuit recently decided that a law firm, acting on behalf of a mortgage lender to collect the balance due on a mortgage loan and to enforce the lender’s security interest in the property, was subject to the federal Fair Debt Collection Practices Act (FDCPA). First, the Eleventh Circuit ruled that the payment obligations of the mortgage loan borrowers under the promissory note clearly qualified as a "debt" under the FDCPA. Second, the court ruled that the law firm’s letter and enclosed foreclosure documents to the borrowers constituted an effort to collect a debt under the FDCPA. In rejecting the law firm’s argument that it was not collecting a debt but was merely enforcing the security interest of the lender, the court determined that the firm’s letter and documents had dual purposes: the collection of the debt and the enforcement of a security interest; the two practices were not mutually exclusive. The Eleventh Circuit determined that the borrowers’ class-action complaint contained enough factual content to adequately allege that the law firm was a "debt collector" under the FDCPA. Reese v. Ellis, Painter, Ratterree & Adams, LLP (11thCir) at ¶52,423.

Debtor’s FDCPA Claim Dismissed, Request for Consumer Survey Denied
The U.S. Court of Appeals for the Seventh Circuit recently held that, as a matter of law, a debtor failed to state a valid claim against a debt collector under the provision of the federal Fair Debt Collection Practices Act (FDCPA) governing validation of debts because, from the perspective of an unsophisticated consumer, the debt collector’s letter to the debtor was not confusing and did not overshadow or contradict required FDCPA disclosures contained elsewhere in the letter. The Seventh Circuit further ruled that the federal trial court properly denied the debtor’s request to conduct a consumer survey—to show the collection letter was confusing—because the debt collector’s letter was clear and permissible as a matter of law. In the court’s view, no reasonable person—however unsophisticated—could construe the wording of the collection letter in a manner that would violate the FDCPA provision. Zemeckis v. Global Credit & Collection Corporation (7thCir) at ¶52,426.

Merchant Did Not Willfully Violate FCRA’s “Credit Card Receipt Rule”
The U.S. Court of Appeals for the Seventh Circuit recently ruled that a merchant did not willfully violate the "credit card receipt rule" under the federal Fair Credit Reporting Act (FCRA) by printing the last four digits of the "account number"—as opposed to the "card number"—designated on the face of its credit cards for cardholders. As a result, the merchant could not be held liable for willful noncompliance under the FCRA. The Fair and Accurate Credit Transactions Act of 2003 (FACT Act) amended the FCRA to provide that an electronically printed receipt must not display more than the last five digits of the "card number." While the merchant electronically printed only four digits on the consumer’s credit card receipt, the consumer brought a class-action lawsuit against the merchant, claiming the merchant printed "the wrong four digits." In noting that the FCRA provision did not define "card number," the Seventh Circuit determined that, regardless of the precise definition, the consumer’s receipt contained too few digits to cause identity theft. Moreover, the merchant’s practice of electronically printing the last four digits of the account number was not "objectively unreasonable" to constitute willful noncompliance with the FCRA. In reaching its decision on the consumer’s class action, the court commented that an "award of $100 to everyone who has used the [merchant’s credit card] would exceed $1 billion, despite the absence of a penny’s worth of injury." Van Straaten v. Shell Oil Products Company LLC (7thCir) at ¶52,421.

State Law Update

Hawaii: Legislation aimed at strengthening the Department of Commerce and Consumer Affairs’ oversight of exempt out-of-state collection agencies clarifies requirements for maintaining the exemption and specifying conduct that would trigger enforcement action. The law begins at Hawaii ¶6134.

Indiana: The Department of Financial Institutions has changed the dollar amounts in the Uniform Consumer Credit Code that are subject to adjustment, including amounts relating to graduated rate scales for credit sales and supervised loans, delinquency charges for credit sales and consumer loans, deficiency judgments, small loans and high-cost home loans. The regulation is at Indiana ¶9031.

Nebraska: Legislation amending the Delayed Deposit Services Licensing Act increases license fees for payday lenders. The law begins at Nebraska ¶6001.

Minnesota: Stricter oversight over debt collectors establishes a personnel screening process that a debt collection agency must follow in hiring and retaining individual collectors. Analysis appears in Report No. 1141, May 1, 2012.

Texas: The Finance Commission of Texas has amended a rule concerning consumer disclosures for credit access businesses. The amendment clarifies the rule's application to payday and auto title loans transacted through the Internet relating to application filing requirements for tax refund anticipation loan facilitators. The rule is at Texas ¶8567.

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:

Maryland: Credit Grantors—Balloon Payments.
Ohio: Consumer Sales Practices Act—Cure Offers.
Oklahoma: Uniform Consumer Credit Code Amendments.

Secured Transactions Guide

Notification Required Only after Default
A bank’s action against its debtors for the outstanding balance on a loan agreement was not barred by Article 9 of the Wyoming UCC. The debtors had financed the purchase of a vehicle for their son.  After their son filed a petition for bankruptcy protection, the bank surrendered the vehicle to the bankruptcy trustee without informing the debtors. The debtors later defaulted on the loan and argued that, because the bank had failed to provide notice of the disposition of the vehicle, the bank could not pursue an action against them for the outstanding balance. Article 9 requires that secured parties provide notice to the debtor prior to the disposition of collateral after default. The court concluded that the bank’s release did not trigger the Article 9 notice requirements because the release occurred prior to the debtors’ default. Wallace v. Pinnacle Bank - Wyoming (WyoSCt) ¶56,284.

State Update
Arizona: According to a recent amendment, a nonconsensual lien, other than a mechanics’ lien or a lien filed by a government entity, political subdivision or licensed utility, or water delivery company, cannot be recorded unless the lien is accompanied by a court order or judgment authorizing the filing. The law is at Arizona ¶R840.

Alabama: Alabama has added a new criminal offense for filing false instruments against public servants. A person commits a Class C felony if the person offers a written instrument for filing which relates to or affects the property, interest or contractual relationship of a public servant knowing that the instrument contains a materially false statement or materially false information with the intent to defraud, intimidate or harass the public servant or impede the public servant’s duties. The law is at Alabama ¶1175.

Colorado: The Colorado Secretary of State has amended and reissued its UCC Filing Office Rules. The regulations include an amended policy statement, new definitions, create a hardship exception for delivery of documents, create an exception for the use of International Association of Commercial Administrators (IACA) forms, and remove regulations relating to filing office identification and hours. The regulations is at Colorado ¶1400—¶1488.

Georgia: A new offense has been added to Georgia’s Criminal Code to provide that is now a felony, subject to imprisonment between one and 10 years and a fine not to exceed $10,000, if a person knowingly files a false lien or encumbrance in a public record or a private record that is generally available to the public against the property of a public officer or employee, knowing that the lien or encumbrance is false or contains a materially false, fictitious or fraudulent statement or representation. The law is at Georgia ¶1265.

Minnesota: An insurer that acquires ownership of a late-model or high-value vehicle after payment of a claim will now have 10 days after obtaining title, rather than 48 hours after taking possession, to notify the department of the change. The definition of "late-model vehicle" has also been amended to mean a vehicle with a manufacturer’s designated model year that is equal to or greater than the fifth calendar year preceding the current calendar year. A "high-value vehicle" is a vehicle that had an actual cash value greater than $5,000 prior to sustaining the damage. The law is at Minnesota ¶1201 and ¶1215A.

Oklahoma: Oklahoma has amended its regulations relating to certificates of title to provide for rebodied vehicles and add new requirements for recovered-theft vehicles. In addition, for unrecovered-theft vehicles, if a subsequent owner is unable to obtain a damage declaration from the insurer and the purchaser contends the damage to the vehicle is less than a total loss, the purchaser may mail a prepared letter of instruction obtained from the Motor Vehicle Division to the insurer requesting the insurer’s compliance. If the insurer refuses or fails to respond within 30 days of the delivery of the purchaser’s request, the purchaser may establish the level of damage with a formal, written estimate of the repairs from a certified mechanic not affiliated with the purchaser. The regulations begin at Oklahoma ¶1392.

Financial Privacy Law Guide

Awareness of Requirements Does Not Establish Willfulness
Allegations that the credit card number truncation requirements of the Fair and Accurate Credit Transaction Act were widely publicized and should have been known by a restaurant, and that the restaurant was complying with the requirement at some of its locations, were not sufficient to establish that the restaurant willfully violated the Act, a federal district court in Maine has held. “Merely being aware of a statute is insufficient to state a claim for willfulness,” the court noted. There must also be a voluntary, deliberate or intentional violation. According to the court, the only reasonable inference from the fact that some locations were in compliance and not others was that the restaurant’s failure was inadvertent. Vidoni v. The Acadia Corporation (DMe) at ¶100-583.

Franchisor Could Be Liable for Franchisee’s Violations
A franchisor could be liable for an out-of-state franchisee’s failure to comply with the credit card number truncation requirements of the Fair and Accurate Credit Transaction Act (FACT Act) if it exerted significant control over the franchisee’s business activities, including those that involved its point of sale policies and procedures. The federal district court in Nebraska noted that the FACT Act is part of the statutory scheme of the Fair Credit Reporting Act, which has been held to allow vicarious liability for violations under common law agency principles. The court determined that, because the individual alleged that the franchisor exercised actual control over the franchisee’s business point of sale policies and procedures and was involved in its day-to-day operations, the individual had alleged a viable FACT Act claim against the franchisor. Keith v. Backyard Burgers of Nebraska, Inc. (DNeb) at ¶100-584.

Consent to Cell Phone Calls Does Not Extend to Reassigned Numbers
Only the consent of the cellular telephone number subscriber at the time of the call exempts a caller from the restrictions on the use of automatic telephone dialing systems of the Telephone Consumer Protection Act (TCPA), the U.S. Court of Appeals for the Seventh Circuit has held. The TCPA provides that it is unlawful for a person to make any call using an automatic telephone dialing system or an artificial or prerecorded voice to any cellular telephone number or to any service for which the called party is charged without prior express consent of the called party. The use of "called party" must mean the current subscriber, the court reasoned, because only the current subscriber pays for the call; nor can there exist any long-term consent because there is no property right in a phone number. A story on Soppet v. Enhanced Recovery Company, LLC (7thCir) is in Privacy Extra, May 31, 2012.

State Law Update

Alabama: Alabama’s first security freeze law gives its residents the power to put a security freeze on their credit report. It prohibits a credit reporting agency from releasing a frozen credit report or score to a third party without the explicit consent of the consumer. The legislation also sets up methods by which a consumer can have the freeze lifted in under 15 minutes, should the consumer wish to apply for credit. A consumer reporting agency must place a freeze on a consumer’s credit report no later than three business days after receiving the consumer’s written request sent by certified mail. The CRA must remove a security freeze within three business days of receiving the consumer’s removal request. A story on H.B. 15, Act No. 500, is in Privacy Extra, May 31, 2012.

Maryland: Expanded security freeze protections establish procedures allowing a parent, guardian or conservator to request a security freeze for a minor, incapacitated person or other protected person. Among other things, a parent, guardian or conservator must provide sufficient proof of identification that may include a Social Security number or driver’s license. The measure also establishes procedures for the removal of a security freeze. A story on S.B. 295, Ch. 208 and H.B. 555, Ch. 209, is in Privacy Extra, May 31, 2012.

Vermont: Consumer protection legislation requires data collectors and other entities subject to Vermont’s personal information protection law to report security breaches to the attorney general within 14 days of discovering the breach, or when the data collector provides notice to consumers, whichever is sooner. The notification must include the date of the security breach and the date the breach was discovered. The notification also must provide a preliminary description of the breach. If the date of the breach is unknown at the time notice is sent to the attorney general, the data collector must send the attorney general the date of the breach as soon as the date is known. A story on H.B. 256, Act No. 109, is in Privacy Extra, May 31, 2012.

Individual Retirement Plans Guide

Extension Granted to Recharacterize Roth IRA
A couple was granted additional time in which to recharacterize a Roth IRA back into a traditional IRA. The taxpayers had relied on a tax professional that had made the correction on their tax return but failed to tell them to notify their IRA trustee to transfer funds from the Roth IRA back to the traditional IRA accounts. The IRS determined that the taxpayers: acted reasonably and in good faith; were unaware that they were ineligible to establish a Roth IRA; and requested a ruling prior to the IRS's discovery that they failed to make a timely election. IRS Letter Ruling 201218037 is at ¶6349.