Consumer Financial Protection Bureau Reporter

Consumer Bureau to Examine Check Overdraft Fees
The Consumer Financial Protection Bureau has begun looking into checking account overdraft fees, starting with a request for information from a number of banks and a separate request for information from the public. The bureau also has provided a prototype of a disclosure—referred to as a "penalty box"—that financial institutions would include on a consumer’s monthly statement to explain the overdrafts and how the resulting fees were calculated. The CFPB said that, according to industry sources, the average overdraft fee ranged from $30 to $35 in 2011 and has increased by 17 percent over the previous five years. Consumers with 20 or more overdrafts per year paid an average of more than $1,600 in annual fees, according to a 2008 Federal Deposit Insurance Corp. study cited by the bureau. The CFPB also noted that rules adopted by the Federal Reserve Board requiring a financial institution to secure a consumer’s affirmative consent before charging fees due to an overdraft from a point-of-sale or automated teller machine transaction do not apply to overdrafts from checks or online bill payments. This story appears in Report No. 27, Feb. 27, 2012.

CFPB Describes Employee Protection Rules
The Consumer Financial Protection Bureau has published a formal notice of the rights and remedies that are available to job applicants, employees and former employees under the Notification and Federal Employees Antidiscrimination and Retaliation Act (the No FEAR Act). Federal agencies are prohibited from discriminating against employees or job applicants on the basis of race, color, religion, national origin, gender, age (of 40 years of age or older), disability, genetic information, marital status, parental status, sexual orientation, political affiliation, military service or any other non-merit factor. A person who believes he has been harmed by illegal discrimination can take advantage of one of several grievance procedures, depending on the nature of the perceived discrimination. Retaliation against whistleblowers is, under most circumstances, prohibited. A person who believes he has been the victim of retaliation can file a written complaint with the Office of Special Counsel. The CFPB’s notice is at ¶1512.

Republican Senators Challenge Cordray Appointment
Thirty-nine Republican senators have signed a letter indicating their intent to file an amicus brief and join a court challenge to the recent recess appointment of Richard Cordray as director of the Consumer Financial Protection Bureau. In the letter, the lawmakers, including Senate Minority Leader Mitch McConnell, R-Ky., said that President Barack Obama’s Jan. 4, 2012, recess appointments of individuals to lead the CFPB and National Labor Relations Board were unprecedented and unconstitutional. A number of ranking members also signed the letter. On Feb. 1, 2012, the House Committee on Oversight & Government Reform held a hearing on Obama’s recess appointments, including the appointment of Cordray as director of the CFPB. Opponents of the appointment testified that the appointments were unconstitutional. This story is in Report No. 25 on Feb. 13, 2012.

Privileged Information Provided to the CFPB Preserved
The House Financial Services Committee unanimously approved bi-partisan legislation fixing an omission in the Dodd-Frank Act that opens the door for third parties to obtain privileged information provided by financial institutions to the Consumer Financial Protection Bureau. The legislation, H.R. 4014, would require the CFPB to preserve the confidentiality of privileged information it receives from financial institutions, as other banking regulators do. Richard Cordray, director of the CFPB, recently testified that this was an oversight and that he supports a legislative solution to ensure that privileged information is not leaked to third parties through the CFPB. A companion bill in the Senate, S.B. 2099, was introduced by Senate Banking Committee Chairman Tim Johnson, D-S.D., and Committee Ranking Member Richard Shelby, R-Ala. This story appears in Report No. 27, Feb. 27, 2012.

Federal Banking Law Reporter

Supervision for Debt Collectors, Credit Agencies Proposed
The Consumer Financial Protection Bureau has proposed a regulation that would define which debt collectors and consumer reporting agencies would be deemed "larger participants" in their markets and thus subject to the bureau’s authority under its nonbank supervision program. According to the bureau, this would be the first time participants in these businesses have been subject to federal supervision. However, credit reporting has been covered by regulations issued by other financial services regulators, and the Fair Debt Collection Practices Act has been enforced by the Federal Trade Commission under its authority to address unfair or deceptive acts and practices. The Dodd-Frank Act empowered the CFPB to supervise nonbanks that are engaged in residential mortgage lending, payday lending and private education lending. It also said the bureau was to supervise larger participants in other markets for consumer financial products and services and instructed the bureau to establish the criteria for what was a larger participant. It is this authority the bureau now is exercising. The notice is at ¶151-171.

Non-Bank Mortgage Lenders to File SARs
The Financial Crimes Enforcement Network has adopted a regulation that will require non-bank residential mortgage lenders and loan originators to establish anti-money laundering programs and report suspicious transactions. According to FinCEN, an analysis of Suspicious Activity Reports filed by banks has shown that independent mortgage lenders and brokers originated many of the mortgages that later were the subject of bank-filed SARs. FinCEN expects the regulations to significantly increase the number of mortgage-related SARs. The rule does not require that Currency Transaction Reports be filed for large currency transactions and does not impose other Bank Secrecy Act-related obligations, FinCEN said. It also does not cover companies that engage strictly in servicing mortgages originated by others. The notice is at ¶151-152.

Volcker Defends Namesake Rule
Former Federal Reserve Board Chairman Paul Volcker defended the need to restrict the risky trading activities of large banks, commenting to regulators that commercial bank proprietary trading is at odds with the basic objectives of financial reform. “Proprietary trading of financial instruments . . . does not justify the taxpayer subsidy implicit in routine access to Federal Reserve credit, deposit insurance or emergency support,” according to Volcker. He added that proprietary trading activity, hedge funds and equity holdings “should stand on their own feet in the market place, not protected by access to bank capital, to the official safety nets, and to any presumption of public assistance as failure threatens.” Volcker stated that restrictions on proprietary trading will also offer customers a “conflict of interest free platform,” where bankers focus exclusively on customer needs and where all of the bank’s capital is committed in support of those customer activities. This story is in Report No. 2456, Feb., 16, 2012.

Rescission Suit Time Limit Ends at Three Years
A consumer’s suit seeking to rescind a mortgage loan that was filed more than three years after the loan closed was too late, regardless of when she notified the lender of her intent to rescind, the U.S. Court of Appeals for the Ninth Circuit has decided. Ruling on the issue for the first time in the circuit, the court determined that the statute of limitations began to run on the date of the loan closing, not on the date of the lender’s failure to agree to the rescission. As a result, the dismissal of the consumer’s suit was affirmed. McOmie-Gray v. Bank of America Home Loans (9thCir) is at ¶101-307.

Bernanke Addresses Community Bank Concerns
Federal Reserve Board Chairman Ben Bernanke, seeking to assuage concerns from community banks that their net interest margins are being squeezed by low interest rates, said the longer term impact of accommodative monetary policy on bank profitability would be "almost certainly positive." Speaking Feb. 16, 2012, at a Federal Deposit Insurance Corp. forum on community banking, Bernanke noted that the effect of interest rate levels on banks and other financial institutions is "certainly part of the discussion" when monetary policy is set. He emphasized that the purpose of the Fed's low interest rate policy is to speed the economic recovery, and in turn spur loan demand and opportunities for profitable lending. The Fed chairman noted that despite difficult economic conditions, "measures of the financial condition of community banks appear to have strengthened somewhat, suggesting that, for the most part, the industry is meeting its challenges." Profits of smaller banks have risen for the past several quarters, he said. Although the ratio of nonperforming assets remains high in many cases, he added, asset quality appears to be stabilizing and bank provisions for loan losses are decreasing. In addition, capital ratios are steadily improving at community banks, in part due to increases in retained earnings and a greater ability to raise new capital. This story is in Report No. 2457, Feb. 23, 2012

FDIC Revises Guidance on Payment Processor Relationships
The Federal Deposit Insurance Corp. has updated its 2008 guidance on relationships with payment processors. The revised guidance emphasizes that financial institutions are responsible for independently reviewing the activities of these customers and that they may be liable for failing to do so. It also provides more detail on the FDIC's supervisory expectations. The guidance addresses relationships between depository institutions and customers who use their accounts to provide payment processing services to merchants, generally by using remotely created checks or automated clearing house debits against consumer accounts. According to the FDIC, these activities can have a higher risk profile, especially when the processors’ customers are telemarketers or online merchants. In order to reduce the risk of consumer fraud or money laundering, these payment processors must have procedures to verify the identities of the merchants the deal with and to review the merchants’ business practices. Moreover, the financial institution must be in a position to understand and verify the business of both the payment processor and its merchant customers, which may require the use of independent audits. FIL-3-2012 is at ¶38-199.

Consumer Credit Guide

Law Firm’s Offer of Judgment Did Not Fully Address Consumer’s FDCPA Relief
The U.S. Court of Appeals for the Fourth Circuit recently ruled that a law firm’s offer of judgment to a consumer did not unequivocally offer the consumer the full relief that she sought under the federal Fair Debt Collection Practices Act. In ruling that the law firm’s offer of judgment did not serve to “moot” the consumer’s FDCPA action, the court determined: the consumer had not demanded a specific amount for actual damages in her complaint; there were no factual findings by the lower court to establish that the consumer’s actual damages did not exceed $250; the law firm’s offer of judgment did not meet the required "unequivocal offer" test; and the offer of judgment also would have improperly deprived the consumer of her right to have a jury, not a judge, determine the actual damages in the case. In reaching that decision and in ruling on several other legal issues arising under the FDCPA, the Fourth Circuit allowed the consumer’s FDCPA action to proceed to trial. Warren v. Sessoms & Rogers, P.A. (4thCir) at ¶52,405.

Partial Expiration Date on Receipt Was a Valid, Not Willful Violation
The U.S. Court of Appeals for the Third Circuit ruled that although a consumer validly alleged a violation of the "credit card receipt rule" under the Fair and Accurate Credit Transactions Act. against a merchant for the merchant’s partial disclosure of the expiration date of the consumer’s credit card on a receipt, the alleged violation did not meet the “willfulness” standard for statutory or punitive damages. In processing the consumer’s credit card for a retail purchase, the merchant electronically printed the month, but not the year, of the card’s expiration on the consumer’s receipt. The consumer claimed that the merchant’s printing on the receipt of any part of his credit card’s expiration date was a violation of the pertinent federal Fair Credit Reporting Act provision—a provision amended by the FACT Act to prevent identity theft involving credit card receipts. In contrast, the merchant contended that the statutory provision was not violated so long as part of the expiration date was omitted. Since the consumer conceded that he did not suffer any actual damages by the merchant’s partial disclosure on the credit card receipt but was only seeking statutory and punitive damages, the court determined that the consumer was required to allege and ultimately prove that the merchant’s FCRA violation was willful. The Third Circuit ruled that no willful violation occurred because the merchant’s interpretation of the FCRA’s “credit card receipt rule,” while incorrect, was "not objectively unreasonable." Long v. Hilfiger U.S.A., Inc. (3dCir) at ¶52,407.

State Law Update

New Hampshire: Changes to the law regulating title loan lenders increase the maximum percentage of interest that may be charged by a title lender annually. The legislation also reduces the number of additional pay periods for which a lender may allow a title loan to be renewed from 11 to 10. The law begins at ¶6164.

Pennsylvania: An amendment to the Motor Vehicle Sales Finance Act eliminates a 100-percent markup cap for service contracts, warranties, debt cancellation agreements and debt suspension agreements sold by automobile dealers. The law is reflected at Pennsylvania ¶6010.

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:
• Pennsylvania: Motor Vehicle Sales Finance Act Markup Cap Eliminated.

Secured Transactions Guide

Sale of Contracts Was an Avoidable Preferential Transfer
Proceeds that were remitted to investors in a retail installment pool were recoverable by a debtor’s bankruptcy trustee as an avoidable preferential transfer. The court determined that, because the investors were unable to purchase the retail installment contracts, they were creditors of the debtor. The debtor had entered into an agreement with the investors that purported to sell a pool of future retail installment contracts, along with any security interests created by the contracts, to the investors, despite the fact that the investors were not licensed to hold installment contracts. The Bankruptcy Code provides that a trustee may avoid any transfer of an interest of the debtor in property that is made to the benefit of a creditor for an antecedent debt owed by the debtor within 90 days of debtor’s filing of a petition for bankruptcy that would enable the creditor to receive more than it would have in bankruptcy. Because the investors were unable to hold installment contracts, the court determined there was no purchase. Instead, they entered into a debtor-creditor relationship when they transferred funds to the debtor in exchange for monthly payments. Thus, the transfer was an avoidable preferential transfer made by a debtor to a creditor intended to pay down an existing debt owed by the debtor to the creditor. In re Moye; Waite v. Cage (5thCir) at ¶56,262.

Delivery of Title Not Necessary to Transfer Interest
An individual’s transfer of his interest in a mobile home was not necessarily ineffective when he failed to deliver the certificate of title to the transferee. In addition, under former Article 1 of the Alaska UCC, a subsequent purchaser of the mobile home was not a good faith purchaser if he did not make a sufficient inquiry into the transferee’s possession of the mobile home. The individual had informed his co-owner in a jointly purchased mobile home that he would transfer his interest in the mobile home to the co-owner. Without his co-owner’s knowledge, he later sold the mobile home. The purchaser was aware the co-owner was in possession of the home, but believed her to be a tenant. In accordance with Alaska law, the transfer of ownership in a vehicle, including a mobile home, is not effective until the original owner delivers the certificate of title to the transferee. The co-owner argued that she was the sole owner of the mobile home because the individual had expressed intent to transfer to her his interest. Although there was no delivery of the title, the court determined that failure to deliver title creates only a presumption that there has been no delivery that may be rebutted by a showing of actual delivery of the home and that ownership has passed in conformity with the parties’ intentions. In addition, the lower court should have considered whether the purchaser made a sufficient inquiry into the nature of the occupant’s interest and its effect on his status as a good faith purchaser. Roberson v. Manning (AlaskaSCt) at ¶56,277.

State Update

Montana: The Montana Secretary of State has revised its rule relating to search criteria for UCC certified searches to conform to the International Association of Commercial Administrators search logic standards. The basic standard for searching individual names has been amended to add that middle names will become an initial or blank space and first names containing only an initial will become an exact match to first names beginning with that initial. The added provisions are also intended to improve discovery of lien notices. The regulation is at Montana ¶1321.

Puerto Rico: Puerto Rico has enacted Revised Article 9, including the 2010 Amendments that were released by the Uniform Laws Commission and the American Law Institute. The law enacts the uniform text in substantially the same format as issued by the ULC and ALI, however, Part 5—Filing contains a number of non-uniform provisions. The amended law also adopts conforming amendments to Articles 1, 3, 5 and 8 of the Puerto Rico UCC. A story appears in Report No. 1112, Feb. 14, 2012.

Financial Privacy Law Guide

Asserted Injuries from Data Security Breach Too Speculative
Two individuals could not go forward with purported class-action claims against human resources, payroll and benefit services provider Ceridian Corp. seeking damages resulting from a data security breach the U.S. Court of Appeals in Philadelphia has determined. An unknown hacker infiltrated Ceridian’s computer systems and potentially gained access to personal and financial information belonging to approximately 27,000 employees at 1,900 companies. The individuals’ allegations of hypothetical, future injury did not establish standing under Article III, in the court’s view. The individuals asserted that they: had an increased risk of identity theft; incurred costs to monitor their credit activity; and suffered from emotional distress. These assertions were too speculative to confer standing. Reilly v. Pluemacher (3dCir) at ¶100-570.

Exemption Under State Law Is No Exemption to TCPA
An individual could maintain a private action against a lender for allegedly violating the Telephone Consumer Protection Act (TCPA), despite the fact that the conduct may have been exempt from liability under California law. The individual had filed a lawsuit in federal court against a lender for allegedly using an automatic telephone dialing system in violation of the TCPA to call the individual’s mobile telephone in order to collect on a debt the customer owed the lender. The court determined that there was no basis for the theory that an exemption from liability under state law provides an exemption under the TCPA. The California Utilities Code, which prohibits any person from operating an automatic dialing system, provides an exemption for messages sent to an existing customer. However, the court noted, “compliance with one statute does not necessarily immunize a litigant from liability under another.” Ridley v. Union Bank, N.A. (SDCal) at ¶100-569.

FCC Imposes New Telemarketing Rules
Amendments to the Federal Communications Commission’s telemarketing rules impose clearer requirements for how a business must obtain consent before it may make a telemarketing call or send a telemarketing text message. Furthermore, telemarketers will no longer be able to make telemarketing robocalls or send texts based solely on an “established business relationship.” The new rules also require telemarketers to allow consumers to opt out of receiving additional telemarketing robocalls immediately during a robocall through an automated menu. This story appeared in the Feb. 28, 2012, Privacy Extra.

Individual Retirement Plans Guide

IRS Clarifies Eligibility to Establish and Contribute to HSAs
The IRS has clarified that a taxpayer is not ineligible to establish and contribute to a Health Savings Account because he or she is eligible to receive medical services at an Indian Health Service facility. The Internal Revenue Code permits eligible taxpayers to establish HSAs, defining such a taxpayer as one who is covered by a high deductible health plan, is not covered by another plan, is not a dependent and is not enrolled in Medicare. A person who is merely eligible to receive medical services at an IHS facility, but who has not received such services in the previous three months, is eligible to establish or contribute to an HSA. However, if a taxpayer has received medical services at an IHS facility within the previous three months, that taxpayer is not eligible to establish an HSA. Eligibility for HSA purposes is not affected by receipt of permitted coverage, such as dental or vision care, preventive care, well-baby visits and certain other services as outlined in earlier IRS guidance. IRS Notice 2012-14 is at ¶6329.