Consumer Financial Protection Bureau Reporter

New Wolters Kluwer Law & Business White Paper Examines CFPB Mortgage Industry Reforms
The adoption of a series of new rules adopted by the Consumer Financial Protection Bureau that are intended to remake the mortgage lending industry are analyzed in a new white paper, entitled “CFPB Mortgage Industry Reforms—Rulemaking and Guidance” by Senior Attorney-Editors Katalina Bianco and Richard Roth. The rules, governing mortgage originating, underwriting and servicing, will all take effect in January 2014, except that a rule on escrow accounts will be effective June 10, 2013. The rules implement the mortgage reforms enacted as part of the Dodd-Frank Act to reform consumer mortgage practices and set minimum standards for mortgage loans. The White Paper also examines the many other mortgage-related initiatives undertaken by the CFPB since its inception under the Dodd-Frank Act.

Procedures for Disclosures of Records and Information Set
The Consumer Financial Protection Bureau has adopted a final rule that outlines the procedures the bureau will use in disclosing records and information to consumers. The rule also establishes the CFPB’s rule regarding the confidential treatment of information obtained from persons in connection with the exercise of the bureau’s authorities under federal consumer financial law. The rule is at ¶300-123.

CFPB Issues Guidance on Servicing Transfer Requirements
The Consumer Financial Protection Bureau has moved to tackle problems that were reportedly arising from the transfer of mortgage servicing rights. The CFPB said that it was going to begin to look closely at servicing transfers and warned that in some cases it would require servicers participating in “significant servicing transfers” to file informational plans that would describe how the resulting risks to consumers would be managed. Servicing transfers-related issues will be made a focus of supervisory activities, the bureau has announced. The guidance can be found at ¶1528.

CFPB Sets Strategy for Implementing Mortgage Rules
The Consumer Financial Protection Bureau has outlined a five-point plan for ensuring compliance with its new mortgage lending rules when they take effect in January 2014. The plan emphasizes cooperation with the mortgage lending industry to promote understanding of and compliance with the rules. The bureau added that it anticipates the Federal Financial Institutions Examination Council will adopt full examination procedures later in 2013. The CFPB’s strategy is at ¶200-187.

GOP Senators Aim to Block Work at CFPB, NLRB
Three Republican senators have introduced legislation that would prohibit the Consumer Financial Protection Bureau and the National Labor Relations Board from enforcing or implementing decisions and regulations without a constitutionally confirmed board or director. The move follows a Jan. 25, 2013, decision by the U.S. Court of Appeals for the District of Columbia that ruled President Barack Obama’s three recess appointments to the NLRB unconstitutional. The ruling has prompted speculation that a separate court will make a similar finding concerning the recess appointment of Richard Cordray to head the CFPB. The story appears in Report 75, Feb. 11, 2013.

Cordray Nominated as CFPB Director; Appointment Questioned
President Barack Obama has nominated Richard Cordray to continue leading the Consumer Financial Protection Bureau. Cordray was appointed CFPB director in January 2012, after strong opposition from Congressional Republicans prompted the president to opt for a recess appointment. However, a Jan. 25, 2013, decision by the U.S. Court of Appeals for the District of Columbia has lent support to the assertion that Cordray’s appointment was invalid. Under the Constitution, the president has the power to make appointments that otherwise would require Senate approval "during the Recess of the Senate," and President Barack Obama relied on this authority to name Cordray CFPB Director. The problem was that the Senate had not formally recessed at the time of the appointment; rather, it was holding pro forma sessions apparently for the specific purpose of blocking recess appointments. The story appears in Report 74, Feb. 4, 2013.

Acting Deputy Director Named
The CFPB has announced that Steve Antonakes will serve as Acting Deputy Director while the agency continues its search for a replacement for departing Deputy Director Raj Date whose last day was Jan. 31, 2013. Antonakes will maintain responsibility for his current duties as the Associate Director for Supervision, Enforcement and Fair Lending. Antonakes first joined the CFPB in November 2010 as the Assistant Director of Large Bank Supervision and was named the Associate Director for Supervision, Enforcement, and Fair Lending in June 2012. This story appears in Report 75, Feb. 11, 2013.

Federal Banking Law Reporter

Debt Collection Act Does Not Limit Ability to Award Court Costs
The Fair Debt Collections Practices Act does not limit a court’s authority under the Federal Rules of Civil Procedure to award court costs to a debt collector that successfully defended against a consumer’s suit, the U.S. Supreme Court has decided. The seven-to-two majority decided that the statute did not overrule the "venerable presumption" that prevailing parties are entitled to recover their costs even when there was no finding that the suit had been brought wrongfully. Marx v. General Revenue Corporation (SCt) is at http://www.supremecourt.gov/opinions/12pdf/11-1175_4fc5.pdf.

Financial Regulation, Housing Finance Deemed High-Risk
The Government Accountability Office maintains a program to focus attention on government operations that it identifies as high risk due to their greater vulnerabilities to fraud, waste, abuse and mismanagement or the need for transformation to address economic, efficiency or effectiveness challenges. Following the 2007-2009 financial crisis, the GAO designated reform of the financial regulatory system as a high-risk area. Since then, the Federal Housing Administration’s mortgage insurance portfolio has continued to grow, and its insurance fund has experienced major financial difficulties. Due to these events, the GAO has revised the title and scope of this high-risk area from "Modernizing the Outdated U.S. Financial System" to "Modernizing the U.S. Financial Regulatory System and Federal Role in Housing Finance." The GAO has incorporated this change into its High Risk Report, which it provides every two years to Congress. GAO-13-283 is at ¶152-282.

Right to Rescind Mortgage Could Be Exercised by Notice
Consumers who claimed not to have been given notices required by the Truth in Lending Act needed only to notify the creditor that they were rescinding the transaction within the three-year time limit, the U.S. Court of Appeals for the Third Circuit has decided. The consumers were not required to file a suit within the three-year term to preserve the right to rescind, the court said. This is contrary to a 2012 decision by the U.S. Court of Appeals for the Tenth Circuit that the right to rescind was lost if no suit had been filed within three years of the date the loan was consummated. Under TILA, a consumer who enters into a loan secured by his principal dwelling generally has three days to rescind the loan. However, if disclosures required by TILA are not given, the right to rescind lasts for three years, as long as the property is not sold. In this case, the consumers sent the creditor a written notice that they were rescinding the loan within the three-year term but did not file suit until more than three years had passed. The court phrased the issue as "[D]oes an obligor exercise his right to rescind a loan subject to TILA by so notifying the creditor in writing, or must the obligor file suit before the three-year period expires?" The answer, the court said, was that written notice alone is sufficient. Sherzer v. Homestar Mortgage Services (3rdCir) is at ¶101-382.

SIGTARP Calls Permanent Ally Exit Essential
The Special Inspector General for the Troubled Asset Relief Program has issued a report to Congress on General Motors Acceptance Corp., rebranded as Ally Financial Inc. According to the report, Ally is the second largest remaining TARP investment, with $14.6 billion in TARP funds owed, for which taxpayers own 74 percent of the company. SIGTARP notes that the rescue of GMAC was "markedly different" from the other auto bailouts because GMAC was the only company in the auto bailout whose business extended beyond the auto industry; GMAC was one of the nation’s largest subprime mortgage lenders. The SIGTARP report is at ¶152-253.

Internal Audit Policy Statement Updated
The Federal Reserve Board has supplemented its 2003 guidance on financial institution internal audit functions and on the outsourcing of those functions. The supplemental policy statement, which applies specifically to state member banks, U.S. bank and thrift holding companies and U.S. operations of foreign banking organizations with more than $10 billion in consolidated assets, addresses the characteristics, governance and effectiveness of institutions’ internal audit functions. It includes lessons learned by the Fed from the financial crisis. The earlier interagency statement remains in effect, the Fed made clear. SR 13-1/CA 13-1 is at ¶43-358A.

Consumer Credit Guide

Dismissal of Mortgage Borrower’s Claims Under FDCPA, Utah Law Upheld
The U.S. Court of Appeals for the Tenth Circuit affirmed the dismissal of a mortgage borrower’s claims under the federal Fair Debt Collection Practices Act (FDCPA) and the Utah Consumer Sales Practices Act (Utah Act) against an attorney who initiated non-judicial foreclosure proceedings in Utah concerning the borrower’s residence. In dismissing the borrower’s lawsuit, the Tenth Circuit determined: (i) since the attorney was properly appointed trustee before the foreclosure proceedings, he did not violate the FDCPA because the attorney had a present right to possession of the property—in keeping with the terms of the pertinent trust deed; (ii) the borrower failed to provide enough factual information in her complaint to give adequate notice of her FDCPA claims because the complaint attributed statements to a large number of individuals, gave no specific examples of the types of communications or the contents of those communications, and never identified which was the "initial communication" requiring an FDCPA notice; and (iii) in connection with the Utah Act, the borrower’s complaint failed to indicate who made allegedly false representations, which communications were false, and when the communications occurred. Burnett v. Mortgage Electronic Registration Systems, Inc. (10thCir) is at ¶52,471.

State Credit Card Act’s “Personal Information” Law Inapplicable to Online Purchases
The California Supreme Court held that the California Song-Beverly Credit Card Act of 1971 (California Act) does not prohibit an online retailer from requesting or requiring personal identification information from a consumer as a condition to accepting a credit card as payment for an electronically downloadable product. In his class-action complaint, the consumer alleged that he purchased media downloads from the online retailer on several occasions and that, as a condition of receiving such downloads, the consumer was required to provide his telephone number and address to complete the credit card purchase in violation of the California Act’s provision governing personal identification information. The California high court ruled that the provision does not govern online purchases of electronically downloadable products because this type of transaction does not fit within the statutory scheme. At the same time, the court noted it was not establishing what type of information would be essential to verify a cardholder‘s identity. Apple, Inc. v. The Superior Court of Los Angeles County (CalSCt) is at ¶52,472.

State Law Update

Michigan: Legislation amending the Consumer Mortgage Lending Act revises various definitions to clarify the Act’s applicability to loan transactions in which the proceeds are used primarily for a personal, family, or household purpose. The Act prohibits lenders from engaging in certain conduct and provides for specific notification requirements. The Act does not cover purchase money loans, reverse mortgages or home equity lines of credit. The law is at Michigan ¶7102.

New Jersey: Legislation restricting the marketing of credit cards at colleges and universities will prohibit the direct solicitation of students for credit card accounts. The measure prohibits a public institution of higher education in the state from entering into an agreement, or permitting its agents or a student organization from entering into any agreement, for the purposes of the direct merchandising of credit cards in person or by displays to students. The law is at New Jersey ¶6200A.

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:
• New Jersey: College Student Credit Card Solicitations.
• South Dakota: Bank Lending Limits.
• Wyoming: Banking Division—Nationwide Licensing System.

Secured Transactions Guide

No Security Claim Without Proof of Perfection
A creditor that failed to perfect any security interest in timber or its proceeds could not submit a secured claim for the timber or proceeds against a debtor’s bankruptcy estate. The creditor allowed the debtor to cut timber from the creditor’s property in exchange for a percentage of the net proceeds from the sale of the cut timber. After the debtor filed for bankruptcy protection, the creditor submitted proof of a secured claim, citing the "timber contract and timber removed" from the creditor’s land as the basis for the claim and "criminal acts" as the basis for perfection. A security interest in "timber to be cut" is perfected by filing a financing statement with the office designated for the recording of a mortgage on the related real property, which is county recorder’s office. A security interest in timber already cut is perfected by filing a financing statement with the secretary of state’s office. Because there was no evidence that any security interest in the timber was ever perfected, the creditor could not submit a secured claim for the timber or proceeds. In re Cruse, d/b/a Cruse Hardwoods (BankrSDInd) is at ¶56,306.

Security Agreements Did Not Secure Future Indebtedness
Although a lender’s standard agreements that secured the purchase of farm equipment failed to also secure a debtor’s future indebtedness to the lender, a security agreement executed in connection with the future indebtedness included the farm equipment as collateral, allowing the lender to retain surplus proceeds from the sale of the equipment to satisfy the future indebtedness. To purchase farm equipment, the debtor executed security agreements that provided that the collateral secured all indebtedness "evidenced by the note or related documents." The debtor later obtained two large operating loans, executing an "Agricultural Security Agreement" that described the collateral as including "farm equipment." The lender later sold the farm equipment and sought to apply the surplus funds to satisfy the operating loans. A security agreement may contain a provision, called a dragnet clause, by which the identified collateral may secure not only the debts specifically referenced in the security agreement, but also other unspecified debts, past and future. The original security agreements, however, covered only the purchase money security interests in the equipment. The Agricultural Security Agreement, however, created a valid security interest in the farm equipment that was effective to secure the operating loans. Thus, the lender was still entitled to the surplus proceeds. In re Duckworth; State Bank of Toulon v. Covey (BankrCDIll) is at ¶56,305.

State Update

Nebraska: Nebraska has revised the allocation of certificate of title fees to the State Treasurer. For a notation of a lien on the certificate of title, $4 of the $7 fee will be remitted to the State Treasurer for credit to the Department of Motor Vehicles Cash Fund, while $3 will be credited to the Motor Carrier Division Cash Fund. For a duplicate certificate of title, $4 of the $14 fee will be remitted to the State Treasurer for credit to the Department of Motor Vehicles Cash Fund, while $10 will be credited to the Motor Carrier Division Cash Fund. The Motor Carrier Division Cash Fund was formerly credited with the entire fee.. The law appears at Nebraska ¶1065A, ¶1065B.

South Dakota: South Dakota has amended its certificate of title provisions to allow for an electronic title system for motor vehicles. Any participant in the electronic title system must submit electronic applications for original vehicle titles in a prescribed form and format and provide all documentation or information required to process the electronic title application, including the electronic manufacturer's statement of origin. The law appears at South Dakota ¶1078, ¶1085F, ¶1087.

Wyoming: Any federal, state or local official or employee in Wyoming whose real or personal property is subject to a recorded claim of lien who believes the claim of lien is invalid now may record an affidavit with the county clerk attesting that the claim of lien has been filed against him in his individual capacity for the performance or nonperformance of actions in his capacity as a government official or employee. If a court finds the lien is invalid, the court may order the claim of lien be stricken and released, and the lien claimant shall be ordered to pay $1,000 or actual damages, whichever is greater, plus the costs incurred by the individual, including reasonable attorneys' fees. The law appears at Wyoming ¶435.

Financial Privacy Law Guide

ID Theft Sentence Depends on Use, Not Transfer, of Information
An individual who transferred the personal identifying information of 65 to 141 patients in furtherance of a conspiracy to create fraudulent credit cards could only receive a two-level sentencing enhancement for the 12 patients whose information was used to successfully create fraudulent accounts, the U.S. Court of Appeals for the Eleventh Circuit has held. Only those persons whose identity information was used, not merely obtained, qualified as victims of identity theft for purposes of federal sentencing enhancements. United States v. Hall (11thCir) is at ¶100-623.

App Operator Pays $800,000 to Settle COPPA Rule Charges
The operator of the Path social networking app will pay $800,000 to settle Federal Trade Commission charges that it illegally collected personal information from children without their parents’ consent in violation of the Children’s Online Privacy Protection Act Rule. The settlement also requires that the operator delete information collected from children under age 13, establish a comprehensive privacy program and obtain independent privacy assessments every other year for the next 20 years. This story appears in Report No. 140, Feb. 13, 2013.

EU Proposes Cybersecurity Directive
The European Union has released on Feb. 7, 2013, a cybersecurity plan and a proposed directive on network and information security. The proposed directive would require financial institutions that do business in Europe to report major cyber-attacks. The cybersecurity strategy – "An Open, Safe and Secure Cyberspace" – represents the EU's comprehensive vision on how best to prevent and respond to cyber disruptions and attacks. It clarifies the principles that should guide cybersecurity policy in the EU and internationally. This story appears in Report No. 140, Feb. 13, 2013.

Individual Retirement Plans Guide

Rollover Waiver Granted Due to Mother-in-Law’s Illness
The IRS granted a waiver of the 60-day rollover requirement for a taxpayer whose failure to timely rollover an IRA distribution to an Individual Retirement Annuity was due to the medical condition of his mother-in-law, which impaired his ability to accomplish a timely rollover. During the 60-day period the taxpayer was consumed in traveling with his wife to be with his mother-in-law and attending to her medical care. IRS Letter Ruling 201304013 is at ¶6405.