Consumer Financial Protection Bureau Reporter

Mortgage lender self-reports to CFPB on fee-splitting violations
The Consumer Financial Protection Bureau has entered a consent order against a Connecticut mortgage lender, 1st Alliance Lending, LLC (First Alliance), for violating the Real Estate Settlement Procedures Act and Regulation X by illegally splitting real estate settlement fees. The bureau said that First Alliance self-reported the violations to the CFPB, consistent with the bureau’s Responsible Business Conduct bulletin, admitted liability, and provided information related to the conduct of others that the bureau said has assisted in other enforcement investigations, all of which the bureau took into account when issuing the consent order. The consent order is at ¶200-351.

CFPB takes initial steps toward HMDA rulemaking
The Consumer Financial Protection Bureau is convening a panel of small businesses to provide feedback on potential changes under the Home Mortgage Disclosure Act (HMDA). As mandated by the Dodd-Frank Act, the bureau said it is considering proposing rules that would make changes in how financial institutions report their mortgage activity. Related documents can be found at ¶200-348 and ¶200-349.

CFPB turns spotlight on mortgage servicing problems in supervision report
The Consumer Financial Protection Bureau has published its Winter 2013 Supervisory Highlights. The report focuses on unfair and deceptive practices in the mortgage servicing market that the CFPB’s supervisory program encountered in 2013. “Problems in mortgage servicing have plagued consumers for years and helped contribute to the financial crisis,” said CFPB Director Richard Cordray. “Taking action against mortgage servicing practices that harm consumers is a key priority for the CFPB. Especially under the detailed protections of our new rules, we expect servicers to clean up their act and provide responsible customer service.” The bureau’s supervisory report is at ¶200-344.

Ally, industry groups balk at CFPB efforts targeting dealer reserve
On Dec. 20, 2013, the Consumer Financial Protection Bureau and Department of Justice took action against Ally Financial Inc. (AFI) and Ally Bank (together with AFI, Ally) alleging that Ally’s dealer compensation practices resulted in discrimination on the basis of race and national origin. Consent orders were entered against Ally in the CFPB’s and DOJ’s actions, requiring that Ally pay $80 million in damages to consumers and $18 million in penalties. An article by Jefrrey Chubak (Proskauer Rose LLP), first appearing in the CFPB Watch (Issue No. 10., Feb. 25, 2014), explores Ally’s response to the bureau’s actions and discusses the industry’s resistance to the CFPB’s attempt to dissuade indirect auto lenders from compensating dealers that arrange financing for retail consumers through “dealer reserve.” This story appears in Report No. 128, March 3, 2014.

Federal Banking Law Reporter

Housing enterprises need anti-money laundering programs
Body. Fannie Mae, Freddie Mac, and the federal home loan banks will be required to create anti-money laundering programs and file Suspicious Activity Reports when necessary under a regulation that has been adopted by the Financial Crimes Enforcement Network. FinCEN says that it has adopted a 2011 proposal without any significant changes. Under the final rule, which creates a new 31 CFR §1030.210, the housing enterprises will be required to create AML programs that, according to FinCEN, do not differ greatly from the programs already required by their regulator, the Federal Housing Finance Agency. Each enterprise’s written program will include: policies, procedures, and controls the enterprise determines are needed based on the risks that arise from its activities; appropriate employee training; and periodic testing. A designated compliance officer also will be needed. The notice is at ¶153-037.

Fed sets enhanced standards for large banking companies
The Federal Reserve Board has adopted amendments to Reg. YY—Enhanced Prudential Standards (12 CFR Part 252) to carry out the Dodd-Frank Act mandate of enhanced prudential standards for the largest U.S. bank holding companies and foreign banking organizations with substantial U.S. operations (see 12 U.S.C. §5365). The amendments impose liquidity, risk management, capital, and corporate governance requirements on the covered companies. According to the Fed, the set of requirements imposed on a covered company “increases in stringency based on the nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company.” The notice is at ¶153-031.

FinCEN tells banks how to serve marijuana businesses
The Financial Crimes Enforcement Network has outlined the steps to be followed by banks that offer financial services to marijuana-related businesses that are legal under state laws. In addition to carrying out strict know-your-customer procedures, banks are required to file Suspicious Activity Reports on all marijuana-related businesses and be alert for anything that appears on a lengthy list of “red flags.” FinCEN’s guidance is an effort to balance state laws that permit some marijuana sales against federal laws that continue to prohibit all such commerce. The distribution and manufacture of marijuana remains illegal under the Controlled Substances Act, FinCEN says, while 20 states and the District of Columbia have now legalized at least some marijuana-related businesses. FinCEN’s guidance is being coordinated with instructions from the Department of Justice to United States District Attorneys on how they should prioritize their enforcement activities. The notice is at ¶76-103.

OCC issues guidance on secured debt discharged in bankruptcy
Body. The Office of the Comptroller of the Currency has issued guidance to clarify the OCC’s supervisory expectations for all OCC-supervised banks regarding secured consumer debt discharged in Chapter 7 bankruptcy proceedings.  The guidance describes the analysis necessary to determine whether “repayment is likely to occur,” precluding any charge-off as required by the OCC’s Uniform Retail Credit Classification and Account Management Policy, and how post-discharge payments should be applied. This story appears in Report No. 2557, Feb. 21, 2014.

Consumer Credit Guide

Consumers may orally dispute validity of debt under FDCPA
In connection with the federal Fair Debt Collection Practices Act’s provision requiring a debt collector to provide a consumer with a “validation notice” concerning the consumer’s right to dispute the validity of an alleged debt, the U.S. Court of Appeals for the Fourth Circuit determined that the FDCPA provision permits consumers to orally dispute the debt’s validity; the provision does not contain an inherent writing requirement—as contended by the debt collector. This story about the Clark v. Absolute Collection Service, Inc. (4th Cir.) decision appears in Report No. 1186, Feb. 18, 2014.

Consumer could sue under FCRA without showing actual harm
A consumer was not required to show that a website’s publication of inaccurate information caused him actual harm in order to have standing to sue the website for claimed willful violations of the federal Fair Credit Reporting Act, the U.S. Court of Appeals for the Ninth Circuit decided. The FCRA created statutory rights and a private cause of action to enforce those rights, the court said, and that was adequate to establish standing to sue under Article III of the Constitution. This story about the Robins v. Spokeo, Inc. (9th Cir.) decision appears in Report No. 1186, Feb. 18, 2014.

Despite Higher Education Act, university’s duties as FCRA “furnisher” endure
Although the federal Higher Education Act of 1965 provides that a consumer reporting agency may disregard the federal Fair Credit Reporting Act’s seven-year “aging off” rule when reporting data on certain federally-backed education loans, the contours of a university’s FCRA duties—as a “furnisher” of information to consumer reporting agencies—remained operative, according to the U.S. Court of Appeals for the Third Circuit. A consumer brought the lawsuit against the university for negligent and willful violations of the FCRA for the university’s alleged reporting of information to consumer reporting agencies about the consumer’s student loan. This story about the Seamons v. Temple University (3d Cir.) decision appears in Report No. 1187, March 4, 2014.

Offering information to improve credit made advertiser a credit repair organization
A company that used television advertisements, social media, and its own website to offer consumers access to their credit reports and credit scores was a “credit repair organization” because the company also said consumers could use the information to improve their credit, the U.S. Court of Appeals for the Ninth Circuit decided. In an opinion that relied heavily on the text of the company’s ads, the court emphasized that the company offered its services “for the implied purpose of providing advice or assistance” on how consumers could improve their credit. That brought the company within the scope of the federal Credit Repair Organizations Act, the court determined. This story about the Stout v. FreeScore, LLC (9th Cir.) decision appears in Report No. 1187, March 4, 2014. 

State Law Update

Oregon: The Department of Consumer & Business Services, Division of Finance & Corporate Securities has issued temporary rules that establish procedures for accepting consumer finance licensing applications, renewals, and administrative actions through the Nationwide Mortgage Licensing System & Registry (NMLSR). The rules are reflected beginning at Oregon ¶8010.

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:
• South Dakota: Bank Revolving Loans.

Secured Transactions Guide

Lender not entitled to security interest in vehicles
In accordance with Article 9 of the Michigan Uniform Commercial Code, a lender was not entitled to assert a security interest against 81 trucks that were in the possession of a debtor for the limited purpose of converting the trucks to right-hand drive. Because the debtor never had any ownership rights in the trucks, any security interest that the lender may have had could not attach to the vehicles. The lender asserted that it had a security interest in the debtor’s inventory and equipment as collateral for more than $3.1 million that remained outstanding on loans it extended to the debtor. However, the trucks were only in the possession of the debtor for a specific series of tasks, and were never its “inventory” or “equipment.” Vehicle Development Corporation PTY LTD v. Livernois Vehicle Development, LLC (E.D. Mich.), ¶56,350.

Creditor entitled to deficiency judgment
Because a creditor provided sufficient evidence that its sale of secured collateral was commercially reasonable, the U.S. District Court for the Northern District of Iowa concluded the creditor was entitled to a deficiency judgment as a result of the debtor’s breach of the parties’ agreement. Article 9 of the Iowa UCC provides that if the secured party’s disposition of collateral is placed in issue, the secured party has the burden of establishing that the collection, enforcement, disposition, or acceptance was conducted in a commercially reasonable manner. Because the declaration submitted by the creditor provided evidence from a source with personal knowledge, that the manner in which the collateral was sold conformed with reasonable commercial practices among dealers in the type of property, the creditor produced sufficient evidence that it disposed of its collateral in a commercially reasonable manner. General Electric Capital Corporation v. FPL Service Corp. (N.D. Iowa), ¶56,351.

Bank’s electronic title trumped clean paper title
A creditor that sold an encumbered vehicle to satisfy a money judgment it had obtained against debtors was not entitled to the proceeds of the sale because the vehicle was subject to a bank’s prior perfected purchase money security interest. In a matter of first impression, the Kansas Supreme Court determined that the bank’s security interest was perfected at the time it electronically filed a notice of security interest with the Kansas Department of Revenue (KDOR), despite the fact that the KDOR later issued a paper certificate of title to the creditor that did not reflect the bank’s lien. Stanley Bank v. Parish (Kan. Sup. Ct.), ¶56,348.

Agricultural commodity lien did not extend to livestock
In accordance with the plain language of Idaho’s agricultural commodity dealer lien law, agricultural commodity dealers that supplied feed for the maintenance of a debtor’s dairy cows did not have a security interest in the debtor’s cows that consumed the encumbered feed because the dealers’ liens did not extend to livestock. As a result, a bank with a perfected security interest in the debtor’s cows was entitled to the proceeds from the sale of its collateral. Farmers National Bank v. Green River Dairy, LLC (Idaho Sup. Ct.), ¶56,349.

State Update

Nebraska: Nebraska has amended the definition of “salvage” as it relates to the state’s certificate of title provisions to provide for vehicles damaged by flooding. A salvage vehicle now includes a vehicle which is “flood damaged resulting from being submerged in water to the point that rising water has reached over the floorboard, has entered the passenger compartment, and has caused damage to any electrical, computerized, or mechanical components.”  The law appears at Nebraska, ¶1070.

Financial Privacy Law Guide

Retailer’s electronically printed receipt did not violate FCRA
In connection with a consumer’s proposed class action against a retail company, claiming that the company violated the Fair and Accurate Credit Transactions Act’s amendment to the federal Fair Credit Reporting Act (FCRA) concerning electronically printed credit or debit card receipts, the U.S. District Court for the Northern District of Illinois determined that the consumer could not prove any set of facts showing that the company violated the FCRA provision prohibiting a business from including the expiration date on any electronically printed receipt provided to the cardholder at the point of sale or transaction. While the consumer alleged that his electronically-printed receipt contained the month of his card’s expiration date, he did not allege that the receipt also contained the year of the expiration date. Notably, the consumer also did not allege that he suffered any actual damages. Nicaj v. Shoe Carnival, Inc. (N.D. Ill.) at ¶100-649.

FTC settles EU-U.S. Safe Harbor Privacy Framework claims
Twelve U.S. businesses have agreed to settle Federal Trade Commission charges that they falsely claimed they were abiding by the U.S.-EU Safe Harbor Framework, which enables U.S. companies to transfer consumer data from the European Union to the United States in compliance with EU law. The companies represent a cross-section of industries, including retail, professional sports, laboratory science, data broker, debt collection, and information security. The companies handle a variety of consumer information, including in some instances sensitive data about health and employment. “Enforcement of the U.S.-EU Safe Harbor Framework is a Commission priority. These twelve cases help ensure the integrity of the Safe Harbor Framework and send the signal to companies that they cannot falsely claim participation in the program,” said FTC Chairwoman Edith Ramirez. This story appeared in Report No. 152, February 19, 2014.

Data Security Act introduced in wake of retailer breaches
Following reports of major data security breaches at major U.S. retailers, Senators Roy Blunt (R-Mo) and Tom Carper (D-Del) introduced the “Data Security Act of 2014” (S. 1927). The bipartisan measure is intended to help protect consumers from identity theft and account fraud and establish clear and consistent national rules of the road for public and private institutions to follow to prevent and respond to data breaches. This story appeared in Report No. 152, February 19, 2014.