Consumer Financial Protection Bureau Reporter

Significant Mortgage Loan Origination Rule Changes Proposed
The Consumer Financial Protection Bureau has proposed changes to the rule governing mortgage loan origination practices that would affect the terms that can be offered to consumers and the ways in which loan originators can be compensated. Among the provisions in the proposed amendments to Reg. Z—Truth in Lending (12 CFR 1026) is a requirement that loan originators make available a no-point, no-fee loan option. The rule, required by the Dodd-Frank Act, also would adopt uniform qualification and fitness standards for loan originators. A summary of the proposal and the Small Business Review Panel’s report are at ¶200-122 and the proposed rule is at ¶300-064.

CFPB Proposes Mortgage Servicer Consumer Protection Rules
The Consumer Financial Protection Bureau has proposed amendments to regulations under the Truth in Lending Act and the Real Estate Settlement Procedures Act that would impose new consumer protection duties on mortgage loan servicers and, in some cases, creditors. According to the bureau, the purpose of the rules would be to protect consumers against both surprises and "costly mistakes by their mortgage servicers." The TILA proposal is at ¶300-060, the RESPA proposal is at ¶300-061 and documents relating to the proposals are at ¶200-118.

Rules for Higher-Risk Mortgage Appraisals Proposed
Regulations that would establish appraisal requirements for higher-risk residential mortgage loans have been proposed jointly by six federal financial institution regulatory agencies. The proposed amendments to Reg. Z—Truth in Lending (12 CFR 1026) would tighten appraiser qualification requirements and attempt to prevent fraudulent property flipping. The proposal, which is required by the Dodd-Frank Act, is being made by the Federal Reserve Board, Consumer Financial Protection Bureau, Federal Deposit Insurance Corp., Federal Housing Finance Agency, National Credit Union Administration and Office of the Comptroller of the Currency. A summary of the proposal is at ¶200-119 and the proposal is at ¶300-062.

CFPB Proposes Appraisal-Related Amendment to Reg. B
The Consumer Finance Protection Bureau has proposed an appraisal-related amendment to Reg. B—Equal Credit Opportunity Act (12 CFR 1002) that is intended to enhance consumers’ access to appraisals in all mortgage loan transactions. While lenders still would be permitted to recover from loan applicants the cost of obtaining an appraisal, the proposal would require lenders to provide copies of appraisal reports to loan applicants without charge at least three days before the closing. It also would require that consumers be notified of the right to free copies of all such reports. A summary of the proposal is at ¶200-120 and the proposal is at ¶200-121.

CFPB Eases Remittance Transfer Rules for Some Banks
Financial institutions that carry out 100 or fewer international remittance transfers each year are expected to benefit from an amendment to Reg. E—Electronic Fund Transfers (12 CFR 1005) that has been adopted by the Consumer Financial Protection Bureau. The bureau’s final remittance rule, found in Subpart B of Reg. E, will take effect Feb. 7, 2013. It implements consumer protections required by the Dodd-Frank Act that require remittance transfer providers to disclose fees up front and disclose the exchange rate and the amount to be received by the recipient. The notice is at ¶300-057.

Federal Banking Law Reporter

Fed Adopts Rule on Supervising Financial Market Utilities
The Federal Reserve Board has finalized a rule, Reg HH—Financial Market Utilities (12 CFR 234), that establishes a regulatory regime for financial market utilities that the Financial Stability Oversight Council has deemed to be systemically important. Financial market utilities are entities such as payment systems, central securities depositories and central counterparties that provide the essential infrastructure to clear and settle payments and other financial transactions. Under the Dodd-Frank Act, the FSOC can deem such an entity to be systemically important if its failure or a disruption of its activities could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system. The notice is at ¶151-663.

Fed Finalizes Swipe Fee Fraud-Prevention Rule
The Federal Reserve Board has finalized a rule under which card issuers that implement qualifying fraud-prevention standards will be able to seek permission to charge an extra 1 cent per transaction in "swipe fees"—the fees that debit card networks can charge for processing transactions. If an issuer meets these standards and wishes to receive the adjustment, it must certify its eligibility to receive the adjustment to the payment card networks in which it participates. The notice is at ¶151-661.

Creditworthiness Standard Finalized
The Dodd-Frank Act requires that any corporate debt security investment held by a savings association must satisfy standards of creditworthiness established by the Federal Deposit Insurance Corp. The agency has finalized that standard, prohibiting any insured savings association from acquiring or retaining a corporate debt security unless the thrift determines, prior to acquisition and periodically thereafter, that the issuer has adequate capacity to meet all financial commitments under the security for the projected life of the investment. An issuer would satisfy this requirement if, based on the assessment of the savings association, the issuer presents a low risk of default and is likely to make full and timely repayment of principal and interest. The final rule is at ¶151-645. The guidance is at ¶62-312.

No Need to Plead Ability to Pay in Rescission Suit
Consumers suing their lender to rescind a mortgage loan were not required to allege in their complaint that they had the ability to return to the lender the money they had received, the U.S. Court of Appeals for the Tenth Circuit has decided. While a trial court has the clear authority to protect the lender by requiring the consumers to show they could repay the funds they were advanced before the mortgage was released, the court could not dismiss their suit because they had failed to include an assertion to that effect in their complaint, the appellate court said. The dismissal of the consumer’s claims under the Truth in Lending Act was reversed and the suit was returned to the trial court. The consumers had no authority to sue the lender for reporting incorrect information to consumer reporting agencies. They were required to have disputed the information with the consumer reporting agencies, which then would have asked the lender to investigate the claimed error. The lender could have been sued for failing to carry out a reasonable investigation, but not for the original incorrect report, the court said. Sanders v. Mountain America Federal Credit Union (10thCir) is at ¶101-343.

FHFA Seeks Input on Eminent Domain to Restructure Loans
The Federal Housing Finance Agency has "significant concerns" about the use of eminent domain to revise existing mortgage loans and the alteration of the value of Fannie Mae, Freddie Mac or Federal Home Loan Bank securities holdings. Also of concern to the agency are programs it fears "could undermine and have a chilling effect on the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market." It has determined that action may be necessary on its part as conservator for Fannie and Freddie and as regulator for the FHLBanks to avoid a risk to safe and sound operations and to avoid taxpayer expense. The concern is over proposals under which state or local governments would use their eminent domain authority to buy existing mortgages, rewrite the mortgages to make them more affordable and then sell them back into the market. The notice is at ¶151-683.

Fannie, Freddie Bailout Plan Modified
The Treasury Department said it will institute a number of changes aimed at accelerating the wind down of Fannie Mae and Freddie Mac while continuing to support the process of repair and recovery in the nation’s housing market. Modifications to the Preferred Stock Purchase Agreements between the Treasury and the Federal Housing Finance Agency include a requirement for Fannie and Freddie to turn over all their profits to the Treasury, rather than the 10-percent dividend payments made on the Treasury’s preferred stock investments. Other changes include a reduction of Fannie and Freddie’s investment portfolios, which will be wound down at an annual rate of 15 percent, rather than the previous 10-percent target. As a result, the investment portfolios must be reduced to the previous $250 billion target four years earlier than originally scheduled. Both Fannie and Freddie will now be required to submit an annual plan to the Treasury outlining actions to reduce taxpayer exposure to mortgage credit risk for both guarantee book of business and retained investment portfolio. The release is at ¶151-709.

Regulators May Delay Stress Tests for Mid-Size Institutions
The Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. are considering whether to delay implementing the requirement that financial institutions with between $10 billion and $50 billion in total assets conduct annual stress tests. The three regulatory agencies separately published proposed regulations in December 2011 and January 2012 that would impose stress test requirements for these institutions and put the requirements into immediate effect. This story is in Report No. 2483, Aug. 30, 2012.

Consumer Credit Guide

Collection Letter to Debtor “in Care of” Employer Violated FDCPA
The U.S. Court of Appeals for the Ninth Circuit recently ruled that a law firm, acting as a debt collector on behalf of a creditor client, committed a violation of the federal Fair Debt Collection Practices Act by mailing a collection letter to a debtor "in care of" the debtor’s employer without the debtor’s prior consent. The Ninth Circuit reasoned that the law firm’s letter might be opened and read by third parties before making its way to the debtor, causing the debtor stress and embarrassment—not only what actually happened in the case but also what the FDCPA was designed to prevent. Although the mailing violated the FDCPA, the Ninth Circuit determined that the content of the law firm’s collection letter did not violate the FDCPA. In reviewing the firm’s collection letter from the perspective of the "least sophisticated consumer," the Ninth Circuit determined that while the letter could have included additional clarifying language, the content of the letter did not rise to the level of a "false, deceptive, or misleading representation." Evon v. Law Offices of Sidney Mickell (9thCir) ¶52,438.

Collector’s Class Action Notice Did Not Satisfy Due Process Requirement
In connection with the provision of the federal Fair Debt Collection Practices Act governing class actions, the U.S. Court of Appeals for the Second Circuit recently held that a consumer not only possessed a due process right to notice and the opportunity to opt out of a prior class action, the debt collector’s notice did not satisfy that due process requirement. The parties did not dispute the fact that the consumer’s individual FDCPA claim against the debt collector was essentially identical to the claim advanced against the same debt collector in the prior class action litigation. In providing notice of the settlement to class members in the prior litigation, the collector published the notice in a single issue of USA Today, a national newspaper. The federal appellate court asserted that, to meet the due process standard, the notice had to be “reasonably calculated to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” The Second Circuit determined that the debt collection company’s one-time publication in the national newspaper was a “mere gesture” that did not satisfy the due process requirement; it was not reasonable under the circumstances. The collector could have undertaken a more extensive notification campaign by publishing the notice multiple times, by publishing the notice in local publications, and by using electronic media. As a result, the Second Circuit reversed the federal district court’s dismissal of the consumer’s FDCPA claim. Hecht v. United Collection Bureau, Inc. (2dCir) ¶52,443.

Most of Consumer’s FCRA Claims Survive Banks’ Challenges
In connection with a consumer’s claims against a bank for alleged violations of the federal Fair Credit Reporting Act, the U.S. Court of Appeals for the Ninth Circuit ruled that, although the bank’s FCRA duties were triggered when a consumer reporting agency notified the bank of a dispute by a consumer, the federal trial court erred in granting summary judgment to the bank because material issues of fact remained as to whether the bank violated two of its three duties. The Ninth Circuit also recognized the consumer’s ability to seek damages for emotional distress relating to his FCRA claim. In connection with the consumer’s FCRA claims against a different bank, that bank’s statute of limitations defense against the consumer’s claims did not prevail because the bank did not satisfy its evidentiary burden. The Ninth Circuit decided that, under the FCRA, the pivotal facts centered on the reasonableness of the bank’s investigation, not the accuracy of the bank’s conclusions. In the court’s view, the consumer could not have discovered the bank’s FCRA violations at the time attributed by the bank because the consumer had no basis during the relevant time period to judge whether the bank’s investigation was reasonable. Drew v. Equifax Information Services, LLC (9thCir) ¶52,440.

Court Erred in Dismissing Borrowers’ ECOA Claim Against Mortgage Lender
The U.S. Court of Appeals for the Tenth Circuit recently decided that a federal trial court erred when it dismissed claims brought by borrowers against a mortgage lender under the Equal Credit Opportunity Act. In seeking to refinance their mortgage, the borrowers completed a credit application over the phone, but the mortgage lender denied their application. Under the ECOA and its regulations, after a creditor receives a completed application for credit, the creditor must notify the credit applicant of any "adverse action" and must explain why the credit application was denied. The mortgage lender contended that the borrowers’ credit application could not be deemed "complete" because the borrowers had not yet provided key documents—such as a credit report or a real estate appraisal. In rejecting the mortgage lender’s argument and reversing the dismissal of the borrowers’ ECOA claim, the Tenth Circuit determined that since the borrowers sufficiently alleged in their complaint that the application was complete, that the application was denied, and that the lender failed to provide them with the required notice of the adverse action, the court was required to accept these allegations as true at the pleading stage of the litigation; the development and resolution of factual issues would be addressed later. Sanders v. Mountain America Federal Credit Union (10thCir), ¶52,437.

State Law Update

Colorado: Amendments to the Uniform Consumer Credit Code clarify that the pawnbroker exclusion in the UCCC applies to all pawnbrokers' rates and charges, and the disclosure of rates and charges, if the rates and charges do not exceed the limits fixed by state law regulating pawnbrokers. The law is at Colorado ¶5022.

Illinois: Governor Pat Quinn signed legislation aimed at better protecting consumers from potentially excessive costs relating to high-risk home loans and refund anticipation loans. In addition to limiting costs and fees, the legislation requires increased disclosure, including information about fees and other costs, and adds additional interest rate protections for consumers who obtain refund anticipation loans from non-bank lenders. Analysis is in Report 1148, Aug. 7, 2012.

Ohio: Legislation aimed at ensuring competitive equality for state-chartered financial institutions allows state banks and other financial institutions to charge the same or lower rates or amounts of interest, fees, and other charges under a revolving credit agreement that respective out-of-state financial institutions may charge Ohio revolving credit customers. The law is at Ohio ¶6031A.

Oklahoma: Changes to the Uniform Consumer Credit Code will allow private educational institutions to charge a convenience fee when accepting a credit or debit card payment. The law is at Oklahoma ¶5071.

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:
• Illinois: Gift Certificates—Credit Slips.
• Massachusetts: Multi-State Licensing.

Secured Transactions Guide

Debtor’s Interest Was Sufficient to Preserve Right to Cure
In keeping with the New Mexico UCC, because a debtor retained sufficient interest in her mobile home, the mobile home became property of the debtor’s bankruptcy estate and the debtor’s right under the Bankruptcy Code to cure the underlying defaulted debt associated with the mobile home until its sale was preserved. Before the debtor initiated a Chapter 13 bankruptcy proceeding, a creditor obtained a default judgment in state court against the debtor and was issued a writ of replevin to recover possession of the debtor’s mobile home. The creditor contended that the mobile home was not part of the debtor’s bankruptcy estate because the state court’s ruling extinguished the debtor’s rights in the mobile home. The debtor argued that the mobile home was part of the bankruptcy estate because the writ of replevin was never executed and she retained possession. In ruling that the debtor maintained sufficient legal and equitable rights in the mobile home under the New Mexico UCC, the court determined that: the mobile home was not attached to real estate; mobile homes are generally considered to be "goods" for purposes of the UCC; and since a survey of the sections of Part 6 of Article 9 of the New Mexico UCC governing default clearly indicates that the ultimate disposition or acceptance of collateral transfers the debtor’s rights, "this necessarily means that the debtor retains those rights until the disposition or acceptance occurs.” In re Martinez (BankrDNM), ¶56,290.

“Master” of Vessel Established Valid Maritime Lien
An individual, who temporarily took control of a vessel for several weeks, had the authority to procure necessaries for the vessel, entitling a towing company to a valid maritime lien for those necessaries. The individual initially obtained custody and control of the vessel after he and others reasonably, but mistakenly, considered the vessel to be abandoned. During the time of the individual’s control, the individual procured towing, repair, and docking services for the vessel totaling $8,080.00. The Federal Maritime Lien Act grants a maritime lien to a person providing “necessaries” to a vessel. Certain persons are presumed to have authority to procure necessaries for a vessel. One such person is the “master” of the vessel. A “master” of a vessel is one who is “responsible for the vessel’s navigation and the safety and care of the crew and cargo. The court concluded that the individual was the "master" of the vessel for several weeks until he was required to vacate the vessel. Although the individual "master" held no ownership interest in the vessel, the court considered the individual to be a "bailee implied at law." Klenner v. M/Y El Presidente (SDFla), ¶56,292.

State Law Update

California: A shade trailer will now be exempt from the registration procedures in California. A "shade trailer" is defined as "a device designed and utilized to provide shade." The law is at California ¶1230A and ¶1290.

Illinois: Illinois has amended its certificate of title law to clarify that only low-speed vehicles that were manufactured after January 1, 2010, are required to apply for a certificate of title. The law is at Illinois ¶1094.

The law relating to personal property exemptions has also been amended to provide that a debtor in Illinois may now claim all proceeds payable upon the death of an insured to a revocable or irrevocable trust that names the wife or husband of the insured or names the child, parent or other person dependent upon the insured as the primary beneficiary of the trust as personal property exempt from execution and judgment. The law is at Illinois ¶1178.

New York: New York has amended its criminal procedure provisions to provide notice to the Secretary of State when a false financing statement is filed. Upon conviction of any person for a crime where the defendant filed a false financing statement, the clerk of the court must file a certificate with the Secretary of State certifying that a judgment of conviction has been entered and specifying the date and location of the filing, any index number assigned to the filing, the debtor named in the statement and a description of the collateral. The law is at New York ¶1150B.

Financial Privacy Law Guide

Economic Harm Not Needed for Text Spam Case Standing
An individual who brought a text spam class action suit against Microsoft had Article III standing even though he alleged no personal economic harm. A federal district court determined that, based on the plain language of the Telephone Consumer Protection Act and supported by its legislative history, the individual, by alleging that he received a text message in violation of the act, established a particularized injury in satisfaction of Article III premised on the invasion of his privacy, even absent any economic harm. Smith v. Microsoft Corp. (SDCalif) at ¶100-593.

Confirmation of Opt-Out Request Did Not Violate TCPA
Taco Bell Corp. did not violate the Telephone Consumer Protection Act by sending a consumer a text message confirming that he had opted out of receiving text messages. The consumer alleged that, during an exchange of text messages regarding a Taco Bell survey, he texted the word “STOP.” The consumer alleged that Taco Bell then sent him a text message confirming his request to opt out of receiving further messages. A federal district court determined that the TCPA does not impose liability for a single, confirmatory text message. The consumer had initiated contact with Taco Bell; therefore, the confirmatory text message did not constitute unsolicited telemarketing. Sending the confirmatory text message in response to the consumer’s opt-out request was not an invasion of privacy, as contemplated by Congress in enacting the TCPA. Ibey v. Taco Bell Corp. (SDCalif) at ¶100-594.

National Origin Not Valid Consideration for ID Theft Sentence
A sentencing court may not consider an individual’s national origin when calculating a sentence for conspiring to commit fraud and aggravated identity theft, the U.S. Court of Appeals for the Seventh Circuit has held. During the sentencing hearing of a Cuban immigrant who had pled guilty to committing aggravated identity theft through the fraudulent use of credit and gift card accounts, the government argued that the individual viewed fraud differently than violent crime due to his Cuban heritage. The defense agreed, arguing that in Cuba stealing is likened to a "Robin Hood type of act." The court, referencing the individual’s Cuban heritage and extensive criminal history, awarded a 48-month sentence for the conspiracy charge, seven months longer than the recommended sentence, and a mandatory 24-month sentence for the aggravated identity theft. The federal sentencing guidelines make clear that race, sex, national origin, creed, religion and socio-economic status are not relevant to the determination of a sentence. Because the Seventh Circuit could not conclude that the district court would have imposed the same sentence absent the impermissible consideration of the individual’s national origin, the court remanded the matter for clarification of the individual’s sentence. A story on United States v. Trujillo-Castillon (7thCir) is in Privacy Extra, Aug. 30, 2012.

State Law Update

California: California Attorney General Kamala D. Harris has announced the creation of the Privacy Enforcement and Protection Unit in the California Department of Justice, which will focus on protecting consumer and individual privacy through civil prosecution of state and federal privacy laws. The Privacy Unit’s mission will be to enforce laws regulating the collection, retention, disclosure, and destruction of private or sensitive information by individuals, organizations, and the government. Laws enforced by the Privacy Unit will include state and federal laws relating to cyber privacy, health privacy, financial privacy, identity theft, government records and data breaches. This story is in Report No. 134, Aug. 16, 2012.

Rhode Island: A recent law prohibits credit bureaus doing business in Rhode Island state from using all or part of a consumer’s Social Security number as the exclusive factor in credit report identity determination. When a Social Security number is used as a factor, a credit bureau may disclose a credit report in its files to an inquiring user of credit reports only if the name and, at a minimum, at least one other identifier such as address, prior address, date of birth, mother’s maiden name, place of employment or prior place of employment, also match the identity of the person who is the subject of the inquiry. The law is at ¶69-460.

Individual Retirement Plans Guide

Distribution from Inherited IRA Subject to Tax
A taxpayer owed tax on an IRA he inherited from his mother and interest he received. On the death of the taxpayer’s mother, the balance of her IRA was distributed to the taxpayer. While an inheritance is usually received tax-free, distributions from inherited IRAs to beneficiaries are included in the gross income of the beneficiaries, unless the distributions are rolled over. Since the taxpayer failed to transfer the funds into another IRA or eligible retirement plan, they were included in his gross income. Tax Court Memorandum 2012-213 is at ¶10,345 .