InfoBytes, April 13, 2012 - A Weekly In-depth review of news & developments in the financial services industry.

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Topics In This Issue:

 

Federal Issues; State Issues; Courts; Firm News; Mortgages; Banking; Consumer Finance; Privacy/Data; Security; and Credit Cards

Federal Issues

CFPB Previews Mortgage Servicing Rule. On April 9, the CFPB previewed its upcoming mortgage servicing rules, which likely will be proposed this summer and finalized in January 2013. The key aspects of the proposal relate broadly to (i) monthly mortgage statements, (ii) ARM adjustment disclosures, (iii) force-placed insurance, (iv) payment crediting, (v) error resolution and borrower inquiries, and (vi) borrower outreach and borrower information. The majority of the details were provided in an outline prepared for a Small Business Regulatory Enforcement Fairness Act (SBREFA) panel, which will consider the potential impact of the planned rules on small businesses. The outline includes model forms related to periodic statements, ARM reset notices, and force-placed insurance notices, which the CFPB has been testing in recent months. The CFPB release also included questions directed to the small entity representatives in order to assist the SBREFA panel in understanding the potential economic impacts of the particular proposals under consideration by the CFPB. Generally, the servicing proposals incorporate statutory changes imposed by the Dodd-Frank Act, which would go into effect in January 2013 unless final rules are issued on or before that date. The concepts in the proposal that do not address specific Dodd-Frank requirements are consistent with servicing requirements imposed by recent mortgage servicing consent orders and/or recent requirements for servicing delinquent loans owned by or serviced on behalf of Fannie Mae or Freddie Mac (see, e.g., Federal Reserve Board Consent Orders and Fannie Mae Ann. SVC 2011-08R).

CFPB Issues Bulletin Regarding Supervision of Vendors. On April 13, the CFPB issued Bulletin 2012-3, which states theCFPB's expectation that supervised banks and nonbanks have an effective process for managing the risks of service provider relationships. In a press release announcing the Bulletin, the CFPB promised to "take a close look at service providers' interactions with consumers" and "hold all appropriate companies accountable when legal violations occur." According to the Bulletin, the CFPB expects supervised institutions to (i) conduct thorough due diligence to verify that a service provider understands and is capable of complying with the law, (ii) request and review a service provider's policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities, (iii) include in the contract with a service provider clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities; (iv) establish internal controls and on-going monitoring to determine whether a service provider is complying with the law, and (v) take prompt action to address fully any problems identified through the monitoring process.

CFPB Proposes Narrowing Application of Credit Card Fee Limit. On April 12, the CFPB published a proposed rule that would lift the current limit on credit card fees charged prior to account opening. Under the current rule, as adopted by the Federal Reserve Board (FRB) in April 2011, card issuers are limited to charging fees up to 25 percent of the credit limit in effect when the account is opened. The FRB rule applies this fee limit prior to account opening and during the first year after account opening. The CFPB proposal would limit the application of this fee restriction to only during the first year after account opening. This proposal addresses a legal challenge to restricting the amount of fees charged prior to account opening, which resulted in a court issuing a preliminary injunction to halt the implementation of the FRB's broader application of the fee limit. The CFPB is accepting comments on the proposal through June 11, 2012.

Fair Housing Groups File First REO Complaint. On April 10, the National Fair Housing Alliance and certain of its member organizations (collectively NFHA) filed the first of several planned administrative complaints and/or lawsuits against multiple financial institutions for alleged discriminatory practices with regard to real estate owned (REO) properties in violation of the Fair Housing Act. The complaint, which was filed with the Department of Housing and Urban Development, triggers a process through which HUD will now conduct its own investigation of the issues presented. The complaint is based on an NFHA report released earlier this month, which overlooks key considerations with regard to servicer management of REO properties. In announcing this complaint, NFHA indicated another will be filed next week.

Federal Reserve Offers Policy Guidance for REO Rental Programs. On April 5, the FRB released a policy statement that reiterates its general policy that banking organizations should make good faith efforts to dispose of foreclosed properties, also known as REO properties, as soon as practicable. However, under current market conditions, the FRB explains that banking organizations may hold and rent residential REO properties within legal holding-period limits without demonstrating continuous active marketing of the property for sale provided suitable policies and procedures are followed. The guidance offers risk management and compliance considerations for renting REO properties, as well as specific expectations for large-scale REO rental programs. The FRB release also points out that REO rental properties may meet the definition of community development under the Community Revitalization Act (CRA), and, if so, a banking organization would receive favorable CRA consideration.

Federal Reserve Publishes Rule to Simplify Administration of Reserve Requirements. On April 12, the FRB published two final rules designed to simplify the administration of reserve requirements and reduce administrative and operational costs for depository institutions and the Federal Reserve Banks. The FRB amended Regulation D to (i) create a common two-week maintenance period, (ii) create a penalty-free band around reserve balance requirements in place of using carryover and routine penalty waivers, (iii) discontinue "as-of adjustments" related to deposit report revisions and replace all other such adjustments with direct compensation, and (iv) eliminate the contractual clearing balance program. These changes will be phased in, with the latter two taking effect on July 12, 2012, and the first two taking effect on January 24, 2013. A second rule amends Regulation J to make it consistent with the Regulation D amendments by eliminating references to "as-of adjustments." The rule also clarifies the handling of checks sent to the Federal Reserve Banks and the application of funds transfer rules to remittance transfers. These changes will take effect on July 12, 2012. Finally, with these rule changes, the FRB also announced modifications to its overnight draft policy, which also will take effect on July 12, 2012.

Fannie Mae Provides Guidance Regarding Chicago Vacant Property Ordinance and Payment of Homeowners' Association Dues and Condo Assessments. On April 11, Fannie Mae published Servicing Guide Lender Letter LL-2012-04, which follows up on a previous notice regarding the City of Chicago's (the City) vacant property ordinance. Effective May 1, 2012, servicers will be required to submit expense reimbursement requests using the Cash Disbursement Request and updated expense designations for all expenses related to the ordinance that are not otherwise required by the Servicing Guide. The Letter attaches a list of the expense designations. Fannie Mae reminds servicers that payments to the City in connection with the ordinance must be made "under protest" by sending a written communication to the City with the registration fee. Further, (i) all ordinance-related expenses must be submitted to Fannie Mae within 10 business days of the date they are paid by the servicer, (ii) ordinance-related expenses incurred from November 19, 2011 through April 30, 2012 must be submitted for reimbursement using the new expense categories no later than May 31, 2012, (iii) servicers will not be reimbursed for any penalties, fines, expenses or interest assessed by the City for failure to comply with the ordinance, and (iv) servicers must submit a request for pre-approval for ordinance expenses that exceed the allowable limits on or after May 1, 2012.

Also on April 11, Fannie Mae published Servicing Guide Announcement SVC-2012-05 to provide guidance regarding payment of homeowners' association (HOA) dues and condo assessments. Effective July 1, 2012, servicers must ensure that any priority liens for delinquent HOA dues and assessments on acquired properties are cleared immediately, but no later than 30 days, after the foreclosure sale or acceptance of a deed-in-lieu of foreclosure. The Announcement also revises the reimbursement policy to align with the amount a servicer must pay to protect the lien position and ensure properties are clear of any liens for HOA dues and condo assessments. The Announcement further reminds servicers of their responsibility to continue (i) advancing funds to pay HOA dues and property taxes as they become due following a foreclosure sale and (ii) performing certain property management duties.

State Issues

Florida Expands Estoppel Letter Provisions. On April 6, Florida Governor Rick Scott approved Senate Bill 1050, which allows a record title owner of a property, a fiduciary or a trustee lawfully acting on behalf of a record title owner, or any other person lawfully authorized to act on behalf of a mortgagor or record title owner of the property to obtain an estoppel letter. Under current law, only a mortgagor can request and receive an estoppel letter. Under the new law, authorized persons must provide a copy of the instrument proving title in the property ownership interest or lawful authorization. In response, the mortgagee must provide the total unpaid balance on a per-day basis and may, but is not required to, provide an itemization of the unpaid balance of the loan. The bill also makes numerous clarifying changes to Florida's Principal and Income Act. All changes made by this bill take effect on January 1, 2013.

New York Extends Emergency Rules Regarding Mortgage Loan Servicers. On April 4, the New York Department of Financial Services extended through June 17, 2012 existing emergency rules regarding the registration and financial responsibility requirements for mortgage loan servicers.

Ohio Creates Supplier Right to Cure Under State's Consumer Sales Practices Act. On April 2, Ohio enacted a law that permits a supplier to provide a consumer a "cure offer" no later than 30 days after the consumer files an action against the supplier alleging a violation of the Consumer Sales Practices Act. House Bill 275, which takes effect July 3, 2012, establishes the timeline and procedures for an offer and details the allowable limits of the offer. A consumer who chooses not to accept a cure offer is prohibited from recovering treble damages, court costs, and attorney fees following any successful legal action if a court or arbitrator awards the consumer actual economic damages that are not greater than the value of the remedy included in the cure offer. The new law also establishes procedures for determining and disputing attorney fees during the cure offer process.

West Virginia Revises Mortgage and Consumer Lending Statutes. West Virginia recently enacted several bills to amend statutes related to mortgage licensing and servicing and consumer lender licensing. House Bill 4271 was enacted March 30 and takes effect June 8, 2012. It amends existing reporting requirements for licensed residential mortgage lenders and brokers to direct lenders and brokers to submit reports through the Nationwide Mortgage Licensing System and Registry for periods established by the NMLS. The law allows the Commissioner of the Division of Banking to require direct reporting, preserves the confidentiality of the reports, and alters certain public reporting obligations of the Commissioner. Also enacted on March 30, House Bill 4274, authorizes the Commissioner of the Division of Banking to fine regulated consumer lenders required to be licensed up to $2,000 for violating applicable statutory and regulatory requirements. Each day that a consumer lender engages in covered conduct without being licensed is considered a separate violation subject to a separate fine. This change takes effect June 7, 2012. On April 2, effectively retroactive to January 1, 2012, Senate Bill 551 creates an exemption to mortgage loan limitations to allow for modification or refinancing loans made between January 1, 2012 and January 15, 2015 as part of the federal Home Affordable Modification Program or any other federal or state program or litigation settlement.

Courts

Fourth Circuit Holds State Debt Collection Law Not Preempted by National Banking Act. On April 5, the Fourth Circuit held that the National Bank Act (NBA) did not preempt the Maryland Credit Grantor Closed End Credit Provisions (CLEC).

Epps v. JP Morgan Chase Bank, No. 10-2444, 2012 WL 1134065 (4th Cir. Apr. 5, 2012). In Epps, the plaintiff purchased a car through a retail sales installment contract subject to the CLEC. The contract was later assigned to Chase which repossessed the vehicle after the plaintiff defaulted. The plaintiff brought a putative class action alleging in part that Chase's notices regarding the sale of the vehicle failed to comply with the CLEC. Relying on OCC regulations implementing the NBA, 12 C.F.R. § 7.4008(d)-(e), the Fourth Circuit reversed the District Court for the District of Maryland and held that the CLEC was not preempted. The court explained that because the CLEC provisions at issue related exclusively to repossession and not to the extension of credit, they were not preempted by the NBA and excluded from preemption by the OCC's regulations. The court further found that the notices required under CLEC, which only related to debt collection upon default under an existing loan, were not disclosures within the meaning of the NBA and OCC regulations.

Florida Appeals Court Holds Servicer's Verified Allegation Insufficient to Establish Standing in Foreclosure Suit. On April 4, the District Court of Appeal for the Fourth District of Florida reversed a trial court decision requiring a commercial borrower to make payments to the servicer of a securitized trust pending a foreclosure action because the servicer did not properly plead standing. Elston/Leetsdale, LLC v. CWCapital Asset Management LLC, No. 4D11-3151, 2012 WL 1108531 (Fla. 4th DCA Apr. 4, 2012). In this case, the borrower executed a promissory note as evidence of a loan, and secured payment by executing a mortgage, security agreement, and an assignment of lease and rents. The lender assigned its rights to a trust company, which in turn assigned the rights to another trust, who is now the owner and holder of all the loan documents. The servicer for the trust filed a foreclosure action in its own name, alleging in the verified complaint that it was duly authorized by the trust to take all action to protect the interests of the trust. The servicer also sought continued payment pending the foreclosure action, which the trial court granted. The borrower challenged the servicer's standing to bring suit on behalf of the trust, which the trial court rejected. The appeals court found that the servicer's evidence in support of its standing, which was nothing more than its own allegations and affidavit, was insufficient. Instead the court noted that in other cases in which courts found that a servicer had established standing, the trustee joined the action or ratified the servicer's commencement of the lawsuit through an affidavit. The appellate court reversed the trial court payment order and remanded for further proceedings.

Federal District Court in Florida Lacks Jurisdiction over TILA and RESPA Claims After State Court Foreclosure Judgment. On April 2, the U.S. District Court for the Middle District of Florida dismissed an action brought by a borrower against her mortgage lender alleging violations of TILA and RESPA and seeking a declaratory judgment that the lender holds no interest in the property. Chipman v. US Bank, N.A., No. 10-cv-483, 2012 WL 1093144 (M.D. Fla. April 2, 2012). The borrower brought the pro se action alleging that a forensic audit revealed certain TILA violations. Upon discovering those violations, the borrower submitted two Qualified Written Requests, at least one of which was not acknowledged by the lender in the time frame established by RESPA. The borrower brought suit seeking a recession of the loan. The court dismissed the case, taking judicial notice of a final foreclosure judgment in state court and holding that the Rooker-Feldman doctrine applies. Applying that doctrine, the court found that it is precluded from reviewing the state court final foreclosure judgment because (i) the parties to the two actions are the same, (ii) the state court ruling was a final judgment on the merits, and (iii) the borrower could have raised the TILA and RESPA claims in the state court action.

Eleventh Circuit Reverses Dismissal of FDCPA Claim Involving MERS. On March 30, the Eleventh Circuit Court of Appeals reversed the dismissal of a FDCPA claim stemming from a communication to the plaintiff that erroneously identified MERS Corp. as the plaintiff's creditor. Shoup v. McCurdy & Candler LLC, No. 10-14619, 2012 WL 1071196 (11th Cir. Mar. 30, 2012). The plaintiff obtained a mortgage from America Wholesale Lender. MERS was the grantee acting as the lender's nominee under the mortgage contract. After the plaintiff defaulted, MERS's law firm sent an initial communication letter described as an attempt to collect a debt and identifying MERS as the "creditor on the above referenced loan." The mortgagee filed suit under the FDCPA, alleging that MERS is not a creditor and that by falsely stating so, the law firm committed a FDCPA violation. The district court granted the defendant law firm's 12(b)(6) motion to dismiss, concluding that MERS was a creditor and that even if it was not, the purported violation was harmless. In its reversal, the Eleventh Circuit reasoned that the FDCPA makes clear that (i) "any false representation" in the collection of a debt is a violation of the statute, (ii) a "creditor" under the statute would not include MERS in this instance, because MERS was not owed a debt, and (iii) any failure to comply with the law subjects the violator to actual and statutory damages.

Federal District Court Holds Allegations of Failure to Protect Data Insufficient to Support Stored Communications Act Claim. Last month, the U.S. District Court for the Northern District of Illinois held that a company's failure to protect personal information does not violate the Stored Communications Act (SCA) because the company did not knowingly divulge the personal information. Worix v. MedAssets Inc., No. 11-8088, 2012 WL 787210 (N.D. Ill. Mar. 8, 2012). In this case, a computer hard drive belonging to the defendant, a firm that provides financial services for health care providers and as such handles the personal and confidential information of individuals, was stolen. The plaintiff, one of the individuals whose personal information was stored on the hard drive, alleged on behalf of a putative class that the defendant violated the SCA when it failed to adequately secure the protected personal information. The court held that the plaintiff could only support allegations that the defendant knowingly failed to protect the data and the plaintiff failed to offer the proof required by the SCA that the defendant knowingly divulged protected information. The court also dismissed the plaintiff's common law negligence claims and statutory fraud claims, holding that the plaintiff failed to allege actual damages when claiming an increased risk of identity theft and monitoring costs.

Firm News

Join Us in Los Angeles, CA for the 2012 CFPB and Top Regulatory and Enforcement Issues Conference, hosted by BuckleySandler LLP.

2012 Topics Include:

  • CFPB Regulatory Initiatives
  • CFPB and AG Enforcement Agenda
  • Anatomy of a CFPB Examination/Enforcement Action and State Involvement
  • The CFPB's Fair Lending Agenda for Auto, Private Student Lenders, and Non-Secured Consumer Lending
  • Loan Originator and Sales Force Compensation
  • Fair Lending Enforcement: Consent Orders, Enforcement Actions, and Settlements
  • Return of the Secondary Market and New Risks
  • Latest Privacy Litigation and Emerging Issues

When: Tuesday, April 24, 2012

Where: Jonathan Club Beach in Santa Monica, CA.

To register, contact Ann Grozman

(agrozman@buckleysandler.com).

Join Us! 2012 Fair Lending Today Conference on Compliance, Regulatory and Litigation Issues and the CFPB in Today's Changing Enforcement Environment, hosted by BuckleySandler LLP.

2012 Panel Topics Include:

  • Overview: A New Agency Emerges
  • The Justice Department and Fair Lending: Disparate Impact Escapes Potential Elimination in Magner
  • Mortgage Servicing Developments: The AG/DOJ Settlement, the CFPB, and Ongoing Enforcement
  • Anatomy of a CFPB Enforcement Action
  • The CFPB's Fair Lending Agenda for Auto, Private Student Lenders, and Non-Secured Lending
  • New CFPB Enforcement Priorities for Credit Cards
  • Fair and Responsible Banking Risk Management Update

When: Monday, April 30, 2012

Where: The Fairmont Hotel in Washington, DC

Registration required. This conference is open to all financial services companies and others subject to CFPB oversight. Please no outside law firms, government agency personnel, consultant firms or media. For more information visit www.fairlendingtoday.com or contact fairlending@buckleysandler.com.

BuckleySandler LLP will be hosting a complimentary webinar entitled "The Consumer Financial Protection Bureau: A Recap of Activities To Date and Predictions for Actions Ahead" on Tuesday, April 17, 2012 from 2:00 PM - 3:15 PM ET. In this webinar, BuckleySandler attorneys Jeff Naimon, Jonice Gray Tucker, and Lori Sommerfield will recap the CFPB's recent activities and provide guidance for institutions which are regulated by the CFPB. The webinar will include discussion of issues related to the protection of confidential data provided by institutions in examination, enforcement, and other contexts as well as bills currently pending in Congress to provide greater assurances to the industry that privileged information will not be further disclosed by the CFPB.

Registration required. This webinar is open to all financial services companies and others subject to CFPB oversight. Please no outside law firms, government agency personnel, consulting firms, or media. After registering and being approved, you will receive a confirmation email containing instructions for joining the webinar. Click here to register: https://www1.gotomeeting.com/register/149905752

The STAGE Network will be hosting a webinar entitled "The Financial Fraud Enforcement Task Force - Insights and Guidance," which will examine the Financial Fraud Enforcement Task Force (FFETF), with a focus on its recently formed Residential Mortgage-Backed Securities (RMBS) Working Group. The webinar will include a discussion of anticipated actions by both the Task Force and by the RMBS Working Group, and how to proactively prepare for them. The discussion will be moderated by Bradley J. Bondi of Cadwalader, Wickersham & Taft LLP and Jeremiah S. Buckley of BuckleySandler LLP. Additional participants will be announced.

When: April 27, 2012 at 2:30 - 3:30 pm (ET)

Registration required. Click here to register.

David Krakoff will be speaking at ACI's 27th National Conference on the Foreign Corrupt Practices Act in New York, NY on April 17, 2012. Mr. Krakoff's session will focus on defending executives in FCPA investigations.

James Parkinson will be speaking at a PLI program seminar entitled "Foreign Corrupt Practices Act 2012" in San Francisco, California on April 17, 2012 and in New York, New York on May 4, 2012.

Andrew Sandler will be speaking at the 2012 Marquis National Compliance Conference in Fort Worth, Texas on April 18, 2012. Mr. Sandler's session will cover the view from Washington, DC on CRA, HMDA, and Fair Lending.

Donna Wilson will be moderating a panel entitled "BANKS UNDER SCRUTINY: The Civil, Criminal, Regulatory and Insurance Fallout from Mortgage Foreclosures and Bank Failures" at the ABA Section of Litigation annual meeting in Washington DC, April 18-21, 2012.

Andrea Mitchell will be speaking at the National Community Reinvestment Coalition's Annual Conference on April 20, 2012 in Washington, D.C. Ms. Mitchell will be a panelist at a session entitled: "Challenging the Use of Discriminatory Overlays."

David Krakoff will be speaking at the ALI-ABA Environmental Crimes Conference in Washington, DC on April 26, 2012. Mr. Krakoff's session will discuss the key issues at the outset of an environmental criminal action.

Jonice Gray Tucker and Amanda Raines will be participating in a D.C. Bar Women Litigators' Committee panel entitled, "Women Litigators: What We Do Right" on April 26, 2012 in Washington, D.C. The panel will discuss those characteristics that female litigators have which make them effective and persuasive advocates.

Benjamin Klubes and Jonice Gray Tucker will be speaking at The Financial Services Roundtable's Spring Meeting of the Lawyers Council on May, 3, 2012, in a session entitled "Litigation & Enforcement Update."

Andrew Sandler and Jonice Gray Tucker will be participating in an American Bar Association webinar focusing on the Federal-State Mortgage Servicing Settlement on May 15, 2012.

Andrew Sandler, Benjamin Klubes, Jeff Naimon, Benjamin Saul, and Margo Tank will be speaking at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference in Palm Springs, CA on May 20, 2012. Mr. Klubes will provide updates on developments in both regulatory and litigation matters in the use of various privileges. Mr. Saul's session will provide an overview and update of the Fair Credit Reporting Act (FCRA), Fair Housing Act, Equal Credit Opportunity Act (ECOA) and Home Mortgage Disclosure Act (HMDA) requirements including recent proposed and final changes.

Jonathan Cannon will be speaking at the Predictive Methods Conference in Dana Point, CA on June 4, 2012 in a session entitled "The Dodd-Frank Act: Understanding its Impact on the Mortgage Industry."

Mortgages

CFPB Previews Mortgage Servicing Rules. On April 9, the CFPB previewed its upcoming mortgage servicing rules, which likely will be proposed this summer and finalized in January 2013. The key aspects of the proposal relate broadly to (i) monthly mortgage statements, (ii) ARM adjustment disclosures, (iii) force-placed insurance, (iv) payment crediting, (v) error resolution and borrower inquiries, and (vi) borrower outreach and borrower information. The majority of the details were provided in an outline prepared for a Small Business Regulatory Enforcement Fairness Act (SBREFA) panel, which will consider the potential impact of the planned rules on small businesses. The outline includes model forms related to periodic statements, ARM reset notices, and force-placed insurance notices, which the CFPB has been testing in recent months. The CFPB release also included questions directed to the small entity representatives in order to assist the SBREFA panel in understanding the potential economic impacts of the particular proposals under consideration by the CFPB. Generally, the servicing proposals incorporate statutory changes imposed by the Dodd-Frank Act, which would go into effect in January 2013 unless final rules are issued on or before that date. The concepts in the proposal that do not address specific Dodd-Frank requirements are consistent with servicing requirements imposed by recent mortgage servicing consent orders and/or recent requirements for servicing delinquent loans owned by or serviced on behalf of Fannie Mae or Freddie Mac (see, e.g., Federal Reserve Board Consent Orders and Fannie Mae Ann. SVC 2011-08R).

Fair Housing Groups File First REO Complaint. On April 10, the National Fair Housing Alliance and certain of its member organizations (collectively NFHA) filed the first of several planned administrative complaints and/or lawsuits against multiple financial institutions for alleged discriminatory practices with regard to real estate owned (REO) properties in violation of the Fair Housing Act. The complaint, which was filed with the Department of Housing and Urban Development, triggers a process through which HUD will now conduct its own investigation of the issues presented. The complaint is based on an NFHA report released earlier this month, which overlooks key considerations with regard to servicer management of REO properties. In announcing this complaint, NFHA indicated another will be filed next week.

Federal Reserve Offers Policy Guidance for REO Rental Programs. On April 5, the FRB released a policy statement that reiterates its general policy that banking organizations should make good faith efforts to dispose of foreclosed properties, also known as REO properties, as soon as practicable. However, under current market conditions, the FRB explains that banking organizations may hold and rent residential REO properties within legal holding-period limits without demonstrating continuous active marketing of the property for sale provided suitable policies and procedures are followed. The guidance offers risk management and compliance considerations for renting REO properties, as well as specific expectations for large-scale REO rental programs. The FRB release also points out that REO rental properties may meet the definition of community development under the Community Revitalization Act (CRA), and, if so, a banking organization would receive favorable CRA consideration.

Fannie Mae Provides Guidance Regarding Chicago Vacant Property Ordinance and Payment of Homeowners' Association Dues and Condo Assessments. On April 11, Fannie Mae published Servicing Guide Lender Letter LL-2012-04, which follows up on a previous notice regarding the City of Chicago's (the City) vacant property ordinance. Effective May 1, 2012, servicers will be required to submit expense reimbursement requests using the Cash Disbursement Request and updated expense designations for all expenses related to the ordinance that are not otherwise required by the Servicing Guide. The Letter attaches a list of the expense designations. Fannie Mae reminds servicers that payments to the City in connection with the ordinance must be made "under protest" by sending a written communication to the City with the registration fee. Further, (i) all ordinance-related expenses must be submitted to Fannie Mae within 10 business days of the date they are paid by the servicer, (ii) ordinance-related expenses incurred from November 19, 2011 through April 30, 2012 must be submitted for reimbursement using the new expense categories no later than May 31, 2012, (iii) servicers will not be reimbursed for any penalties, fines, expenses or interest assessed by the City for failure to comply with the ordinance, and (iv) servicers must submit a request for pre-approval for ordinance expenses that exceed the allowable limits on or after May 1, 2012.

Also on April 11, Fannie Mae published Servicing Guide Announcement SVC-2012-05 to provide guidance regarding payment of homeowners' association (HOA) dues and condo assessments. Effective July 1, 2012, servicers must ensure that any priority liens for delinquent HOA dues and assessments on acquired properties are cleared immediately, but no later than 30 days, after the foreclosure sale or acceptance of a deed-in-lieu of foreclosure. The Announcement also revises the reimbursement policy to align with the amount a servicer must pay to protect the lien position and ensure properties are clear of any liens for HOA dues and condo assessments. The Announcement further reminds servicers of their responsibility to continue (i) advancing funds to pay HOA dues and property taxes as they become due following a foreclosure sale and (ii) performing certain property management duties.

Florida Expands Estoppel Letter Provisions. On April 6, Florida Governor Rick Scott approved Senate Bill 1050, which allows a record title owner of a property, a fiduciary or a trustee lawfully acting on behalf of a record title owner, or any other person lawfully authorized to act on behalf of a mortgagor or record title owner of the property to obtain an estoppel letter. Under current law, only a mortgagor can request and receive an estoppel letter. Under the new law, authorized persons must provide a copy of the instrument proving title in the property ownership interest or lawful authorization. In response, the mortgagee must provide the total unpaid balance on a per-day basis and may, but is not required to, provide an itemization of the unpaid balance of the loan. The bill also makes numerous clarifying changes to Florida's Principal and Income Act. All changes made by this bill take effect on January 1, 2013.

New York Extends Emergency Rules Regarding Mortgage Loan Servicers. On April 4, the New York Department of Financial Services extended through June 17, 2012 existing emergency rules regarding the registration and financial responsibility requirements for mortgage loan servicers.

West Virginia Revises Mortgage and Consumer Lending Statutes. West Virginia recently enacted several bills to amend statutes related to mortgage licensing and servicing and consumer lender licensing. House Bill 4271 was enacted March 30 and takes effect June 8, 2012. It amends existing reporting requirements for licensed residential mortgage lenders and brokers to direct lenders and brokers to submit reports through the Nationwide Mortgage Licensing System and Registry for periods established by the NMLS. The law allows the Commissioner of the Division of Banking to require direct reporting, preserves the confidentiality of the reports, and alters certain public reporting obligations of the Commissioner. Also enacted on March 30, House Bill 4274, authorizes the Commissioner of the Division of Banking to fine regulated consumer lenders required to be licensed up to $2,000 for violating applicable statutory and regulatory requirements. Each day that a consumer lender engages in covered conduct without being licensed is considered a separate violation subject to a separate fine. This change takes effect June 7, 2012. On April 2, effectively retroactive to January 1, 2012, Senate Bill 551 creates an exemption to mortgage loan limitations to allow for modification or refinancing loans made between January 1, 2012 and January 15, 2015 as part of the federal Home Affordable Modification Program or any other federal or state program or litigation settlement.

Florida Appeals Court Holds Servicer's Verified Allegation Insufficient to Establish Standing in Foreclosure Suit. On April 4, the District Court of Appeal for the Fourth District of Florida reversed a trial court decision requiring a commercial borrower to make payments to the servicer of a securitized trust pending a foreclosure action because the servicer did not properly plead standing. Elston/Leetsdale, LLC v. CWCapital Asset Management LLC, No. 4D11-3151, 2012 WL 1108531 (Fla. 4th DCA Apr. 4, 2012). In this case, the borrower executed a promissory note as evidence of a loan, and secured payment by executing a mortgage, security agreement, and an assignment of lease and rents. The lender assigned its rights to a trust company, which in turn assigned the rights to another trust, who is now the owner and holder of all the loan documents. The servicer for the trust filed a foreclosure action in its own name, alleging in the verified complaint that it was duly authorized by the trust to take all action to protect the interests of the trust. The servicer also sought continued payment pending the foreclosure action, which the trial court granted. The borrower challenged the servicer's standing to bring suit on behalf of the trust, which the trial court rejected. The appeals court found that the servicer's evidence in support of its standing, which was nothing more than its own allegations and affidavit, was insufficient. Instead the court noted that in other cases in which courts found that a servicer had established standing, the trustee joined the action or ratified the servicer's commencement of the lawsuit through an affidavit. The appellate court reversed the trial court payment order and remanded for further proceedings.

Federal District Court in Florida Lacks Jurisdiction over TILA and RESPA Claims After State Court Foreclosure Judgment. On April 2, the U.S. District Court for the Middle District of Florida dismissed an action brought by a borrower against her mortgage lender alleging violations of TILA and RESPA and seeking a declaratory judgment that the lender holds no interest in the property. Chipman v. US Bank, N.A., No. 10-cv-483, 2012 WL 1093144 (M.D. Fla. April 2, 2012). The borrower brought the pro se action alleging that a forensic audit revealed certain TILA violations. Upon discovering those violations, the borrower submitted two Qualified Written Requests, at least one of which was not acknowledged by the lender in the time frame established by RESPA. The borrower brought suit seeking a recession of the loan. The court dismissed the case, taking judicial notice of a final foreclosure judgment in state court and holding that the Rooker-Feldman doctrine applies. Applying that doctrine, the court found that it is precluded from reviewing the state court final foreclosure judgment because (i) the parties to the two actions are the same, (ii) the state court ruling was a final judgment on the merits, and (iii) the borrower could have raised the TILA and RESPA claims in the state court action.

Eleventh Circuit Reverses Dismissal of FDCPA Claim Involving MERS. On March 30, the Eleventh Circuit Court of Appeals reversed the dismissal of a FDCPA claim stemming from a communication to the plaintiff that erroneously identified MERS Corp. as the plaintiff's creditor. Shoup v. McCurdy & Candler LLC, No. 10-14619, 2012 WL 1071196 (11th Cir. Mar. 30, 2012). The plaintiff obtained a mortgage from America Wholesale Lender. MERS was the grantee acting as the lender's nominee under the mortgage contract. After the plaintiff defaulted, MERS's law firm sent an initial communication letter described as an attempt to collect a debt and identifying MERS as the "creditor on the above referenced loan." The mortgagee filed suit under the FDCPA, alleging that MERS is not a creditor and that by falsely stating so, the law firm committed a FDCPA violation. The district court granted the defendant law firm's 12(b)(6) motion to dismiss, concluding that MERS was a creditor and that even if it was not, the purported violation was harmless. In its reversal, the Eleventh Circuit reasoned that the FDCPA makes clear that (i) "any false representation" in the collection of a debt is a violation of the statute, (ii) a "creditor" under the statute would not include MERS in this instance, because MERS was not owed a debt, and (iii) any failure to comply with the law subjects the violator to actual and statutory damages.

Banking

Federal Reserve Publishes Rule to Simplify Administration of Reserve Requirements. On April 12, the FRB published two final rules designed to simplify the administration of reserve requirements and reduce administrative and operational costs for depository institutions and the Federal Reserve Banks.

The FRB amended Regulation D to (i) create a common two-week maintenance period, (ii) create a penalty-free band around reserve balance requirements in place of using carryover and routine penalty waivers, (iii) discontinue "as-of adjustments" related to deposit report revisions and replace all other such adjustments with direct compensation, and (iv) eliminate the contractual clearing balance program. These changes will be phased in, with the latter two taking effect on July 12, 2012, and the first two taking effect on January 24, 2013. A second rule amends Regulation J to make it consistent with the Regulation D amendments by eliminating references to "as-of adjustments." The rule also clarifies the handling of checks sent to the Federal Reserve Banks and the application of funds transfer rules to remittance transfers. These changes will take effect on July 12, 2012. Finally, with these rule changes, the FRB also announced modifications to its overnight draft policy, which also will take effect on July 12, 2012.

Consumer Finance

CFPB Issues Bulletin Regarding Supervision of Vendors. On April 13, the CFPB issued Bulletin 2012-3, which states theCFPB's expectation that supervised banks and nonbanks have an effective process for managing the risks of service provider relationships. In a press release announcing the Bulletin, the CFPB promised to "take a close look at service providers' interactions with consumers" and "hold all appropriate companies accountable when legal violations occur." According to the Bulletin, the CFPB expects supervised institutions to (i) conduct thorough due diligence to verify that a service provider understands and is capable of complying with the law, (ii) request and review a service provider's policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities, (iii) include in the contract with a service provider clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities; (iv) establish internal controls and on-going monitoring to determine whether a service provider is complying with the law, and (v) take prompt action to address fully any problems identified through the monitoring process.

West Virginia Revises Mortgage and Consumer Lending Statutes. West Virginia recently enacted several bills to amend statutes related to mortgage licensing and servicing and consumer lender licensing. House Bill 4271 was enacted March 30 and takes effect June 8, 2012. It amends existing reporting requirements for licensed residential mortgage lenders and brokers to direct lenders and brokers to submit reports through the Nationwide Mortgage Licensing System and Registry for periods established by the NMLS. The law allows the Commissioner of the Division of Banking to require direct reporting, preserves the confidentiality of the reports, and alters certain public reporting obligations of the Commissioner. Also enacted on March 30, House Bill 4274, authorizes the Commissioner of the Division of Banking to fine regulated consumer lenders required to be licensed up to $2,000 for violating applicable statutory and regulatory requirements. Each day that a consumer lender engages in covered conduct without being licensed is considered a separate violation subject to a separate fine. This change takes effect June 7, 2012. On April 2, effectively retroactive to January 1, 2012, Senate Bill 551 creates an exemption to mortgage loan limitations to allow for modification or refinancing loans made between January 1, 2012 and January 15, 2015 as part of the federal Home Affordable Modification Program or any other federal or state program or litigation settlement.

Fourth Circuit Holds State Debt Collection Law Not Preempted by National Banking Act. On April 5, the Fourth Circuit held that the National Bank Act (NBA) did not preempt the Maryland Credit Grantor Closed End Credit Provisions (CLEC). Epps v. JP Morgan Chase Bank, No. 10-2444, 2012 WL 1134065 (4th Cir. Apr. 5, 2012). In Epps, the plaintiff purchased a car through a retail sales installment contract subject to the CLEC. The contract was later assigned to Chase which repossessed the vehicle after the plaintiff defaulted. The plaintiff brought a putative class action alleging in part that Chase's notices regarding the sale of the vehicle failed to comply with the CLEC. Relying on OCC regulations implementing the NBA, 12 C.F.R. § 7.4008(d)-(e), the Fourth Circuit reversed the District Court for the District of Maryland and held that the CLEC was not preempted. The court explained that because the CLEC provisions at issue related exclusively to repossession and not to the extension of credit, they were not preempted by the NBA and excluded from preemption by the OCC's regulations. The court further found that the notices required under CLEC, which only related to debt collection upon default under an existing loan, were not disclosures within the meaning of the NBA and OCC regulations.

Privacy/Data Security

Federal District Court Holds Allegations of Failure to Protect Data Insufficient to Support Stored Communications Act Claim. Last month, the U.S. District Court for the Northern District of Illinois held that a company's failure to protect personal information does not violate the Stored Communications Act (SCA) because the company did not knowingly divulge the personal information.

Worix v. MedAssets Inc., No. 11-8088, 2012 WL 787210 (N.D. Ill. Mar. 8, 2012). In this case, a computer hard drive belonging to the defendant, a firm that provides financial services for health care providers and as such handles the personal and confidential information of individuals, was stolen. The plaintiff, one of the individuals whose personal information was stored on the hard drive, alleged on behalf of a putative class that the defendant violated the SCA when it failed to adequately secure the protected personal information. The court held that the plaintiff could only support allegations that the defendant knowingly failed to protect the data and the plaintiff failed to offer the proof required by the SCA that the defendant knowingly divulged protected information. The court also dismissed the plaintiff's common law negligence claims and statutory fraud claims, holding that the plaintiff failed to allege actual damages when claiming an increased risk of identity theft and monitoring costs.

Credit Cards

CFPB Proposes Narrowing Application of Credit Card Fee Limit. On April 12, the CFPB published a proposed rule that would lift the current limit on credit card fees charged prior to account opening. Under the current rule, as adopted by the Federal Reserve Board (FRB) in April 2011, card issuers are limited to charging fees up to 25 percent of the credit limit in effect when the account is opened. The FRB rule applies this fee limit prior to account opening and during the first year after account opening. The CFPB proposal would limit the application of this fee restriction to only during the first year after account opening. This proposal addresses a legal challenge to restricting the amount of fees charged prior to account opening, which resulted in a court issuing a preliminary injunction to halt the implementation of the FRB's broader application of the fee limit. The CFPB is accepting comments on the proposal through June 11, 2012.

 

Published In: Administrative Agency Updates, Consumer Protection Updates, Finance & Banking Updates, Privacy Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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