Mortgage Banking Update - October 19, 2012

by Ballard Spahr LLP
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FTC Settles FCRA Enforcement Actions Alleging Wrongful Sale and Use of Prescreened Lists

The Federal Trade Commission announced on October 10, 2012, that it had settled enforcement actions filed against a consumer reporting agency (CRA) and companies to whom the CRA sold prescreened lists of consumers who were late on their mortgage payments. The actions demonstrate again that even though the FTC shares Fair Credit Reporting Act (FCRA) enforcement authority as to non-banks with the Consumer Financial Protection Bureau, it remains focused on FCRA enforcement.

The settlements provide for the payment of a $1.2 million civil penalty by the companies that purchased the lists. They also require a $392,803 payment by the CRA, which is labeled "disgorgement" in the FTC's analysis of the CRA settlement and described in the proposed consent order as "equitable monetary relief [that] is solely remedial in nature and is not a fine, penalty, punitive assessment, or forfeiture."

The complaint alleged that the CRA sold prescreened lists of consumers who met criteria that included having a 30-, 60-, or 90-day mortgage payment delinquency, and the purchasers resold the lists to third parties who used the lists to market products and services aimed at financially distressed consumers, such as loan modification, debt relief, and foreclosure relief services. The FTC charged that the CRA had violated the FCRA by furnishing consumer reports to someone without a "permissible purpose," and the purchasers had violated the law by obtaining and using such reports without a "permissible purpose." Under the FCRA, only the use of prescreened lists to make a firm offer of credit or insurance constitutes a "permissible purpose." The FTC also charged that the purchasers had violated the FCRA requirements for resellers of consumer reports, such as by reselling the prescreened lists to persons without a permissible purpose, not disclosing to the CRA who would be the end users of the lists, and, to the extent the lists were used to make firm offers of credit, failing to maintain records of certain information.

In addition, the FTC alleged that the same conduct by the CRA and the purchasers also violated Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices. The FTC used the theory that the CRA and the purchasers failed to employ appropriate measures to control access to sensitive consumer financial information. According to the FTC, such failures constituted an unfair act or practice.

In addition to the monetary payments, the settlements require the CRA to maintain certain records for a five-year period and the purchasers to create certain records for a 20-year period and retain each such record for five years.

Barbara S. Mishkin


Colorado Court of Appeals Finds “Fractional Interests” Not Lots under the Interstate Land Sales Full Disclosure Act

The Colorado Court of Appeals has issued the first state appellate decision on the Interstate Land Sales Full Disclosure Act (ILSFDA) since the global economic downturn began. In PFW, Inc. v. Residences at Little Nell Development, LLC, the court was confronted with the issue of whether one-eighth fractional interests constitute individual “lots” under the ILSFDA. As more fully described below, the court determined in a decision issued on August 16, 2012, that such fractional interests are not lots under the law and, as a result, purchasers of those fractional interests were not permitted the continuing rescission rights afforded under the ILSFDA. The decision represents a rare win for a developer in a climate that has seen long-held understandings and interpretations of the ILSFDA overturned in favor of interpretations permitting contract rescission.

In PFW, Inc., a recalcitrant contract purchaser sought rescission of its preconstruction purchase and sale agreement for a one-eighth floating fractional interest in the Little Nell Residences in Aspen, Colorado. The purchaser also sought return of its $450,000 earnest money deposit. Under an arbitration clause in the purchase and sale agreement, all of the plaintiff’s non-ILSFDA claims were resolved through arbitration, leaving only the ILSFDA claims for the district and appellate courts to consider. The plaintiff argued that each fractional interest in the project constituted a separate lot under the ILSFDA, meaning that the 42-unit condominium project actually contained more than 200 lots for purposes of the ILSFDA. Under this theory, the project did not fall within the ILSFDA’s exemption for projects containing less than 100 units, and the plaintiff argued that the developer’s failure to provide an ILSFDA property report entitled the plaintiff to rescind the purchase and sale agreement.

Referring to the definition of “lot” set forth in 24 CFR §1710.1(b), one of the regulations interpreting the ILSFDA, and the HUD Guidelines, the trial court focused on the requirement that to be a lot, a property interest must include the “right to the exclusive use of a specific portion of the land.” The Residences at Little Nell project documents confirmed that all fractional interests must participate in the rotating priority reservation system that gave owners a right to use specific types of units, but not to use any particular unit. Accordingly, the trial court determined that the fractional interests did not provide exclusive occupancy rights and therefore were not lots under the ILSFDA. On appeal, the Colorado Court of Appeals relied on the same regulations and Guidelines in affirming the trial court’s analysis. The court’s standard for determining whether a particular fractional interest constitutes a lot for purposes of the ILSFDA requires a case-by-case evaluation that depends on the particular use rights and restrictions set forth in the project’s governing documents. In addition, note that as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, administration of the ILSFDA was moved from HUD to the Consumer Financial Protection Bureau. The HUD Guidelines have not been adopted by the Bureau. Judgment at the trial court level was entered prior to the Bureau taking over administration of the ILSFDA.

The case is notable for a number of reasons. First, it provides vital judicial support and precedent consistent with a 1992 advisory opinion issued by HUD to a South Carolina developer for the principle that floating interest timeshare projects are not subject to the ILSFDA. Second, in addition to the specific fractional interest holding described above, the case confirms that in Colorado, condominium units generally constitute separate lots under the ILSFDA as currently interpreted, and the determination of whether the ILSFDA applies must be based on the facts at the time the purchaser executed its purchase and sale agreement (rather than at any later date or based on events that could occur in the future).

Ballard Spahr’s Real Estate Resort and Hotel Group is nationally recognized for its in-depth legal, industry, and market knowledge of vacation ownership plans and timeshare resorts as well as of the intricacies of the Interstate Land Sales Full Disclosure Act. The group advises timeshare and resort clients on regulatory compliance throughout the United States. If you would like more information about this decision and its application, please contact Christopher Payne at 303.299.7345 or payne@ballardspahr.com, or Joseph Lubinski at 303.299.7359 or lubinskij@ballardspahr.com.

– Christopher W. Payne and Joseph E. Lubinski


Employers Must Update FCRA-Required Forms

The Consumer Financial Protection Bureau (CFPB) has released new regulations requiring employers to update forms mandated by the Fair Credit Reporting Act (FCRA) by January 1, 2013. The changes consist primarily of substituting the CFPB for the Federal Trade Commission (FTC) as the point of contact for questions regarding consumers' rights under the Act. The CFPB assumed enforcement and rulemaking authority from the FTC under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The FCRA imposes procedural requirements on employers that gather and use "consumer reports" to hire, fire, promote, demote, or reassign current or prospective employees. Consumer reports are defined broadly in the regulations to include background checks for employment purposes.

Among the mandated procedures are those that require employers to inform applicants or employees in advance of the intent to obtain both a consumer report and their express written consent; to give an individual a copy of the consumer report and advance notice of intent to take adverse action based on the report; and to notify an affected individual in writing if adverse action is taken based on information in the report.

Under the revised regulations, the CFPB issued a revised Summary of Consumer Rights, which employers are required to furnish to individuals before taking adverse employment action. In addition, the CFPB revised the Notice of Furnisher Responsibilities, which details the obligations imposed upon furnishers of consumer reports under the FCRA, and the Notice to Users of Consumer Reports of Their Obligations Under the FCRA, which summarizes the duties of employers as consumer report users.

Employers should be aware that additional developments under the FCRA may take shape as the CFPB's oversight role becomes more defined. Ballard Spahr's Labor and Employment Group routinely assists employers in complying with federal and state laws governing the hiring process and other employment actions. If you have questions regarding FCRA compliance or other issues related to employment background checks, please contact Brian D. Pedrow at 215.864.8108 or pedrow@ballardspahr.com, Paul Apicella at 215.864.8872 or apicellap@ballardspahr.com, or the member of the Labor and Employment Group with whom you work.

Consumer financial services providers should also be aware that the CFPB will be examining institutions subject to its jurisdiction for compliance with the provisions of the FCRA that govern the use of credit reports in the employment context, as well as for FCRA compliance in all other contexts. If you have questions regarding FCRA compliance in other contexts, please contact John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, or any members of the Consumer Financial Services Group with whom you work.

– Brian D. Pedrow and Paul Apicella


NMLS Renewal Season Almost Underway

The NMLS renewal period, during which licenses can be renewed for 2013, begins November 1. Between November 1 and December 31, licensees can request renewal of their licenses, or indicate to their regulator that they do not intend to renew certain licenses. In preparation for this renewal period, licensees should make sure their NMLS record is up to date. Licensees should also review state-specific renewal requirements and begin to prepare any documentation required as part of the renewal process.

– Matthew Saunig

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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